PROJECT ON

Bank Reconciliation Statement

Submitted To: Ms. Samana Abbas

(B.F.Accounting)

Submitted By: Anum Tariq

Maryam Javed

Date: 2nd Dec,2009

In The Name of Allah The Most Gracious The Most Merciful.

Acknowledgement:
We initially like to thank Allah Almighty for giving us the confidence and the courage to seek knowledge as well as to successfully finish this project. After this we would like to thank our parents for the continuous support and bearing us and trusting our abilities. A very important person needs to be thanked, Ms. Samana Abbas for being an excellent guide. We will always be grateful to you for your support & all the hard work and efforts you have put in, for educating and changing us.

Table of Contents
Sr.# 1. 2. 3. 4. 5. 6. 7. 8. Topics Introduction Salient points Purpose Advantages Errors Reconciling Bank statement Mechanism of BRS Cover Letter Page # 5-7 8-9 10-12 13-15 16-19 20-22 23-33 34

Introduction

BANK RECONCILIATION STATEMENT:

5

Bank reconciliation is the process of comparing and matching figures from the accounting records against those shown on a bank statement. The result is that any transactions in the accounting records not found on the bank statement are said to be outstanding. Taking the balance on the bank statement adding the total of outstanding receipts less the total of the outstanding payments this new value should (match) reconcile to the balance of the accounting records. Bank reconciliation allows companies or individuals to compare their account records to the bank's records of their account balance in order to uncover any possible discrepancies. Discrepancies could include: cheques recorded as a lesser amount than what was presented to the bank; money received but not lodged; or payments taken from the bank account without the business's knowledge. A bank reconciliation done regularly can reduce the number of errors in an accounts system and make it easier to find missing purchases and sales invoices.

Bank statement:
An account statement or a bank statement is a summary of all financial transactions occurring over a given period of time on a deposit account, a credit card, or any other type of account offered by a financial institution. Bank statements are typically printed on one or several pieces of paper and either mailed directly to the account holder's address, or kept at the financial institution's local branch for pick-up. Certain ATMs offer the possibility to print, at any time, a condensed version of a bank statement. Depending on the financial institution, bank statements may include certain features such as the cancelled cheques (or their images) that cleared through the account during the statement period, promotional inserts or important notices about changes in fees or interest rates

Cash book:
Cashbooks are simple accounting books that are used to record basic information about cash receipts and payments.

Salient points On Bank Reconciliation Statement

Salient points On Bank Reconciliation Statement:

Salient points On Bank Reconciliation Statement are as following: 1.Understand the objective of Bank Reconciliation Statement which is simply to reconcile the bank balance of the Cash Book with the balance in the Bank Statement 2.Remember that in the Bank Statement which has the records of the firm. Normally the firm is a creditor to the bank hence the bank records deposits of the firm on the credit side and payments or withdrawals on the debit side. 3.Terms for us to be familiar with when preparing a bank reconciliation statement

Unpresented cheques:

Cheques issued to creditors, but not presented for payment to the firms bank, till the date of reconciliation.

Bank lodgments :

Not yet credited-cheques received from debtors but not deposited in the bank account.

Credit transfer-money :

Directly deposited in the bank by a debtor/customer.

Direct debit:

Instructions given to bank to pay an organization directly from the firms account.

Standing order:

Bank pays directly from the firms accounts, payment like insurance premium, rent, others

Purpose of Bank Reconciliation Process

Purpose of Bank Reconciliation Process:

Identify and rectify divergences:

The purpose of bank reconciliation process is to identify and rectify divergences between the two bank balances.

Prevent overspending by keeping strict accounts of cash outflows:

Bank reconciliations prevent overspending by keeping strict accounts of cash outflows. They also check for any overcharging of fees, done on the bank's side.

Correction of bank errors:

Bank reconciliations aid in the timely correction of bank errors. They also check duplication of transactions.

Help in tracking and correcting employee errors:

Bank reconciliations help in tracking and correcting employee errors. Regular bank reconciliations help in avoiding payment problems and delays due to insufficient balances.

Active check on the embezzlement of money:

Bank reconciliation processes put an active check on the embezzlement of money and ensures responsible accounting.

Help in reaching the correct account balance

Bank reconciliations help in reaching the correct account balance figures and this provides external auditors with easily verifiable documentation.

10

Reduce accounting errors:

If a bank reconciliation process is done regularly, it can reduce accounting errors drastically and makes the finding of missing purchase and sales invoices, easy in the accounting system. i)Bank reconciliations make it easy to identify whether the accounting errors are actual errors or errors of a timing mismatch. ii)Bank reconciliations make it possible to keep track of checks that are cashed, separate from those that are outstanding or in transit. Basically, the purpose of bank reconciliations is to introduce efficiency and transparency into the business accounting systems. It is highly worthwhile to take time and do them, as it helps in avoiding situations like the one mentioned in the description. Nowadays, the bank reconciliation process can also be outsourced to specialist companies.

11

Advantages

12

Advantages of bank reconciliation statement:

Error Detection:

It helps in detection of errors of omission of transactions or wrong recording of transactions either by the bank or the business enterprises. Errors identified in the books by preparing BRS can be rectified.

Delay in Collection Revealed:

The delay in the collection of cheques, bills, etc., if any, is revealed, when BRS is prepared. The matter can be pursued to avoid unnecessary delays in collection. It also helps the management to keep track of the cheques and bills sent for collection.

Completion of Cashbook:

Business enterprises get information about bank charges, cheques dishonored, direct payments, direct deposits, etc. from the bank statement only. Entries of the same are made in the Cashbook on the basis of bank statement. Thus to complete the Cashbook, comparison and reconciliation of Cashbook and bank book is essential.

Chances of Embezzlements are Reduced:

Periodical comparison of Cashbook and passbook keeps a check on the office staff. For example, entry for cash deposit is appearing in the Cashbook but not in the passbook, indicates fraud being committed by the staff. This type of frauds come to light when Bank Reconciliation Statement is prepared.

Requirement of less manpower:

It requires less man power.

13

Easy identification of errors:

It Provides the ability to reduce bank statement and cash book errors.

Help in finding uncover irregularities:

It helps to find uncover irregularities and eliminate them.

14

Errors

15

Errors:The difference between the two balances are due to the following reasons. 1. Un presented cheques: Cheques issued but not presented for payment. When cheques are issued, the entry in the cash book is made immediately. In the books of the bank, the entry is made only when the cheque is presented for payment. It is possible that at the time when the balance of the two books are being compared, some of the cheques might have been issued but might not have been presented for payment thus causing a disagreement between the two balances. 2. Un collected cheques: Cheques paid into the bank but not yet cleared. As soon as the cheques arc deposited into the bank, the entry is passed on the debit side of the bank column in the cash book. The customer's account is credited by the bank only when the Cash book is compared with pass book some of the cheques deposited by the concern may remain uncollected. For example, Pakistan Company Limited deposited a cheque on March 28, 2003 for a sum of Rs.3,000. The cheque was collected on April 4, 2003. In case the bank sends a statement of account upto March 31, 2003, there will be a difference of Rs 3,000 between the balance shown by the cash book and the pass book. 3. Interest allowed: Interest allowed by the bank. Bank might have credited the account of the customer with the interest and may have made the entry in the pass book. It is possible that the entry 10 respect of such interest may not have been made by the customer in the bank column of the cash book thus causing a disagreement between the two balances. 4. Interest received: Interest and bank charges debited by bank. The bank debits the account of the customer by way of interest on overdraft. It also debits the account of the customers by way of incidental charges and collection charges. As soon as
16

these charges are made the bank debits the customer's account. But the entries in the cash book are made by the customer .only when he receives the bank statement or the pass book. 5. Interest collected by the bank: Interest, dividend etc. collected by the bank. Sometimes interest on government securities or dividend on shares is collected by the bank and is credited to customer's account. If the entry for these do not appear in the cash book, the balance will differ. 6. Direct payment by the bank: Direct payment by the bank Sometimes under standing instructions from the client, certain payments like insurance premium, club fees etc. are made by the bank. The entry in the bank column of the cash book is only made when the necessary intimation to that effect is received from the bank by the client. The entries in the cash book and pass book may be on different dates.

7. Direct payment into the bank

Direct payment into the bank by a customer. Sometimes our customers deposit money direct into the account in the bank, the corresponding entry for which may not appear in the cash book, due to delay in necessary instructions by the customers. 8. Dishonor of bill: Dishonor of bill discounted with the bank. Sometimes customers get their bills discounted with the bank. If the bank is not able to get payment of these bills on the due date, it will debit the customers accounts with the amount of the bills together with the noting charges, if any. The customer will pass the entry in his books on receipt of the information from the bank.

9. Errors on the part of Customer:

Besides the reasons stated above, there may be certain errors from customer's side, e.g,, posting in the wrong column, calculation error, unrecorded transaction, etc. In such cases also there would be a difference between the balances of Pass Book and cash book 10. Errors committed by bank: Bank may also commit certain errors causing difference in the Pass Book id Cash Book by giving wrong.debit or credit to customers
17

account. In such cases the balance of Cash Book and Pass Book will not agree. A reconciliation statement is, therefore, prepared at periodical intervals with a view to indicate the items which cause such disagreement between the balance as shown by the bank column of the cash book and the bank pass book on any given date.

18

Mechanism of Preparation of Bank Reconciliation Statement

19

Reconciling the bank account:

Reconcile is to i. To bring (something) into a state of agreement or accord. ii. Getting two things to correspond make compatible with. Reconciling a bank account implies ensuring that the bank account balance as per the Cash Book and the Bank book is agreeing after taking into consideration all the reasons for the difference in the balance. In reconciling the bank balance, we consider the balance either as per the Cash Book or the Bank Pass Book and make adjustments to the same to account for the difference in the books and thereby check whether we get the balance as per the other book or not. If after taking into consideration all the reasons for the difference in balances as shown by both the books and making adjustments to the balance as shown by one of the books, we arrive at the balance as per the other book, then we assure ourselves that the balance as revealed by both the books is correct.

When is BRS prepared?

Bank Reconciliation Statement (BRS) is prepared as and when needed. The need for preparation of BRS arises only when there is a difference in the bank a/c balance as revealed by the Cash Book and the Bank Pass Book. In simple terms BRS can be taken to be a statement that explains the difference. Generally we prepare a BRS at the end of the accounting period, to explain the difference between the Bank a/c balance as shown in the Balance Sheet and the balance as revealed by the pass book.

20

The process is as follows:

Cash Book (Bank Column)

Bank Reconciliation Statement

Bank Statement

21

Nature of th bank
Format of Bank Reconciliation Statement:

Debit represents an in

Ba

22

Bank Reconciliat
Mechanism of Preparation of BRS:
There are two ways to prepare Bank Reconciliation Statement:

Corrected balance in hand as per C Add Unpresented cheques Wrong credits by the bank

1. To reconcile the Bank statement with the Corrected Cash Book.

2. To reconcile the Bank statement with the Unadjusted Cash Book.

1.

To reconcile the Bank statement with the Corrected Cash Book:

There are three steps to prepare Bank reconciliation statement by reconciling the Bank statement with Corrected Cash Book.

Less Bank deposits notto yet entered Check the Bank statement with the Cash book Wrong debits by the bank
23

identify items which have been omitted.

Compare the cash receipts book to the receipts shown on the bank statement (the credits on the bank statement) - for each receipt that agrees, tick the item in both the cashbook and the bank statement.

Update the Cash book with any omissions and errors made by the firm itself.

Any un-ticked items on the bank statement (other than rare errors made by the bank) will be items that should have been entered into the cash books, but have been omitted for some reason - these should be entered into the cashbook and then the amended balance on the cashbook can be found. To find the correct cashbook balance a ledger account is used for the bank with the original cashbook balance shown as the brought forward balance and any additional payments shown as credits and receipts as debits.

Prepare the Bank reconciliation statement.

Finally, any un-ticked items in the cashbook will be the timing differences - unpresented cheques and outstanding lodgments - these will be used to reconcile the bank statement closing balance to the corrected cash book closing balance.

Example:Question: Cash Book (Bank column)

1996 Dec 1 bal b/d 3 W lee 10 T Cheung 30 S Sin 2800 1000 2000 1400 _________ 7200 1996 Dec 8 20 29 31 K Wong C cork M tang bal c/f 1600 700 100 4800 ________ 7200

24

Bank Statement 1996

Dec 1 3 8 10 Balance cheque deposit cheque 76896 cheque deposit

Dr,

Cr.
1000

Balance
2800 3800 2200 4200 2200 2170 1920 1220

1600 2000 2000 30 250 700 50 300

11 cheque dishonored 11 service charges 12 auto pay rent 20 cheque 76344 31 bank interest 31 credit transfer commission received 31 balance

1270 1570 1570

Answer Cash book (bank column)

1996 Dec 31 balance b/f 31 Commission Rec. 31 Bank Interest 4800 300 50 ______ 5,150 1996 Dec 31 T CheungDishonored Cheque 2000 31 bank charges 30 31 Rent 250 31 Bal c/f 2870 _______ 5,150

25

Bank Reconciliation Statement as at 31 Dec 1996

Balance as per Pass book Add: Unpresented Cheques 2870 100 _____ 2,970 1400 ______ 1,570

Less: Bank deposits not yet entered On bank statement Adjusted Bal. as per cash book

2. To reconcile the Bank statement with the Unadjusted Cash Book.

There are two steps in reconciling the bank statement with the unadjusted Cash Book: Check the bank statement and the cash book to identify the items which have been omitted. Check opening balances of both Cash Book and Bank Statement to ascertain whether the two balances are the same; Compare the Cash Books Dr Column (receipts) with the Cr column of Bank Statement, tick all common items. Compare the Cash Books Cr columns (payments) with the Dr Column of Bank Statement, tick all common items. Prepare the bank reconciliation statement. All items unticked in the Bank Statement will be adjusted in the Cash Book and all items unticked in the Cash Book will be recorded in the Bank Reconciliation Statement.

26

Example
Cash Book (Bank column)
1996 Dec 1 bal b/d 3 W lee 10 T Cheung 30 S Sin 2800 1000 2000 1400 _________ 7200 1996 Dec 8 20 29 31 K Wong C cork M tang bal c/f 1600 700 100 4800 ________ 7200

1996
Dec 1 3 8 10 Balance cheque deposit cheque 76896 cheque deposit

Bank Statement Dr,

Cr.
1000

Balance
2800 3800 2200 4200 2200 2170 1920 1220

1600 2000 2000 30 250 700 50 300

11 cheque dishonored 11 service charges 12 auto pay rent 20 cheque 76344 31 bank interest 31 credit transfer commission received 31 Balance

1270 1570 1570

Answer: The facts are same as previous example but cash book is not updated.

27

Bank Reconciliation Statement as at 31 Dec 1996

Corrected balance in hand as per Cash Book Add Credit transfers Bank interest Unpresented cheques 5,250 Less Bank charges Dishonored cheques Bank deposits not yet entered on Bank Statement Direct debit 30 2,000 1,400 250 4,800 300 50 100 450

3,680 1,570

Other Issues & their Accounting treatment: 1) Post-Dated Cheque:

A cheque with a future date entered. The cheque cannot be cashed until that date is reached. Accounting treatment The cheque should be held by the cashier and no entry should be made until the cheque becomes mature. If a post-dated cheque has been entered in the cash book, make correcting entries. In corrected entry we Debit the Debtor & Credit the Bank.
Dr. Cr. Debtors Bank With the amount of post-dated cheque.

2) Stale Cheque:
Stale cheques are also known as Unpresented Cheques. Cheques which have been issued by us but not encashed by the recipient of cheque. Accounting Treatment: When stale cheque is received back we should pass the following journal entry.

28

Dr Bank Cr Creditor With the amount of stale cheque.

The same cheque cannot be issued once again but we can issue new cheque with the same name which was issued earlier at any time either immediately or passing some time. 3) Errors made by the bank i. Errors corrected within the current accounting period. ii. Errors not corrected within the current accounting period. Accounting Treatment: Errors corrected within the current accounting period: As the error has been corrected by the bank within current accounting period, no adjustment is needed. Example 1996 Dec 1 Balance 1 Cheque 54321 2 Credit 8 Cheque 54232 20 Cheque 10674 20 Adjustment Dr $ 520 1,600 300
No Adjustment should be made.

Cr $ 2,000 300

Balance 240 280 1,720 120 180 O/D 120

Errors not corrected within the current accounting period: As it is an error made by the bank, no adjustment is needed in the Companys cash book Example :

An amount of $1,000 which should be credited into the owners personal account was wrongly credited by the bank to the
29

companys bank account. The balance of the cash book is $4,000 and the balance of the bank statement was $5,000 at 31 Dec 1996. Answer: Bank Reconciliation Statement as at 31 Dec 1996 $ Balance in hand as per Cash Book Add wrong credit by the bank 4000 1000 5000

4) Different Opening Balances of the Cash Book & the Bank statement: The following steps should be taken: 1. Reconcile the opening cash book balance with the opening bank statement balance. 2. The adjusting items for the opening balances should not appear in the bank reconciliation statement of the current period. 3. Prepare the bank reconciliation statement. Example Question Cash book
1996 Dec 1 bal b/d 2 C lee 8 P Wong 31 T Kong 10600 2800 1538 1300 7200 1996 Dec 2 bank charges 28 k tong 29 30 31 C-Au China Ltd Bal c/f 500 1000 1400 2100 11238 7200

30

Bank Statement
1996 Dec 1 balance 2 credit 2 credit 3 736 8 credit 22 standing order rent 24 service charges 28 k tong 31 bal 2400 1538 4000 200 1000 1000 2800 Dr Cr Balance 11500 12500 15300 12900 14438 10438 10238 9238 9238

Answer Step: 1 Bank Reconciliation Statement as at 1 Dec 1996 $ $ Balance in hand as per cash book Add: Unpresented Cheque Less: Uncredited Items Bank Charges Balance as per Bank Statement 1000 500 10,600 2400 13000 1500 11,500

31

Step: 2 Cash Book

1996 Dec 31 Bal c/f 11,238
_______

11,238

1996 Dec 31 Rent 4000 31 Service charges 200 31 bal c/d 7038 11,238

Step: 3 Bank Reconciliation Statement as at 31 Dec 1996 Corrected Balance as per Cash Book Add: Unpresented Cheques (1400+2100) Less: Uncredited Item Balance as per Bank Statement 7,038 3,500 10,538 1300 9,238

5) Bank Overdrafts: Businesses sometimes have overdrafts at the bank. Overdrafts are where the bank account becomes negative and the business in effect borrows from the bank. This is shown: In the cash book as a credit (right-hand) brought down balance On the bank statement where the balance is followed by DR (or sometimes by OD) which to the bank and the customer means that there is an overdraft. Example: Question:

32

Cash Book
1996 Dec 1 bal b/f 6 cash 13 C lee 31 R wrong 31 Bal c/d 500 50 200 390 150 1290 1290 1996 Dec 8 A Tong 16 T Chan 28 Textile Ltd 300 500 490

1996
Dec 1 6 8 13 16 29

Bank Statement Dr
balance cash A Tong C Lee T Chan Standing order

Cr
50

Balance
500 550 250 450 50 320 O/D 360 O/D 360 O/D

300 200 500 270 40

31 bank charges 31 balance

Answer: 1996 Cash Book 1996

____

Dec 31 bal c/f 460 460

Dec 31 bal b/f 31 standing order 31 Bank charges

150 270 40 460

Bank Reconciliation Statement as at 31 Dec 1996

33

Corrected Balance as per cash book (overdraft) Add. Unpresented Cheques Less: Uncredited items Balance as per bank statement (overdraft)

(460) 490 30 390 (360)

34

Cover Letter:
Topics covered by Anum Tariq: Introduction,Salient points on bank reconciliation statement, Purpose,Advantages,Errors,Compilation of hard copy. Topics covered by Maryam Javed: Reconciling the bank account, Nature of BRS, Format of BRS , When is BRS needed and Mechanism of preparation of BRS.

35