PREPARATION OF BANK RECONCILIATION STATEMENT INTRODUCTION
• Bank reconciliation is the agreement of the
balance on a company’s cashbook with the balance shown on the bank statement sent by the bank in respect of such account. If the cashbook and the bank statement show the same balance, then there may be no need for reconciliation. • The treatment of items in both the cashbook and bank statement can be summarized as follows: Description Bank Column of Cashbook In bank statement
Receipts Debit Credit
Payment Credit Debit Cash at Bank Debit Balance Credit Balance Bank overdraft Credit Balance Debit Balance • From the above, it can be seen that the cashbook and bank statement should normally contain the same information, but in practice, this cannot be achieved, as there are certain reasons that could cause differences between the cashbook and the bank statement. A bank reconciliation statement is then prepared to reconcile the cashbook with the bank statement. CAUSES OF DIFFERENCES BETWEEN CASHBOOK AND BANK STATEMENT ITEMS IN THE CASHBOOK ONLY: • UNPRESENTED CHEQUE: These are cheques paid out by the firm, but yet to be presented by the payees to the bank for payment. The cheques would have been credited to the cashbook when they were issued, however, due to the fact that they are yet to be presented to the bank for payment, they will not appear in the bank statement. • UNCREDITED CHEQUES/LODGEMENTS: these are cheques/ cash lodged into the bank account by the firm but which are yet to be credited by the bank. A common reason for uncredited cheques is the delay caused by the clearing system – the period from the time the cheque is paid into the firm’s bank account to the time the cheque is honoured by the paying banker. ITEMS IN BANK STATEMENTS ONLY • There are various items debited in the bank statement, which to be recorded in the firm’s cashbook. They include:- • Bank Charges, commission on turnover (COT), commission on draft and value added tax (VAT). • Interest on loan and overdraft. • Direct debits: These are payments made directly out of the bank account to persons who had been authorized by the firm to draw money from the account. They are usually used for paying insurance premium. • Standing order: These are regular payments made by the bank on the instruction of the customer. Payment usually made by standing order includes subscription. • Dishonoured cheque: These are cheques earlier credited by the bank but which were later dishonoured by the paying banker. Upon the dishonoured, the cheque is debited to the accounts of the firm by the bank. RECEIPTS IN BANK STATEMENT ONLY • These are various items credited in the bank statement, which are yet to be recorded in the firm’s cashbook. They include:- • Interest received on deposit and current account • Dividend received • Traders credit: These are amounts received directly into the bank account from debtor’s accounts who had been instructed to pay directly into the firms account. Traders credit are normally effected by the firm’s debtors, instructing their own bankers to transfer the amount to the bankers of the firm who will then receive the amount on the firm’s behalf. • Others include:- • Errors in the cashbook. • Errors in the bank statement. PROCEDURES FOR PREPARING BANK RECONCILIATION STATEMENT The preparation of a bank reconciliation statement is a periodic exercise depending on the activities of the organizations. It could be prepared daily, weekly, monthly or even annually. The procedure is firstly to adjust on the bank balance disclosed in the cashbook and items, which are entered in the bank statement but not in the bank columns of the cashbook. The adjusted amount will represent the true bank balance in the cashbook. • Secondly, adjust on the bank statement balance the amount of any unpresented cheque and lodgment not yet credited by the bank. These adjusted bank statement balance would then agree with the bank balance in the cashbook. The format for a bank reconciliation statement is shown below:- FORMAT Starting with the bank statement Note: Where the adjusted cashbook gives rise to an overdraft, the procedures for preparing a bank reconciliation statement will just be a reverse of a normal situation e.g. WHAT TO DO WITH THE RECONCILIATION STATEMENT • Notify the bank of its error(s) for correction • Review the bank statement for the period immediately following the reconciliation date to confirm if the unpresented cheque has been presented and if the uncredited cheques/lodgment has been credited. • If the unpresented cheque remains unpresented for too long, get in touch with the payee to find out why the cheque has remained unpresented. It is possible that the payee is no longer in a position to present the cheque to the bank for payment. This would be the case if, for example, the payee has died or has misplaced the cheque. In such circumstances, the bank should be notified not to honor the cheque. This would ensure that payment is not made to the wrong persons. • If the uncredited cheques/lodgments remain uncredited for an unreasonable period; this should be taken up with the bank for appropriate action. It is possible that the cheques/lodgments have been credited by the bank to the account of another customer. ILLUSTRATION 1 Bank Statement Solution ONOME & OSAGIE Adjusted cashbook ONOME & OSAGIE COMPANY Bank Reconciliation Statement as at April 2004 ILLUSTRATION 2 SOLUTION 2 AMISCO LTD ADJUSTED CASHBOOK AMISCO Bank Reconciliation Statement As At 31st December 1994 OR Bank Reconciliation Statement ASSIGNMENT Vicman cashbook showed a debit balance of 3,344 on 31st Jan, 2002. His bank statement for January, 2002 however showed a credit balance of 3,424. On investigation, it was discovered that: • The opening balance on the cashbook for the month had been wrongly brought down as 1505, instead of 1550. • Payment for rent 250 had been debited in the cashbook • A customer had paid 600 directly into the bank • The bank had paid a standing order of 300 to an insurance company • A cheque for 870 deposited on 25th January was not credited until 3rd Feb. 2002. • Cheques paid to suppliers totaling 1875, had not been presented for payment • Cost of cheque book and other charges by bank totaling 90 had not been entered in the cashbook • The bank had paid a cheque of 680 in error from Vicman’s account. You are required to • Prepare an adjusted cashbook • Bank reconciliation statement as at 31st January, 2002.