Chapter Ten

BANK RECONCILIATION
Bank reconciliation is the process of bringing into agreement the balance as per cashbook
(bank column) and the balance as per bank statement. In the books of an organization,
funds paid into and out of the bank are entered into the bank columns of the organizations
cash book. At the same time, the bank will also be recording the flow of funds into and out
of the organizations bank account.

A statement sent by the bank to the account holder showing a summary of transactions
between him/her and the bank .i.e. deposits (bankings) and withdrawals or payments and
the remaining balance after each transaction is called a bank statement. The bank prepares
a statement for each account holder especially holders of current accounts at the end of
each month but can also be prepared at any time on request by the account holder.

When a cheque is banked or cash is deposited, the customers account will be credited in
the bank. The person who made the deposit or banked the cheque will debit his cashbook.
When a customer makes a withdrawal or makes payments out of his bank account, his/her
account will be debited by the bank and he/she will credit his/her cashbook (bank
column).
If all the items entered in the cashbook were the same as those entered in the records held
by the bank, the balance on the business bank account as shown in the cashbook and the
balance on the account as shown by the banks records would be the same. i.e if all credits
in the bank were also debited to the cash book and all debits in the bank were credited to
the cashbook, the two balances would obviously agree but this is not always the case.

There may be items paid into and out of the business bank account which have not been
recorded in the cash book. And there may be items entered in the cash book that have not
yet been entered in the banks records of the account.
To check and correct such errors requires that the cash book entries be compared with
those in the bank statement issued by the bank after which a bank reconciliation statement
is prepared. This statement will aim at reconciling the cash book balance with the balance
presented by the bank in the bank statement.

Importance of preparing Bank Reconciliation statements

a. Bank reconciliation strengthens an organizations internal control system through
detection and prevention of fraud. An accountant or cashier who embezzles his/her
employers funds and manipulates the cash book will be discovered if bank
transactions (cheques) were involved. This is why most organizations are advised to
receive and make payments by cheque because such transactions are easier to trace
in the bank statement than if they were in cash.
b. Bank reconciliation leads to accuracy in records. This is because the cash book and
the bank statement are synchronized. A mistake in either the cash book or bank
statement will be detected and corrected during bank reconciliation.

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Reasons for discrepancy between the cash book and bank statement balances
The following are the reasons or items which cause a difference between the cashbook
balance and the bank statement balance thus necessitating preparation of a bank
reconciliation statement.

1. Direct debits by the bank (Not credited to the cashbook)

These are payments that are made by the bank without requiring a cheque to be issued by
the account holder. Since cheques are not issued by the account holder, they are not
captured/recorded in the cashbook and yet the bank debits them in the account and are
reflected in the bank statement. Examples of direct debits by the bank are bank charges and
standing orders.
a. Bank charges. These are charges levied by the bank for services offered to the account
holder. These charges include account maintenance charges, commissions. These
charges are directly debited to the bank statement.
b. Standing orders. These are arrangements where the account holder instructs the bank
to make certain routine (monthly, bi-annual or annual) and fixed type of payments
directly to the payees on behalf of the account holder. Cheques are not issued by the
account holder for these types of payments. Standing orders are normally made for
paying insurance premiums, utility bills like water, telephone and electricity bills

2. Direct credits by the bank (Not debited in the cashbook)

These are receipts that are directly credited to the bank statement but not debited in the
cashbook. For example some accounts receivables might prefer to settle their debts by
paying directly to the payees bank account. Organizations like UMEME and NWHC
experience a lot of direct credits. Direct credits include interest received, dividends received
etc. When a persons bank account is directly credited, the bank is supposed to send a credit
advice note/credit memo to the account holder and a debit advice note for direct debits.
However in many cases, these advice notes are sent together with the bank statement and
therefore too late to be included in the cashbook.

3. Unpresented cheques
These are cheques that are drawn and credited in the cashbook but not yet presented to the
bank for enactment or payment. These cheques are not debited to the bank statement.

4. Uncredited cheques (Deposits-in-transit)

These are cheques or cash deposited to the bank and debited in the cashbook but are not
yet credited by the bank.

5. Clerical errors
Errors made in recording amounts or wrong postings in the cashbook or bank statement
will also cause the cashbook and bank statement balances not to agree.

6. Dishonoured cheques
These are cheques that the bank refuses to pay or recognize as an instrument for
transferring money from one person to another. These are normally recoded in the
cashbook but are not captured in the bank statement.

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There are many reasons as to why a bank may dishonor a cheque. Some of these include the
following:
No sufficient funds on the drawers account. (this is a criminal offence in Uganda)
Amount in words differing with amount in figures
If the drawers signature on the cheque differs from that held by the bank.
When a cheque becomes stale or expires. (Normally six months from the date on its
face)
Alterations in figures or words that are not counter signed by the drawer.
If there is no account title on the cheque.

Procedure followed when conducting a bank reconciliation

1. Beginning with the cash book balance, adjusting, up-dating or correcting that
balance to show all those entries that may have been recorded by the bank but are
not reflected in the cash book.
2. Preparing a bank reconciliation statement starting with the adjusted cash book
balance with an aim of arriving at the bank statement balance.

Name of Organisation Adjusted Cash book

Date Details Amount Date Details Amount
(shs) (shs)
Bal b/d xxx Direct debits xxx
Direct Credits xxx
Dishonoured cheques Dishonoured
written to A/Cs cheques received
payables xxx from A/Cs
receivables xxx
Under casting errors xxx Over casting errors xxx
Balance c/d xxx
XXX XXX

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 Name of Organisation
Bank reconciliation statement for the month ended
(Shs) (Shs)
Balance as per adjusted cash book xxx
Add: Un presented cheques
Name of A/c payable Xxx
Name Xxx
Name Xxx
Name xxx xxxx
xxxx
Less: Un credited Cheques
Name of A/c receivable Xxx
Name Xxx
Name xxx xxxx
Balance as per Bank statement XXXX

Illustration one
The following cash book and bank statement for BBK Ltd for the month of September 2012.

Cash book (Bank Column)

DATE PARTICULARS AMOUNT(Shs) DATE PARTICULARS AMOUNT(Shs)
1/9/2012 Bal b/d 80,000 7/9/2012 Mukasa 32,000
2/9/2012 John 60,000 8/9/2012 Peter 40,000
10/9/2012 XY Ltd 24,000 11/9/2012 Okurut 30,000
14/9/2012 Twesigye 10,000 17/9/2012 Bob 14,000
16/9/2012 Tibaire 4,000 28/9/2012 Jimmy 6,000
28/9/2012 Stella 34,000 28/9/2012 Harriet 4,000
30/9/2012 Matte 13,000 30/9/2012 Martin 2,000
30/9/2012 Joel 2,000 30/9/2012 Manda 1,000

30/9/2012 Simon 4,000

30/9/2012 Bal c/d 94,000
227,000 227,000

BBK Ltd Bank Statement for the period 1/9/2012 to 30/9/2012

Dr. (Shs) Cr. (Shs)
Withdrawals Deposits Balance (Shs)
1/9/2012 Bal b/d 80,000
5/9/2012 John 60,000 140,000
8/9/2012 Mukasa 32,000 108,000
10/9/2012 Peter 40,000 68,000
13/9/2012 Okurut 30,000 38,000
14/9/2012 XY Ltd 24,000 62,000

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16/9/2012 Twesigye 10,000 72,000
18/9/2012 Bob 14,000 58,000
Credit Memo
20/9/2012 (Leon) 18,000 76,000
Standing Order
25/9/2012 (MTN) 2,000 74,000
Credit memo
26/9/2012 (George) 16,000 90,000
30/9/2012 Bank charge 200 89,800

A cheque written to Jimmy on 28/9/2012 and one received from Tibaire and banked on
16/9/2012 were dishonored.
Required: Prepare a bank reconciliation Statement for the month ended 30/9/2012

Illustration 2
a) Briefly explain any five reasons for the disagreement between the cash book and
bank statement balances.
b) The following are extracts from the cash book and the bank statement of BAM Enterprises Ltd
for the month of December 2012.

Cash book
Date Details Amount Date Details Amount
1st Dec Balance b/d 3,419 8th Dec B Young 462
7th Dec F Lamb 101 10th Dec F Gray 21
22nd
Dec G Brock 44 11th Dec T Errant 209
31st Dec W Terry 319
31st Dec S Miller 246 31st Dec Bal c/d 3,437
4,129 4,129

Bank Statement
Debit Credit Balance
Date Details (shs) (shs) (shs)
1st Dec Bal c/d 3,419
7th Dec F lamb 101 3,520
11th Dec B Young 462 3,058
20th Dec F Gray 21 3,037
22nd Dec G Brock 44 3,081
31st Dec Credit transfer: T Morris 93 3,174
31st Dec Bank Charges 47 3,127

Required: a) Prepare a bank reconciliation statement as at the end of December 2012.

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Illustration 3
Equator valley farm found the following in an attempt to reconcile its bank balance of
October. The bank statement showed a balance of 2,050,000/= while the cash book showed
a balance of 1,404,580/=. The following were identified:
A deposit of 145,000/= was not appearing on the statement.
Included with the bank statement was a credit memorandum showing that the bank
collected a note receivable for the company on October 24 th. The notes proceeds of
500,000/= less a 15,000/= collection fee were credited to the companys account.
The bank statement also showed a credit of 8,420/= for interest earned on the
average cash balance on the account. Nothing has been recorded yet in the
cashbook.
A comparison of the cleared cheques with the companys books showed that two
cheques were outstanding. Cheque no.124 for 150,000/= and cheque no. 126 for
200,000/=. Other debits in the bank statement that had not been recorded in the
books included: a 23,000/= debit memorandum for cheques printed by the bank, a
dishonored cheque for 20,000/= plus related processing fee of 10,000/=
The dishonored cheque had been received from a customer Frank Jones on October
16th and had been included in that days deposit.

Required: Reconcile the two accounts