Bank

Reconciliation

AfiyaDteacher
What is a Bank Statement?
A bank statement is a report released (on a fixed date every month) by banks that lists deposits,
withdrawals, cheques paid, interest earned, and service charges or penalties incurred on an
account. It shows the cumulative effect of these transactions the account's balance, up to the date
the report was prepared.

Example of a Bank Statement

AfiyaDteacher
Debits and credits are reverse in a bank statement because the bank would be recording the
transactions from its point of view. The bank sees the business as a liability therefore when the
business deposits money the business a/c would be credited and if there is a withdrawal the bank
a/c would be debited.

At any point in time it is possible that the cashbook ending bank account balance of a business
may differ from the ending balance on the bank statement. To manage the cash system, a bank
reconciliation must be performed. There are TWO main reasons why the cashbook ending bank
account balance of a business may differ from the ending balance on the bank statement.

DEFINITION
A bank reconciliation is a schedule explaining any difference between the balance shown in
the bank statement and the balance shown in the depositor’s accounting record

Reasons for differences between the Cashbook and the Bank

Statement.

At any point in time it is possible that the cashbook of a business may differ from the balance on
the bank statement. The first reason for this is because there are Items found in the bank
statement that are not yet recorded in the cashbook. These Items must be recorded in the
cashbook. To do so, we must update the cashbook with these items. Updating the cashbook
means that these items must be included (posted) to the cash book’s bank account based on how
they may affect (increase or decrease) the bank account balance. A new updated balance is then
found.
These Items are as follows:
Bank Charges Credit Transfer Error
Interest Received Dishonoured
Dividends Cheques
Standing Order Direct Debit

AfiyaDteacher
 ITEM Description Treatment
Bank Charges Fees that the bank charges for using any Credit (Decreasing)
of their services (Expense)

Interest Percentage of Balance given by the Debit (Increasing)

Received bank to the account holder(Revenue)

Dividends Money received from a company from Debit (increasing)

having shares in that said company.

Standing An direction or instruction or order to Credit (Decreasing)

Order the bank by the account holder to make
a payment to a person or institution on
a regular basis

Credit Funds are directly deposited into an Debit (increasing)

Transfer account
(Direct
Credit)
Dishonoured A cheque returned by the bank to the Credit (Decreasing)
Cheques account holder and it cannot be
processed for various reasons

Direct Debit Funds are being withdrawn from the Credit (Decreasing)
account

Error Errors made by business. Debit or Credit

Reasons for differences between the Cashbook and the Bank

Statement.

The second reason for this difference is because there are Items found in the cashbook that are
not yet recorded in the bank statement. However these Items cannot be recorded in the bank
statement. Therefore these items, along with the updated balance in the cash book, are used to
prepare the Bank reconciliation statement. There are 3 items that can be found.

AfiyaDteacher
 ITEM Description Treatment
Unpresented cheques Cheques that were given out as payment ADD back to Updated
but not yet presented to the bank as at the Cash book Balance.
time of the statement.

Bank lodgements Cheques/funds deposited by the account SUBTRACT from

/Uncredited cheques holder but not processed by the bank as at Updated Cashbook
the time of the bank statement Balance

Errors made by the ADD or SUBTRACT

bank

Preparing Bank Reconciliation

1. Cash Book Bank Balance

The bank account can have either a debit balance b/d or a credit balance b/d. If the bank
account has a debit balance b/d this means that the business has money in the bank account
(it is a Current Asset). On the other hand, if the bank account has a credit balance b/d this
means that the business withdrew more cash than they had in the bank. This can only happen
if the bank approved the application for overdraft facility for the business. The credit balance
is called a bank overdraft and it becomes a current liability for that period.

2. Updating the cashbook

Remember, Items found in the bank statement that are not yet recorded in the cashbook must
be recorded in the cashbook. To do so, we must update the cashbook with these items.

To identify these items you must use the following steps.

STEP 1 Compare the bank statement and the Cash book

STEP 2 Circle the items that are the same (have the same money amount)
STEP 3 Look at the bank statement and list out all the items that are not circled
STEP 4 Decided where this item will be recorded (debit or credit)
STEP 5 Update the Cashbook

AfiyaDteacher
 NAME OF THE BUSINESS

Updated Cashbook (BANK ACCOUNT)

Date Details S Date Details $

2017 2017
Balance b/d Balance b/d
Interest Received Bank charges
Dividend Standing order
Credit Transfer Direct debit
Balance c/d Dishonoured Cheques
Interest paid
Balance c/d

Balance b/d Balance b/d

Remember, Items found in the cashbook that are not yet recorded in the bank statement.
However these Items cannot be recorded in the bank statement. Therefore these items, along with
the updated balance in the cash book, are used to prepare the Bank reconciliation statement

Format for the Bank Reconciliation Statement (Starting with Updated Cashbook Balance)

NAME OF BUSINESS

Bank Reconciliation Statement for the year ending_________________

$ $
Balance as per adjusted/Updated Cashbook XXX
ADD: Unpresented Cheques:
(List each one individually) XXX
XXX
XXX
XXX
LESS: Bank Lodgements/Uncredited Cheques (XXX)
Balance as per Bank Statement XXX

AfiyaDteacher
Format for the Bank Reconciliation Statement (Starting with Bank Statement Balance)

NAME OF BUSINESS

Bank Reconciliation Statement for the year ending_________________

$ $
Balance as per Bank Statement XXX
ADD: Bank Lodgements/Uncredited Cheques (Deposits) XXX
XXX
LESS: Unpresented Cheques:
(List each one individually) XXX
XXX
XXX
(XXX)
Balance as per adjusted/Updated Cashbook XXX

Method 1

Updated CB balance + Unpresented Cheques – Lodgements = Bank Statement Balance

Method 2

Bank Statement Balance + Bank Lodgements – Unpresented Cheques = Updated CB Balance

June 2012 #3b, June 2015 #4 June 2016 #3

AfiyaDteacher
 Bank Reconciliation
Word Search

N J C O S F C A S H B O O K Q Z U
O H K H T N I S N V Q F U A F N F
I X G Y I Y I U H B T N P V C R B
T A X A B L C G O F I G R R E Q F
A S F N E E E C A N R C E F M U P
I J U B D N R R M A S D S U K I Y
L X R U T Z D R R B I N W D L M T
I G X X C R H M O T A X V W F R T
C E U Q E H C D E R O N O H S I D
N R H V R C B D T K S I J C V R A
O O O U I C C T V W R F M F T T A
C P Z I D H I U A A N N F O W V J
E T K R E D R O G N I D N A T S W
R H B Q E M B S D O J U F J Q B R
Q F U R B A N K S T A T E M E N T
J E C Q M Z J A O I Y X F N D B W
S P E N V X W U E N C A A O Q P V

BANK STATEMENT CASH BOOK

CREDIT TRANSFER DIRECT DEBITS
DISHONORED CHEQUE ERRORS
OVERDRAFT RECONCILIATION
STANDING ORDER UNCREDITED CHEQUES

AfiyaDteacher