ABFA1163 FINANCIAL ACCOUNTING II 1

Lecture 5: Bank Reconciliation

Important Textbook Reading: 4 Differences between the Cash Book closing balance and the Bank
 Chapters 12 & 30: Frank Wood & Alan Sangster “Business Accounting 1”-14th
edition
Statement closing balance:

(i) Bank charges/interest, other payments or receipts – items in the Bank

Learning Objectives Statement not yet recorded in the Cash Book of the business. The
After you have studied this chapter, you should be able to: Cash Book will need to be revised.
 explain the purpose of bank reconciliation statement
 explain the reasons for the differences between the Cash Book and the
o The bank might DEDUCT:
Bank Statement
 identify errors made in the Cash Book and those made by the bank
 bank charges for services rendered to the business,
 update the Cash Book and prepare the bank reconciliation statement
such as bank overdraft facilities, banker’s cheques/ bank
draft, telegraphic transfer of funds, etc.
1 Cash Book
 stamp duty on cheque book.
o Prepared by the proprietor/company to record the business
 bank interest on loan/overdraft.
transactions by cash and cheque.
 direct debit payments (this is an instruction by the
o Debit receipts (deposits) and credit payments (withdrawals). record in business to the bank to make direct payments for
reconciliation amounts owing to certain suppliers).
2 Bank Statement
 standing order payments (this is an instruction by the
o Prepared by the bank and sent to clients at the end of each month (for
business to the bank to make certain fixed amount of
current account only), itemising the opening balance, deposits into
payments every month, such as insurance premium,
and withdrawals from the account during the period, and the closing
rental, loan repayment instalments, etc.
balance.
o Debit withdrawals and credit deposits by the client.
o The bank might ADD:
o Clients who are overdrawn (debit balance) are short-term receivables
to the bank and clients with excess balance (credit balance) are short-
 credit transfer, which is amount paid by customers
term payables to the bank.
directly through bank transfer.
 dividend/ interest received which have been
3 Bank reconciliation statement
credited directly into the bank account.
o Prepared by the proprietor/company to compare the Bank Statement
 There might be other transactions which the business
with the Cash Book, in order to identify and explain the errors and
has not been informed about it until when the Bank
differences between the two and finally, to reconcile the closing
Statement is received eg. Inter-Bank Giro
balances between the two.
Transaction (IBG)*
o Bank reconciliation statement is a necessary internal control activity
that must be undertaken every month to ensure that book-keeping
records of the proprietor/company are accurate and there are no errors
in the bank’s records.
ABFA1163 FINANCIAL ACCOUNTING II 2

*Inter-Bank Giro (IBG) is now widely used currently as banks 5 Format of bank reconciliation statement:
encourage the use of e-banking and discourage the use of cheques
by increasing the fee/charge for issuing cheques. Bank Reconciliation Statement as at …
RM RM
(ii) Time difference – items already recorded in the Cash Book, not in Balance as per Bank Statement X
appearing in the Bank Statement. The bank reconciliation statement Add:
will need to be prepared to explain the two types of transactions not Uncredited lodgement X
yet taken up by the bank: Error by the bank X
XX
o Uncredited lodgement Less:
There are some cheques received and deposited into the bank Unpresented cheque X
account, but not yet 'cleared'. This receipt has already been Error by the bank X
debited into the Cash Book, but not yet acknowledged by the (XX)
bank – although it will be in a very short time when the cheque Balance as per Cash Book XX
is eventually cleared.
Which amount should be shown in the
o Unpresented cheque ! Quiz Statement of Financial Position as “Bank”
There are some cheque payments where recipients have delayed under current assets?
in depositing into their bank accounts. This payment has already
been credited from the Cash Book, but not yet withdrawn from
the bank account.

(iii) Errors in calculation or recording incomes and payments – most

errors are likely to be made by the business rather than by the bank,
but it is conceivable that the bank makes mistakes too.

o Errors in the Cash Book

 recording errors, omissions, casting errors, entries on the
wrong side (debit or credit side)
 the Cash Book will need to be revised

o Errors made by the bank

 cheque withdrawals from other clients wrongly entered,
deposits by other clients wrongly entered, errors in bank
charges/interest
 the bank reconciliation statement will need to explain the
errors
 ABFA1163 FINANCIAL ACCOUNTING II 3

Lecture Illustration 1: Items in the Cash Book, not in the Bank Statement Analysis of items in the Cash Book, not in the Bank Statement:

Cash Book (bank columns only) i) Uncredited lodgements (already debited in the Cash Book, but not yet
RM Cheque No. RM credited in the Bank Statement):
Balance b/d 2,500 Furniture 12501 600  Commission received RM780
Sales 800 T. Payables 12502 970  T. Receivables RM1,200
Commission received 780 Purchases 12503 550
T. Receivables 1,200 Salary 12504 500 ii) Unpresented cheques (already credited in the Cash Book, but not yet
Balance c/d 2,660
debited in the Bank Statement):
5,280 5,280
 Cheque no. 12503 (Purchases) RM550
Balance b/d 2,660
 Cheque no. 12504 (Salary) RM500

Bank Statement as at … Solution:

Withdrawal Deposit
(Dr) (Cr) Balance Bank Reconciliation Statement as at …
RM RM RM RM RM
Balance 2,500 Balance as per Bank Statement 1,730
Cheque 12501 600 1,900
Cheque 12502 970 930 Add: Uncredited lodgements
Deposit 800 1,730 - Commission received 780
- T. Receivables 1,200 1,980
3,710
Less: Unpresented cheques
- Cheque no. 12503 (550)
- Cheque no. 12504 (500) (1,050)
Balance as per Cash Book 2,660
 ABFA1163 FINANCIAL ACCOUNTING II 4

Lecture Illustration 2: Items in the Bank Statement, not in the Cash Book
(continuation from Lecture Illustration 1) iv) Cheque book (already debited in the Bank Statement, but not yet credited
in the Cash Book) RM15
Cash Book – same as in Example 1.
Solution:
Bank Statement as at …
Revised Cash Book (bank columns only)
Withdrawal Deposit RM RM
(Dr) (Cr) Balance Balance b/d 2,660 Standing order 120
RM RM RM Interest received 70 Bank charges 20
Balance 2,500 Credit transfer 150 Cheque book 15
Cheque 12501 600 1,900 Dividend received 105 Balance c/d 2,930
Cheque 12502 970 930 100
Fund transfer
Deposit 800 1,730 3,085 3,085
Interest on fixed deposit 70 1,800 Balance b/d 2,930
Standing order 120 1,680
Bank charges 20 1,660
Cheque book 15 1,645 Bank Reconciliation Statement as at …
Credit transfer 150 1,795 RM RM
Dividend received 105 1,900 Balance as per Bank Statement 2,000
IBG fund transfer 100 2000 Add: Uncredited lodgements
- Commission received 780
Analysis of items in the Bank Statement, not in the Cash Book: - T. Receivables 1,200 1,980
3,980
i) Receipts in the bank account (already credited in the Bank Statement, but Less: Unpresented cheques
not yet debited in the Cash Book) - Cheque no. 12503 550
 Interest on fixed deposit RM70 - Cheque no. 12504 500 (1,050)
 Credit transfer RM150 Balance as per revised Cash Book 2,930
 Dividend received RM105
 IBG fund transfer from other bank via e-banking RM100

ii) Standing order (already debited in the Bank Statement, but not yet
credited in the Cash Book) RM120

iii) Bank charges (already debited in the Bank Statement, but not yet credited
in the Cash Book) RM20
 ABFA1163 FINANCIAL ACCOUNTING II 5

Lecture Illustration 3: Bank Overdraft Analysis of items in the Bank Statement, not in the Cash Book:

Cash Book (bank columns only) i) Receipts in the bank account (already credited in the Bank Statement, but
RM RM not yet debited in the Cash Book)
May 15 Jaya Bhd 450 May 1 Balance b/d 3,000  Interest RM55
28 Soda & Co 215 9 Johan Sdn Bhd 190  Direct credit RM950
31 Balance c/d 3,220 18 Equipment 600
25 Mei Enterprise 95 ii) Standing order (already debited in the Bank Statement, but not yet
3,885 3,885 credited in the Cash Book) RM170
June 1 Balance b/d 3,220
iii) Bank charges (already debited in the Bank Statement, but not yet credited
in the Cash Book) RM30
Bank Statement as at 31 May
Withdrawal Deposit Solution:
( Debit) (Credit) Balance
RM RM RM Revised Cash Book (bank columns only)
RM RM
May 1 Balance 3,000 Dr May 31 Interest received 55 May 31 Balance b/d 3,220
11 J Ltd 190 3,190 Dr “ Direct credit 950 “ Standing order 170
18 Cheque 450 2,740 Dr “ Balance c/d 2,415 “ Bank charges 30
20 Interest 55 2,685 Dr 3,420 3,420
23 Standing order 170 2,855 Dr June 1 Balance b/d 2,415
25 Bank charges 30 2,885 Dr
31 Direct Credit 950 1,935 Dr
Bank Reconciliation Statement as at 31 May
Analysis of items in the Cash Book, not in the Bank Statement: RM RM
Balance as per Bank Statement (1,935)
i) Uncredited lodgement (already debited in the Cash Book, but not yet Add: Uncredited lodgement
credited in the Bank Statement): - Soda & Co 215
 Soda & Co RM215 (1,720)
Less: Unpresented cheques
ii) Unpresented cheques (already credited in the Cash Book, but not yet - Equipment (600)
debited in the Bank Statement): - Mei Enterprise (95) (695)
 Equipment RM600 Balance as per revised Cash Book (2,415)
 Mei Enterprise RM95
 ABFA1163 FINANCIAL ACCOUNTING II 6

Lecture Illustration 4: Difference in Opening Balances Solution:

Cash Book (bank columns only) Reconciliation of opening balances as at 1 June

RM Chq RM RM
June1 Balance b/d 750 June 15 Insurance 109 170 Opening balance as per Bank Statement 310
8 Sales 330 20 Purchases 110 25 Add: Uncredited lodgement 550
25 K Ltd 180 28 Yok S/B 111 175 Less: Unpresented Cheque (110)
29 Zeta & Co 112 100 Opening balance as per Cash Book 750
30 Balance c/d 790
1,260 1,260
July 1 Balance b/d 790 Revised Cash Book (bank columns only)
RM RM
June 30 Balance b/d 790 June 30 Bank charges 80
Bank Statement as at 30 June “ Credit transfer 300 “ Error in Cash
Book 225
Withdrawal Deposit 785
“ “ Balance c/d
(Debit) (Credit) Balance
1,090 1,090
RM RM RM
July 1 Balance b/d 785
June 1 Balance 310
2 Cheque 108 110 200
3 Deposit 550 750 Bank Reconciliation Statement as at 30 June
10 Deposit 330 1,080 RM RM
17 Cheque 109 170 910 Balance as per Bank Statement 880
21 Cheque 110 250 660 Add: Uncredited lodgement
25 Credit transfer 300 960 - K Ltd 180
30 Bank charges 80 880
1,060
Less: Unpresented cheques
- Cheque no: 111 (175)
- Cheque no: 112 (100) (275)
Balance as per revised Cash Book 785
 ABFA1163 FINANCIAL ACCOUNTING II 7

Lecture Illustration 5: Adjustments of error in the Cash Book Lecture Illustration 6: Adjustment of error in the Bank Statement

As at 30 September, the balance in the Cash Book of Warisan Enterprise was On 31 January, a firm’s Cash Book showed a credit balance of RM1,500 on
RM80,515 on debit side. Bank Statement on the same date showed a credit its current account, which did not agree with the balance in Bank Statement.
balance of RM111,230. During the reconciliation, the following points were noted:
RM
On investigation of the difference between the two sums, it was established Not recorded in Cash Book
that: Bank charges 360
(i) Cash book had been undercast by RM9,000 on the debit side. Direct debit 4,500
(ii) Cheques deposited but not yet credited by bank amounted to Transfer from fixed deposit account 5,000
RM20,820. Not recorded in Bank Statement
(iii) Cheques drawn but not presented to the bank amounted to RM42,535. Unpresented cheques 9,160
Uncredited lodgements 4,300
Required:
(a) Show the correction to the Cash Book, It was also discovered that bank had debited the firm’s account with a
(b) Prepare a statement reconciling the balance per Bank Statement to the cheque of RM1,000 in error. What was the balance on the Bank
balance per Cash Book. Statement?

Solution: Solution:
Revised Cash Book (bank columns only)
(a) Revised Cash Book (bank columns only) RM RM
RM RM Jan 31 Transfer from Jan 31 Balance b/d 1,500
Sep 30 Balance b/d 80,515 Sep 30 Balance c/d 89,515 fixed deposit 5,000
“ Error in Cash “ Balance c/d 1,360 “ Bank charges 360
Book 9,000 “ Direct debit 4,500
89,515 89,515 6,360 6,360
Oct 1 Balance b/d 89,515 Feb 1 Balance b/d 1,360

Bank Reconciliation Statement as at 31 January

(b) Bank Reconciliation Statement as at 30 September RM RM
RM RM Balance as per Bank Statement (bal. fig.) 5,220
Balance as per Bank Statement 111,230 Add: Uncredited lodgement 4,300
Add: Uncredited lodgements 20,820 Error by the bank 1,000 5,300
132,050 10,520
Less: Unpresented cheques (42,535) Less: Unpresented cheques (9,160)
Balance as per revised Cash Book 89,515 Balance as per revised Cash Book 1,360
 ABFA1163 FINANCIAL ACCOUNTING II 8

Lecture Illustration 7: Finding the Bank Statement balance Lecture Illustration 8:

A company’s Bank Statement shows RM7,150 direct debit and RM3,530
investment income that were not yet recorded in the Cash Book. The Bank
Statement does not show a customer’s cheque of RM8,750 and a cheque
payment of RM4,000 for the purchase of a second hand motor van, which
have already been entered in the Cash Book on the last day of the accounting
period.
If the Cash Book shows a debit balance of RM6,100, what is the balance that
appears on the Bank Statement?
On 30 June, Carmen’s Cash Book showed that she had an overdraft of
RM3,000 on her current account at the bank. A Bank Statement as at the end
of month June showed that she was in credit with the bank by RM650.
On checking the Cash Book with the Bank Statement, you find the following:
(i) Cheques drawn amounting to RM5,000 had been entered in the
Cash Book but had not been presented.
(ii) Cheques received amounting to RM4,000 had been entered in the
Cash Book but had not been credited by the bank.

(iii) On 29 June, Carmen instructed the bank to transfer interest

Solution: received on her deposit account amounting to RM600 to her
current account. Carmen had credited this amount in the Cash
Revised Cash Book (bank columns only) Book on 29 June. On the other hand, the bank had wrongly
RM RM delayed the transfer, which was made only on 3 July, the next
Balance b/d 6,100 Direct debit 7,150 month.
Investment income 3,530 Balance c/d 2,480
9,630 9,630 (iv) Bank charges RM35 and a standing instruction to pay insurance
Balance b/d 2,480 premium of RM315 had not entered in the Cash Book.

(v) The payment side of Cash Book had been undercast by RM100.
Bank Reconciliation Statement as at …
RM RM (vi) Dividend received amounting to RM2,500 had been paid direct to
Balance as per Bank Statement (bal. fig.) (2,270) the bank and not entered in the Cash Book.
Add: Uncredited lodgement 8,750
6,480 (vii) A cheque issued to Johnny for RM250 was replaced when it
Less: Unpresented cheque (4,000) became outdated. It was entered again in the Cash Book, no other
Balance as per revised Cash Book 2,480 entry being made. Both cheques were included in the total of
unpresented cheques shown in (i) above.

Required:
(a) Indicate the appropriate adjustments in the Cash Book.
(b) Prepare a statement reconciling the amended balance with that shown in
the Bank Statement.
 ABFA1163 FINANCIAL ACCOUNTING II 9

Solution:

Revised Cash Book (bank columns only)

RM RM
June (iii) Interest rec’d June Balance b/d 3,000
30 wrongly credited 600 30
“ (iii) Interest rec’d 600 “ (iv) Bank charges 35
“ (vi) Dividend “ (iv) Standing order 315
rec’d not recorded 2,500
“ (vii) Chq outdated 250 “ (v) Payment u/cast 100
“ Balance c/d 500
3,950 3,950
July 1 Balance b/d 500

Bank Reconciliation Statement as at 30 June

RM RM
Balance as per Bank Statement 650
Add: Uncredited lodgements (ii) 4,000
Interest received not yet credited (iii) 600 4,600
5,250
Less: Unpresented cheques (i) (5,000)
Cheque to Johnny cancelled (vii) (250) (4,750)
Balance as per revised Cash Book 500

Please click the link below for the steps to do bank reconciliation:
https://www.youtube.com/watch?v=HLkN6hwi3DM
https://www.youtube.com/watch?v=7x-W_xFCD2A