BANK RECONCILIATION STATEMENTS

Businesses open accounts with banks. When money is paid, into and out of the bank:

1. the business records the transactions into the bank columns of its Cash Book.

NB: A cash book combines the cash and bank accounts. In this case, will be only
concerned with the bank column.

2. At the same time, the bank will also be recording the flows of money into and
out of our bank account.

This therefore means that if all the items entered in the bank column of the business
Cash Book were the same as those entered by the bank in the business records held by
the bank, the balance on the business bank account as shown in the Cash Book and the
balance on the account as shown by the bank’s records would be the same.

Unfortunately, this is not always true, especially in the case of a current account
because:

1. There may be items paid into or out of the business bank account which have
not been recorded in the bank column of the business Cash Book.
2. There may be items entered in the bank column of the Cash Book that have not
yet been entered in the bank’s records of the account.

How to check for 1 and 2 above?

Compare the entries in the bank column of the Cash Book against the record of the
account held by the bank on the bank statement. Banks usually send a copy of that
record, called a bank statement, to their customers on a regular basis, but a bank
statement can be requested by a customer of the bank at any time. See page 352 of
the book.

After comparing the two:

1. There will be items in the bank statement which will not be in the bank columns
of the cash book.

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  Use the items to update the cash book.
2. There will be items in the bank columns of the cash book which will not be in the
bank statement.
 Items on the debit side of the cash book but not in the bank statement
are referred to as “Deposits not yet cleared”.
 Use them to prepare a Bank Reconciliation Statement.
 Items on the credit side of the cash book but not in the bank
statement are referred to as “Unpresented cheques”.
 Use them to prepare a Bank Reconciliation Statement.

Preparing the accounts/statements

1. Updating the cash book

Updating the cash book will be done first.

 The heading is Updated Cash Book

 If the cash book of the business is balanced, start with the balance b/d and take
it to the side where it is on the balanced account.
 If the cash book of the business is not balanced, add the items which were in the
bank statement but not in the cash book.
 See Exhibit 30.2 in Business Accounting 1 for the format.

2. Preparing a bank reconciliation statement

 The heading is:
Bank Reconciliation Statement as at 31 December 2020.
 The format of a Bank Reconciliation Statement

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 Bank Reconciliation Statement as at 31 December 2020.

Dat Details Amount Amount

e $ $
Balance as per cash book xx xxx
Add Unpresented cheques:
Cheque A x xxx
Cheque B x xxx
x xxx
xx xxx
Less Deposits not yet cleared xxx
Balance as per Bank Statement xx xxx

Other terms used in banking

1. Standing Orders

A firm can instruct its bank to pay regular amounts of money at stated dates to persons
or firms. For instance, you may ask your bank to pay $200 per month MSU towards
your fees.

2. Direct Debits

These are payments which have to be made, such as gas bills, electricity bills,
telephone bills, rates and insurance premiums. Instead of asking the bank to pay the
money, as with standing orders, you give permission to the creditor to obtain the
money directly from your bank account. This is particularly useful if the amounts
payable may vary from time to time, as it is the creditor who changes the payments,
not you. With standing orders, if the amount is ever to be changed, you have to inform
the bank. With direct debits it is the creditor who informs the bank.

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For practice: Do exercises 30.3 and 30.4A from Business Accounting 1.

*The End*