TOPIC: BANK RECONCILIATION STATEMENT

There are many individuals who keep various types of accounts at commercial banks. Some of
these are:

1. Saving accounts.

2. Fixed Deposit accounts.

3. Chequeing / Current accounts.

4. Foreign Currency accounts.

There are also many reasons why people keep their monies at the banks. A few of the reasons
are:

1. To accumulate wealth.

2. To protect their money (safe keeping).

3. To earn interest.

4. To have a proper record of their spending and savings.

It must be noted that for this topic, we are specifically looking at the Current Account.

When an individual has an account at the bank, they will treat the bank as an asset. This is so
because the money they have at the bank belongs to them. Therefore, when they make a
deposit, they will debit their cash book (bank account). In addition, when a withdrawal or
payment is done, they will credit their cash book (bank account).

On the other hand, the bank also keeps a record of the customer’s transactions. However, the
bank treats the customer as a liability. Therefore the bank will credit the customer’s account
when they make a deposit and debit their account when they make a withdrawal or payment.

At the end of the month, the bank sends the customer a document which is called a Bank
Statement. This document will show all the transactions done directly by the customer or by
the bank on the customer’s behalf.
NB: When the Bank Statement has a credit balance the Cash Book will have a credit balance
and vice versa.

Based on what was explained above, it would be expected that since both parties (bank and
customers) are keeping records, the balances would be the same amount. However, in many
cases the balances differ/ they are not the same/ they do not agree.

When the cash book and bank statement balances do not agree, it is the customer who will
reconcile them. Hence a Bank Reconciliation Statement is prepared by the customer. This
simply means that the customer will bring both balances together or make them agree. The
cash book and bank statements balances are reconciled when the customer starts with the
cash book balance and arrive at the bank statement balance or the other way around.

NB. The items that result in the cash book and bank statement balances being different are
the same items that are used to reconcile the balances.

In order to identify the items that have caused the difference in the cash book and bank
statement balances, a comparison of both records are done by the customer. The debit side of
the cash book is compared with the credit side of the bank statement and vice versa.

Items that will result in the Cash Book and Bank Statement balances not agreeing:

▪ Unpresented Cheques - These are cheques that have been paid out by the customer
and recorded on the credit side of the cash book; however, they have not been
recorded by the bank or pass through the banking system.

▪ Late Lodgment/ Outstanding Lodgments/ Uncredited Cheques - Cheques and cash

received by the customer and debited in their cash book; however, they have not pass
through the banking system.

▪ Credit Transfers/Direct Credit - Monies the bank receives on behalf of the customer,
directly through the banking system. This means from one bank to the next.
 ▪ Standing Order – Payments that the bank makes on behalf of the customer. These
payments are usually a fixed amount, paid on a specific date. Examples: Mortgage,
Insurance Premium.

▪ Direct Debit – These are also payments that the bank makes on behalf of their
customers. However, these payments are not fixed amounts and are also paid at various
times. Example: Utility Bills.

▪ Bank Charges – Money deducted by the bank from the customer’s account for
services rendered.

▪ Dishonoured Cheque - Cheques received and debited by the customer, however, for
one of many reasons, the bank will not accept or honour the cheque.

▪ Errors – These are mistakes that are made either by the bank or the customer.

NB. Only errors that are made by the customer can be corrected by the customer.

Methods used for reconciling cash book and bank statement balances.

There are two methods that are used to reconcile the cash book and bank statement balances.
They are:

Method 1: A bank reconciliation statement only. For this method we can either start with the
cash book balance or the bank statement balance. When the statement is prepared starting
with the cash book balance, the following is done:
Add: Subtract:

Unpresented Cheques Late Lodgment

Credit Transfers Standing order

Direct Debit

Bank Charges

Dishonoured Cheque

Example 1

Bank Reconciliation Statement as at January 31, 2014

$ $
Balance as per Cash Book 10 000
Add:
Unpresented Cheque 20 000
Credit Transfer 15 000
35 000
45 000
Subtract:
Standing Order 4 500
Direct Debit 6 000
Bank Charges 1 000
Dishonoured Cheque 9 000
Late Lodgment 7 000
27 500
Balance as per Bank Statement 17 500

When the Bank Reconciliation Statement is prepared starting with the Bank Statement Balance,
the opposite is done in terms of how the items are treated.

Example 2

Bank Reconciliation Statement as at January 31, 2014

$ $
Balance as per Bank statement 17 500
Add:
Standing Order 4 500
Direct Debit 6 000
 Bank Charges 1 000
Dishonoured Cheque 9 000
Late Lodgment 7 000
27 500
45 000
Subtract:
Unpresented Cheque 20 000
Credit Transfer 15 000
35 000
Balance as per Cash Book 10 000

Method 2

This method consists of two parts:

1. Updated/ Adjusted Cash Book

2. A Bank Reconciliation Statement

Updated Cash/ Adjusted Cash Book

This is where changes are made in the cash book. Items that are on the bank statement and not
in the cash book will now be placed in the cash book. For example, standing order that was
recorded by the bank will now be placed in the cash book on the credit side. This entry would
be made in the cash book as the customer’s asset would have decrease.

NB. It is the closing balance that is placed in the Cash Book when it is updated.

Bank Reconciliation Statement

Items that are in the cash book and not on the bank statement will remain on the bank
reconciliation statement.

Updated Cash Book

 $ $
Balance b/d 10 000 Standing Order 4 500
Credit Transfer 15 000 Direct Debit 6 000
Bank Charges 1 000
Dishonoured Cheque 9 000
Balance c/d 4 500
25 000 25 000
Balance b/d 4 500

Bank Reconciliation Statement as at January 31, 2014

$ $
Balance as per Updated Cash Book 4 500
Add Unpresented Cheque 20 000
24 500
Less Late Lodgment 7 000
Balance as per Bank Statement 17 500

In some cases, after the cash book has been updated, students may be required to prepare the
bank reconciliation statement stating with the bank statement balance.

Bank Reconciliation Statement as at January 31, 2014

$ $
Balance as per Bank Statement 17 500
Add Late Lodgment 7 000
24 500
Less Unpresented Cheque 20 000
Balance as per Updated Cash Book 4 500
Errors

An error is a mistake that has been made. Both the bank and customer can make mistakes.
Errors that are made by the customer are corrected in their cash book. Errors that are made by
the bank must be corrected by them. However, the error is noted by the customer on the bank
reconciliation statement.

Common errors made by customers:

1. An entry was made on the wrong side of the cash book. For example, a receipt was
credited instead of being debited in the cash book. To correct such an error, the
customer must double the figure and place it on the correct side in the updated cash
book.

Example: A receipt of $10 000 From J. Brown was entered on the credit side of the bank
account.

Updated Cash Book

$
Receipt entered as payment 20 000

2. The incorrect amount was either entered on the debit or credit side of the cash book.
This error is corrected by finding the difference between the correct and incorrect
figures. The difference is used to make the correction. If the incorrect amount was more,
 the difference will be subtracted. On the other hand, if the incorrect was less, the
difference will be added.

Example: Payment of $5 000 to M. Miller was entered in the cash book as $500.

Updated Cash Book

$
Payment understated 4 500

NB:

● When a receipt is overstated, the difference is placed on the credit side of the updated
cash book.

● When a receipt is understated, the difference is placed on the debit side of the
updated cash book.

● When a payment is overstated, the difference is placed on the debit side of the
updated cash book.

● When a payment is understated, the difference is placed on the credit side of the
updated cash book.

NB. If the bank debited the customer’s account in error, this would indicate that the bank owes
the customer less money. The amount is therefore subtracted on the bank reconciliation
prepared by the customer. However, if the bank credited their account in error, this would
indicate that they owe them more money. This amount would be added on the statement.
Bank Overdraft – This is a case where the bank allows the customer to pay out or withdraw
more money than what the customer has in their account. When this occurs:

1. The customer will treat the bank as a liability

2. The bank will treat the customer has an asset.

If the cash book and bank statements do not agree when there is an overdraft, the customer
will still need to reconcile both balances.

NB. The same principles are applied as before and the items are treated the same, however, the
negative and positive rules are applied.