Bank reconciliation statement

The entries on the bank statement are opposite to those appearing in the trader’s cash book. For example,
cheques received from customers are debited to the Bank A/c in the trader’s books and credited to his
account in the bank’s books.

As debit entries in the trader’s books are credit entries in the bank’s books and vice versa, the balance
appearing on the bank statement should agree with the balance shown in the trader’s cash book. In other
words, the two balances should be equal and opposite. Unfortunately, the bank statement balance and
the cash book balance do not agree! This is mainly due to omissions and timing differences as explained
below. For this reason, the trader has to draw up a bank reconciliation statement.

1. Omissions from cash book: These refer to items shown on the bank statement but not
entered in the trader’s cash book. The main cash book omissions are the following:

(a) Standing Orders (S / O): Written instructions by the trader asking his bank to pay or
receive money regularly on his behalf. Standing orders are frequently used for the
payment of rent, insurance premiums, subscriptions and hire-purchase installments.
They can also be used for the collection of dividends, interest, rent receivable etc.
Standing order payments appear as debits on the bank statement, whilst receipts are
shown as credits.

(b) Direct Debits (D / D): Written instructions whereby the trader arranges for amounts to
be charged automatically to his bank account. They are similar to standing orders
except that the amounts involved often fluctuate or are paid at irregular time intervals.
Electricity, telephone and trade payables can all be paid by means of direct debits.
Obviously, direct debits appear as debits on the bank statement.

(c) Credit Transfers (C / T) or Bank Giro: An arrangement by which payments for goods
and services are made direct to the suppliers’ banks. More specifically, the payer sends
a cheque to his bank for the total amount payable. The bank then transfers money to
each of the suppliers’ banks as appropriate. Credit transfers to the trader’s bank
account, i.e. payments by customers, appear as credits on the bank statement. On the
other hand, credit transfers from his bank account, i.e. payments to suppliers, are
shown as debits.

(d) Bank Charges: These are charges made by the bank for services rendered to the trader.
They include commission, interest on overdraft, cost of cheque books etc. Bank charges
appear as debits on the bank statement.

(e) Dishonoured Cheques: These are cheques originally received from trade
receivables/customers and paid into the bank by the trader but subsequently returned
to him unpaid, most probably because the trade receivables / customers did not have
sufficient funds in their bank accounts. Dishonoured cheques are shown as debits on
the bank statement. This means that the customers concerned still owe the relevant
amounts to the trader.

2. Timing differences or omissions from bank statement: By these we mean those items
 duly recorded in the trader’s cash book but not appearing on the bank statement.
Timing differences arise in connection with the following:

(a) Unpresented Cheques: These are cheques issued by the trader to his suppliers
etc and duly entered on the credit side of his cash book. However, they have not
yet been presented for payment to the trader’s bank.

(b) Lodgements not Credited by Bank: These are amounts, i.e. cheques and / or
cash, paid by the trader into his bank account and duly entered on the debit side
of his cash book. The bank, however, has made no entry in its books most
probably because the amounts involved had been deposited shortly before
closing time. Normally, it takes some time for the checking and the clerical work
to be completed. Lodgements as above are expected to appear on the next bank
statement.

3. Cash book adjustments: These are adjustments we have to make to bring the trader’s
cash book balance up-to-date; to “up-date” the cash book balance as we often say. To
adjust or up-date the cash book balance, involves checking the entries on the bank
statement against those in the cash book. Any items which appear on the bank
statement but not in the cash book should be used to up-date the cash book. More
specifically, the following steps have to be taken:

(a) Tick debit entries on the bank statement and credit entries in the cash book.
Unticked items may be standing order payments, direct debits, bank charges etc.
Enter each of these items on the credit side of the cash book.

(b) Tick credit entries on the bank statement and debit entries in the cash book.
Unticked items may be amounts collected by the bank on behalf of the trader,
e.g. dividends, or credit transfers to the trader’s bank account. Enter each of
these items on the debit side of the cash book.

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

4. Preparation of Bank Reconciliation Statement: Those items which, due to timing

differences, appear in the cash book but not on the bank statement, i.e. unpresented
 cheques and lodgements not credited by bank, should be used to draw up the bank
reconciliation statement. Unless otherwise stated, we can draw up the bank
reconciliation statement starting either with the bank statement balance or with the
adjusted / up-dated cash book balance. The procedure to follow is:

(a) When we start with the bank statement balance: - Add the lodgements not credited
by bank and deduct the unpresented cheques to arrive at the adjusted cash book
balance.

(b) When we start with the adjusted cash book balance: - Add the unpresented
cheques and deduct the lodgements not credited by bank to arrive at the bank
statement balance.

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

5. Additional points to consider: Students are strongly advised to consider the following:

(a) A difference between the cash book balance and the bank statement balance
might also arise because of errors. For example, a cheque for $423 paid by the
trader to a supplier might be entered in the cash book as $324. If an error is in
the cash book, we should simply adjust the cash book. But if it is on the bank
statement, we should notify the bank and ask for a correction to be made.

(b) The preparation of the bank reconciliation statement involves only the bank
columns of the cash book. These columns represent the trader’s Bank Current
a/c which makes necessary the use of cheques.

(c) It is important to understand the nature of the following balances:

(i) Cash Book

Debit Balance = Cash at Bank

Credit Balance = Bank Overdraft

(ii) Bank Statement

Debit Balance = Bank Overdraft

 Credit Balance = Cash at Bank

(d) The adjusted cash book balance which may be either cash at bank or bank
overdraft, should be the one to appear on the trader’s balance sheet.

Tangible non-current assets. IAS 16: Property, Plant and Equipment

Kinds of expenditure: We have the following two kinds of expenditure:

(i) Capital expenditure: Amounts spent on non-current assets, i.e. purchase of new non-current
assets including their delivery and installation cost; construction of non-current assets using own
materials and labour; extensions or improvements to existing non-current assets etc. Items of
capital expenditure should be debited to the appropriate non-current asset accounts and shown
on the balance sheet at each year-end until fully depreciated or disposed of.

(ii) Revenue expenditure: Amounts spent on items affecting only one year. In other words, the day-
to- day expenditure of a business, e.g. rent, electricity, insurance, wages, purchases of goods for
resale etc. Items of revenue expenditure should be debited to the appropriate nominal / expense
accounts and fully written off to the trading a/c or the profit and loss a/c at the end of the year.

Note: Classifying expenditure into capital and revenue is of great importance because it is only in this
way that a trader can calculate his annual profit correctly and state fairly his balance sheet position at
each year-end.