14 BANK RECONCILIATION STATEMENTS - …

1 This chapter covers ..In the last chapter we balanced the cash book of a business to find out the balance ofthe bank this chapter we look at the way in which a business deals with any differencesbetween the balance of the bank account in the cash book and the closing balance ofthe bank account shown by the bank statement for the same differences are explained by a document known as a bank reconciliationstatement: which lists items which are in the cash book but not on the bank statement items which are on the bank statement but not in the cash bookThis process is an important one: it enables the business to update its cash book andalso helps to prove the accuracy of the bookkeeping of the business and the RECONCILIATIONSTATEMENTSOCR LEARNING OUTCOMES unit 3.

2 MAINTAINING THE CASH BOOKA ssessment objectives4 Prepare a bank RECONCILIATION Statement(a) Compare transactions that appear on both Cash Book and bank Statement(b) Update Cash Book from details of transactions appearing on bank Statement(c) Balance the bank columns of the Cash Book to calculate the revised balance5 Complete a bank RECONCILIATION Statement(a) Enter correct date of the statement(b) Enter the balance at bank as per the Cash Book(c) Enter details of unpresented cheques(d) Enter sub-total on RECONCILIATION statement(e) Enter details of bank lodgements(f) Calculate balance as per bank StatementTHE NEED FOR AN ACCURATE CASH BOOKMost organisations keep a record of their cash and bank transactions in acash book (see Chapter 13). The cash book contains a record of both the cashaccount and the bank account and shows the balance in each account at theend of a period.

3 Once the cash book has been balanced off it is usual to checkthe details with the records of the firm s bank transactions as recorded by enable this check to be made the cashier will need to ensure that the cashbook is completely up-to-date and a recent bank statement has been obtainedfrom the ,when a comparison is made between the bank balance as shown in thefirm s cash book with that shown on the bank statement, the two balanceswill be different. It is for this reason that a bank RECONCILIATION statementis prepared to reconcile( tally up ) the two balances. The RECONCILIATION mayidentify errors that may have been made in either the firm s cash book or inthe bank s records. Any corrections can then be example of a bank RECONCILIATION statement is shown below.

4 As you cansee, it is a very simple calculation. The process of drawing up a bankreconciliation statement will be explained in full on pages RECONCILIATION STATEMENTS 247 CECILIA WHOLESALE LIMITEDBank RECONCILIATION Statement as at 31 October 2004 Balance at bank as per Cash Book525 Add: unpresented cheques Taverner Trading Company60 Puccini Partnership100B Britten Ltd 80240765 Less:outstanding lodgements220300520 Balance at bank as per bank statement545 THE bank STATEMENTA bank statement is a copy of a bank account as shown by the bank STATEMENTS are sent out to customers on a regular basis, for exampleevery month. This enables the customer to check their funds in the bank (orborrowing on overdraft) regularly and to update their own records oftransactions that have occurred.

5 It could be, for example, that the bank hasnot previously notified them of a certain deduction from the account, forexample bank charges. An example of a bank statement is shown below: If you are not familiar withthe details of payments eg SO (standing order), DD (direct debit), BGC( bank giro credit), BACS (Bankers Automated Clearing Services) youshould read the last chapter which introduces these 1 BookkeepingSTATEMENTN ational bank PLC5-6 Christmas SquareMerefordMR1 7 GHAccountTeme ComputersAccount Number12037661 Sheet17 Date31 October 2004 Date DetailsDebitCreditBalance200401 CR01 CR07 CR07 CR13 OctRT Telecom (DD) CR15 CR17 OctMereford City Council (SO) CR20 OctGH Trading (BGC) CR20 CR23 CR24 OctTombenco (BACS) CR27 OctUnpaid CR31 CR31 OctBank CRWHY DO YOU NEED A bank RECONCILIATION STATEMENT?

6 RECONCILIATION RECONCILIATION between the cash book and the bank statement final balancesimply means an explanation of the differences. This explanation takes theform of a written calculation (see page xx for an example). The process canbe seen as follows:Differences between the cash book and the bank statement can arise from: timing of the recording of the transactions errorsmade by the business, or by the bankWe will explain each of these in differences items recorded in the cash bookWhen a business compares the balance according to its cash book with thebalance as shown by the bank statement there is often a difference. Thisdifference can be caused by the timingof payments. For example: A cashier may send cheques out to suppliers, some of whom may pay inthe cheque at the bank immediately while others may keep the cheque forseveral days before paying it in.

7 When this happens the cashier will haverecorded all the payments in the cash book. However, the bank recordswill only show the cheques that have actually been paid in by thesuppliers and deducted from the business bank cheques are known as unpresented cheques. With another type of timing difference known as outstandinglodgements the firm's cashier records a receipt in the cash book as heor she prepares the bank paying-in slip. However, the receipt may not berecorded by the bank on the bank statement for a day or so, particularlyif it is paid in late in the day (when the bank will put it into the next day'swork), or if it is paid in at a bank branch other than the one at which theaccount is RECONCILIATION STATEMENTS 249cash book ( bank columns) bank RECONCILIATION statementbank statementtiming differences items not recorded in the cash bookpayments inAnother timing difference may also occur when the bank has received adirect payment from a customer of the business.

8 In this instance the bank willhave recorded the receipt in the business s account at the bank but thebusiness will be unaware of the payment and will not, therefore, haverecorded the receipt in the cash book. This type of payment includes: standing order and BACS (Bankers' Automated Clearing Services),ie incoming payments received on the account, eg payments from debtors (customers) when the payment has not been advised to the business bank giro credit amounts received by the bank , eg payments from debtors (customers) when the payment has not been advised interest and refunds credited by the bankpayments outAnother reason why the balance of the cash book and the balance of the bankstatement may not agree is because the bank may have deducted items fromthe customer s account, but the customer may not be aware of the deductionuntil the bank statement arrives.

9 Examples of these deductions include: standing order and direct debit payments which the customer did notknow about bank charges for running the account interest charged for overdrawn balances unpaid cheques deducted by the bank ie stopped and 'bounced' cheques (see page xx)differences caused by errorsSometimes the difference between the two balances may be accounted for byan error on the part of the bank or an error in the cash book of the is for this reason that a bank RECONCILIATION is carried out frequently so thaterrors may be identified and rectified as soon as possible. It is good business practice to prepare a bank RECONCILIATION statement eachtime a bank statement is received. The RECONCILIATION statement should beprepared as quickly as possible so that any queries either with the bankstatement or in the firm s cash book can be resolved.

10 Many firms willspecify to their accounting staff the timescales for preparing bankreconciliation STATEMENTS . For example, if the bank statement is receivedweekly, then the RECONCILIATION statement should be prepared within fiveworking 1 Bookkeepingsource documents for the cash book 251 PREPARING THE bank RECONCILIATION STATEMENTWhen a bank statement has been received, RECONCILIATION of the two balancesis carried out in the following way:step 1 The cashier will tick off the items that appear in both the cashbook and the bank 2 The unticked items on the bank statement are entered into thebank columns of the cash book to bring it up to 3 The bank columns of the cash book are now balanced to findthe revised 4 The remaining unticked items from the cash book will be thetiming 5 The timing differences are used to prepare the bankreconciliation statement (see below).