O Level Accounting Chapter 4 Theory Bank Reconciliation

BASIC PRINCIPLE

 Whenever a business deposits cheques or cash into the Bank, it enters on the debit side
of the Bank account because it is an asset for the business.

 When a bank receives cheques or cash from the business, it enters on the credit of the
business account because it is a liability for the bank.

 On issue of a cheque for payment to its supplier, the business enters this cheque on the
credit side of bank account, because it decreases the business, assets.

 When these cheques are presented by the suppliers to the bank for receiving money the
bank enters them on the debit side of business account. Because it decreases the bank’s
liabilities.

Types of bank accounts

Current accounts

● Regular deposit can be made

● Account holder can withdraw money at any time
● There will be no interest given to act holder

Deposit A/C or Fixed deposit A/CS

● These are the interest holding accounts

● The amount is deposit for a specific period
● Before the specific period the account holder cannot withdraw money

 To deposit money in current a/c, the a/c holder uses pay-in-slip

 To withdraw money, cheque book is to be used and its validity is of 6 month

Types of cheque

Bearer cheque or cash cheque:

One who holds the cheque can withdraw the money. The bank gives cash against that
cheque

Cross cheque:

These cheque never cash they can only transferred to the account of payee.

From the desk of Sir Zeeshan Malik Page 1

O Level Accounting Chapter 4 Theory Bank Reconciliation

ACCOUNTING TERMS USED IN THIS CHAPTER

Uncredited cheques/Uncleared cheques (outstanding lodgments)

Those cheques and cash received by a business and entered on the debit side of the cash
book, and deposited with the bank, but these deposits are still in banking channel and not
yet added to the business account’s balance.

Unpresented cheques (outstanding cheques)

Those cheques which have been issued by a business for payment to its suppliers, but the
suppliers have not presented them to the bank to collect their money. Hence the bank has
not yet deducted these amounts from the business account’s balance.

Credit transfer / bank giro credit

Under this arrangement, a bank directly collects money from the customer of a business
and makes credit entry in the business account for this amount. On receipt of bank
statement, business makes debit entry in its bank account.

Dishonored cheques

Those cheques which we received from the customers and paid into the bank but the bank
has failed to honor it. It was recorded on the debit side of the cash book. When the bank
notifies us (through bank statement) then we have to chenille it by a credit in the cash
book.

Standing order

A business can instruct its bank to pay regular amounts of money at a stated date to a
person or firm. On payment bank makes entries on debit side of business account. When
business receives bank statement it makes entries on the credit side of bank account.

Direct debit

Under this arrangement a business gives permission to its creditors to obtain money
directly from bank. On these payments bank make entries on the debit side of business
account. When business receives bank statement it makes entries on the credit side of bank
account. (Cash book)

Bank charges

This is an amount deducted by the bank from business account for services provided by the
bank. When business receives this intimation, it enters on the credit side of bank account.

From the desk of Sir Zeeshan Malik Page 2