CHAPTER 12

Bank reconciliation

Contents

Bank reconciliations The bank statement Procedures for performing a bank

reconciliation Reconciliations on a computerised

system

Bank reconciliations

A bank reconciliation compares the balance of cash in the business's records to the balance held by the bank.

Differences will be errors or timing differences, and they must be identified and satisfactorily explained.

The bank statement

Sent by a bank to its short-term receivables and payables (customers with bank overdrafts and customers with money in their accounts) itemising The balance on the account at the beginning of the

period Receipts into the account Payments from the account during the period And the balance at the end of the period. These statements may be produced monthly,

weekly or even daily depending on the volume of transactions going through the account.

Proforma bank reconciliation

Example

At 30 September 20X7 the debit balance in the cash book of Wordsworth was $805.15. A bank statement on 30 September 20X7 showed Wordsworth to be in credit by $1,112.30.

On investigation of the difference between the two sums, the following items were established.

(a) The cash book had been undercast by $90.00 on the debit side.

(b) Cheques paid in not yet credited by the bank amounted to $208.20.

(c) Cheques drawn not yet presented to the bank amounted to $425.35.

We need to show the correction to the cash book and show a statement reconciling the balance per the bank statement to the balance in the cash book.

Answer

Example

Answer

The difference between the opening bank balance at 1 February per the cash book of $922.22 and the opening balance at 1 February per the bank statement of $1,057.62 CR is explained by the cheque number 800119 which was recorded in the cash book in January and presented on 7 February.

Reconciliation

Example

At your firm, Precision Products, a new trainee has been asked to prepare a bank reconciliation statement as at the end of October 20X7. At 31 October 20X7, the company's bank statement shows an overdrawn balance of $142.50 DR and the cash book shows a favourable balance of $24.13.

You are concerned that the trainee has been asked to prepare the statement without proper training for the task. The trainee prepares the schedule below and asks you to look over it.

The trainee says that he was not able to reconcile the difference completely, but was pleased that he was able to 'get it down' to $1.50. He feels that there is no need to do any more work now since the difference remaining is so small. He suggests leaving the job on one side for a week or so in the hope that the necessary information will come to light during that period.

Tasks(a) So that you can show the trainee how a bank reconciliation

ought to be performed, prepare:(i) a statement of adjustments to be made to the cash book balance(ii) a corrected bank reconciliation statement as at 31 October 20X7

(b) Explain to the trainee why it is important to prepare bank reconciliations regularly and on time.

Answer

(b) (i) The company's records should be updated for the bank correct balance.(ii) Errors should be identified and corrected as soon as possible(iii) A better understanding of such timing differences will help managers to improve their cash planning.

Example

You have been asked to prepare the monthly bank reconciliation as at 30 November 20X6 for your company Mentor Trading Ltd. The company's bank statement shows a credit balance of $1,698.50 and the cash book an overdrawn balance of $460.50.

During your investigation you discover the following:

• Overdraft interest of $24.60 in the bank statement, not yet posted to cash book

• Cheques issued amounting to $1600.40 not appeared on the bank statement

• A cheque received for $1906.00 was posted in the cheque book for $1609.00

• Bank charges of $25 were incorrectly posted to the wrong side of the cash book

• A cheque for $120.60 was paid in, but has, not yet been credited on the bank statement

• An intercompany bank transfer in favour of Mentor Trading for $456.80 was made direct to the bank but not recorded in the cash book.

Tasks(a) Prepare

(i) a statement of adjustments to be made to the cash book balance(ii) a bank reconciliation statement as at 30 November 20X6

(b) Give two of the most common reasons why the cash book balance and the bank balance may differ.

(b) The most common differences between the cash book and the bank statement are timing differences and errors. The most common timing differences are due to unpresented cheques.

These are cheques which have been issued by the company and recorded in the cash book but have not at the date of the bank reconciliation reached its bank.

Quiz

1 What are the three main reasons why a business's cash book balance might differ from the balance on a bank statement?

2 What is a bank reconciliation?3 What is a bank statement?4 Why are cheque numbers shown on the

bank statement?5 What are the two parts of a bank

reconciliation statement?

1 Reasons for disagreement are: errors, bank charges or interest, timing differences (for amounts to clear).

2 A bank reconciliation compares the balance of cash in the business's records to the balance held by the bank.

3 A bank statement is a document sent by a bank to its short-term receivable and payable customers, itemising transactions over a certain period.

4 Cheque numbers aid identification of the transaction, the amount would not be enough.

5 (a) The adjustment of the cash book balance(b) The reconciliation of the cash book balance to the bank statement

QB 20

Your cash book at 31 December 20X3 shows a bank balance of $565 overdrawn. On comparing this with your bank statement at the same date, you discover the following:

A cheque for $57 drawn by you on 29 December 20X3 has not yet been presented for payment

A cheque for $92 from a customer, which was paid into the bank on 24 December 20X3, has been dishonoured on 31 December 20X3.

The correct bank balance to be shown in the statement of financial position at 31 December 20X3 is

A $714 overdrawn

B $657 overdrawn

C $473 overdrawn

D $53 overdrawn

QB 21

The cash book shows a bank balance of $5,675 overdrawn at 31 August 20X5. It is subsequently discovered that a standing order for $125 has been entered twice, and that a dishonoured cheque for $450 has been debited in the cash book instead of credited.

The correct bank balance should beA $5,100 overdrawnB $6,000 overdrawnC $6,250 overdrawnD $6,450 overdrawn

QB 22

A business had a balance at the bank of $2,500 at the start of the month. During the following month, it paid for materials invoiced at $1,000 less trade discount of 20% and cash discount of 10%. It received a cheque from a customer in payment of an invoice for $200, subject to cash discount of 5%.

The balance at the bank at the end of the month wasA $1,970B $1,980C $1,990D $2,000

QB 24

Your firm's cash book at 30 April 20X8 shows a balance at the bank of $2,490. Comparison with the bank statement at the same date reveals the following differences:

Unpresented cheques 840Bank charges 50Receipts not yet credited by the bank 470Dishonoured cheque not in cash book 140The correct balance on the cash book at 30 April 20X8 isA $1,460B $2,300C $2,580D $3,140

QB 25

Your firm's bank statement at 31 October 20X8 shows a balance of $13,400. You subsequently discover that the bank has dishonoured a customer's cheque for $300 and has charged bank charges of $50, neither of which is recorded in your cash book. There are unpresented cheques totalling $2,400. Amounts paid in, but not yet credited by the bank, amount to $1,000. You further discover that an automatic receipt from a customer of $195 has been recorded as a credit in your cash book.

Your cash book balance, prior to correcting the errors and omissions, was:

A $11,455B $11,960C $12,000D $12,155

QB 26

Your firm's cashbook shows a credit bank balance of $1,240 at 30 April 20X9. Upon comparison with the bank statement, you determine that there are unpresented cheques totalling $450, and a receipt of $140 which has not been passed through the bank account. The bank statement shows bank charges of $75 which have not been entered in the cash book.

The balance on the bank statement isA $1,005 overdrawnB $930 overdrawnC $1,475D $1,550

QB 27

Which of the following is NOT a valid reason for the cash book and bank statement failing to agree?

A Timing differenceB Bank chargesC ErrorD Cash receipts posted to payables

QB 28

The bank statement at 31 December 20X1 shows a balance of $1,000. The cash book shows a balance of $750 in hand. Which of the following is the most likely reason for the difference.

A Receipts of $250 recorded in cash book, but not yet recorded by bank

B Bank charges of $250 shown on the bank statement, not in the cash book

C Standing orders of $250 included on bank statement, not in the cash book

D Cheques for $250 recorded in the cash book, but not yet gone through the bank account

QB 29

The cash book balance at 30 November 20X2 shows an overdraft of $500. Cheques for $6,000 have been written and sent out, but do not yet appear on the bank statement. Receipts of $5,000 are in the cash book, but are not yet on the bank statement. What is the balance on the bank statement?

A $1,500B $500 in handC $1,500 in handD $500 overdrawn