Bank reconciliation

1. Omission from cash book: These refers to the items shown on the bank statement but not
entered in the cash book
 Standing orders: Business instruction for the bank to withdraw from the account.
Standing orders are frequently used to pay rent, insurance premium, subscriptions and
hire-purchase installment. They can be used to the collection of dividend, interest, rent
receivable…. Standing orders payment appear as debit on the bank statement, while
receipts are shown as credit.
 Direct debit: Business instruction for the bank to withdraw from the account. They are
similar to Standing Order except that the amounts involved often fluctuate i.e electricity,
telephone….obviously, Direct debit appears as debits on the bank statement.
 Bank charges: appears as debits on the bank statement
 Credit transfer: when the trader receives the money, it appears as credit on the bank
statement, while the payments appear as debit on the bank statement.
 Dishonoured cheques: these are cheques originally received from trade
receivables/customers and paid into the bank by the transfer but subsequently returned
to him unpaid, most probably because the customers did not have sufficient fund in
their bank account. Dishourned cheques are shown as debits on the bank statement. It
means that customers concern still owe the relevant amounts to the traders.

2. Omission from bank statement: These refers to the items shown on the cash book but not
shown in the bank statement. Due mainly to timing differences
 Unpresented cheques
 Unclear lodgements
3. Reconciliation

Step 1: Cash book adjustment

- Entering the omitted receipts on the debit side of the cash book and omitted payments on
the credit side of the cash book, the original cash book balance is updated. Having done that,
we are now ready to draw up bank reconciliation statement.

Step 2: Preparation of Bank Reconciliation Statement

- Those items which, due to the timing difference, appear in the cash book but not in the bank
statement i.e: unpresnted cheque, unclear lodgement. The procedure is follow:
 When we start with the bank statement balance: Add the unclear lodgement and
deduct the unpresented cheque to arrive at the adjusted cash book balance.
 When we start with the adjusted cash book balance: Deduct unclear lodgement
and Add the unpresented cheques to arrive at bank statement balance.

Note: when the balance we start with is an overdraft, the above procedure should be
reversed. This means the items normally added will now have to be deducted and vice versa.