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FINANCIAL ACCOUNTING

Week 10: Lecture 10

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LEARNING GOALSBy the end of the lecture you will be able to: Understand the purpose of the Bank Reconciliation

Statement Be familiar with the nature of the Cash Book and

Bank Statement Identify the reasons for differences between the

Cash Book and the Bank Statement Balance Solve Exercises

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THE PURPOSE OF THE BANK RECONCILIATION STATEMENT

The purpose of the Bank Reconciliation is to reconcile (resolve – make two parts agree) the difference between:

The cash book balance : the company’s records of its bank account transactions

and The bank statement balance : the bank’s records of the

bank account transactions that the company is doing

The content of the cash book should be exactly the same as the record provided by the bank (bank statement) and therefore the records in the cash book should also appear in the bank statement.

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THE PURPOSE OF THE BANK RECONCILIATION STATEMENT

Due to the timing difference, omissions and errors made by the bank or the firm itself , the balance of the bank statement and the bank account in the cash book rarely agree.

Bank reconciliation statements can be used to explain the reasons for the differences and to identify errors and omissions in both documents, so that corrections can be made as soon as possible.

THE RECONCILIATION IS CARRIED FREQUENTLY , USUALLY AT A MONTHLY BASIS

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The debits and credits in the cash book are reversed(opposite) in the bank statements because the bank will be recording the transaction from its point of view :

When there is an increase in the company’s money the accountant of the company makes a debit entry in the cash book but the Bank makes a credit entry because this increase in money is a liability for the Bank to the company or the individual customer.

When there is a reduce in the company’s money the accountant of the company makes a credit entry in the cash book but the Bank makes a debit entry because this reduction in money is a decrease of the liability- obligation that the Bank has to the company or the individual customer.

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NATURE OF THE CASH BOOK AND BANK STATEMENT

Cash Book

Debit represents an increase Credit represents a decrease

Bank Statement

Dr Cr Balance

(representsdecrease)

(representsincrease)

(representsthe amountowned to the clients - liability)

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BANK RECONCILIATION STATEMENT

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REASONS FOR DIFFERENCES BETWEEN THE CASH BOOK BALANCE AND THE BANK STATEMENT BALANCE

1) Unrecorded items These are items which arise in the Bank Statements

before they are recorded in the Cash Book. Such unrecorded items may include:

* interest * bank charges * dishonored cheques * interest allowed by the bank: interest

received for deposits.They are not recorded in the Cash Book because the business does not know that these items have arisen until they see the Bank Statement.The Cash Book must be adjusted to reflect these items!!!

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2) Timing Differences These items have been recorded in the cash book, but due

to the bank clearing process have not yet been recorded in the bank statement:

* Outstanding / unpresented cheques : cheques given to suppliers but they have not presented to the bank for money.

* Outstanding / uncleared deposits: cheques received by the business but not yet cleared by the bank.

The bank statement balance needs to be adjusted for these items: € Balance per Bank Statement XLess: Outstanding / Unpresented cheques (X)Add: Outstanding / Unpresented deposits XBalance per cash book revised X

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3) Errors * Errors in the cash book The business may make a mistake in their cash

book. The cash book balance will need to be adjusted for these items

* Errors in the bank statement The bank may make a mistake e.g. record a

transaction relating to a different person within our business bank statement. The bank statement balance will need to be adjusted for these items

NOTE THAT THE BANK BALANCE ON THE STATEMENT OF FINANCIAL POSITION IS ALWAYS THE BALANCE PER THE REVISED CASH BOOK

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Other methods of payment except from cheques are:

The Standing orders (S/O): They are standing instructions from the firm to the

bank to make regular payments. For example paying every month a loan installment.

Direct debit or autopay: Is the instruction given by the depositor to his /

her creditor’s bank to collect the money with a variable amount directly from the depositor’s bank account from time to time. (water bill, telephone bill, electricity, insurance e.t.c)

Direct credit: They are money received from customers directly

through the banking system or money paid to our creditors from our bank account.

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EXERCISE 1:

On which side of the cash book should the following

unrecorded items be posted?

Bank charges Standing orders Direct Debits Direct Credits Dishonored cheques Bank interest allowed

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Cash Book

Bank Interest allowed

SOLUTION:

Direct Credits

Bank Charges

Direct Debits

Standing Orders

Dishonored cheques

Direct Credits

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EXERCISE 2:

In preparing a company’s bank reconciliation statement, the accountant finds that the following items are causing a difference between the cash book balance and bank statement balance:

1) Direct Debit €5302) Deposits not credited €12003) Cheque paid in by the company and dishonored

€2344) Outstanding cheques €6775) Bank charges €1006) Error by Bank €2399 – cheque incorrectly credited

to the account

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SOLUTION:

Which of these items will require an entry in the cash book?

A) 3,4 and 6B) 1,3 and 5C) 1,2 and 4D) 2,5 and 6

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Two steps :1. Check the bank statement and the cash

book to identify the items which have been omitted.

2. Prepare the bank reconciliation statement.

TO RECONCILE THE BANK STATEMENT WITH THE UNADJUSTED CASH BOOK

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The following information has been extracted from the records of J.Franco:

DR Bank Account CR

€ cheque no. € 1 Dec B/ce b/d 16491 1 Dec Alexander 782 857 2 Dec Able 6 Dec Burgess 783 221 Baker 2065 14 Dec Barry 784 511 10 Dec Charlie 2312 17 Dec Cook 785 97 14 Dec Delta 419 24 Dec Hay 786 343 21 Dec Echo 327 29 Dec Rent 787 260 23 Dec Cash Sales 529 31 Dec Fred-chq 119 31 Dec B/ce c/d 19973 22262 22262

EXERCISE 3:

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High Street BankBank statement – J.FrancoDate Details Dr Cr Balance

1 dec B/ce b/d 164915 dec 782 8575 dec bank charges 47 155876 dec deposit 2065 1765210 dec standing order 137 1751511 dec 783 212 1730313 dec deposit 2312 19616 17 dec 784 511 1910417 dec deposit 419 1952317 dec deposit 327 1985017 dec deposit 528 2038728 dec 786 343 2003530 dec 310923 297 19738 31 dec B/ce c/d 19738

withdrawals deposits € € €

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Revised /corrected Cash BookB/ce as per wrong cash book 19973 5/12 bank charges

4711/12 cheque 783 error 9 10/12 S/O

137 17/12 deposit

differ 1 B/ce c/d revised

19797 19982

19982

SOLUTION:

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Bank Reconciliation Statement as at 31st December

Balance as per Bank Statement 19738Add: 31/12 Outstanding Deposit- Fred 119Less: 6/12 Outstanding cheque 785 (97)Less: 29/12 Outstanding cheque 787 (260)Add: 30/12 Bank Error: wrong cheque 310923 297Balance per Cash Book 19797

€

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The following is a summary of Ami’s cash book as presented to you for the month of December’2012:

Cash Book

Receipts 1469 B/ce b/d 761 B/ce c/d 554 Payments 1262 2023 2023All receipts are banked and payments are made by

cheque.On investigation discovered:1)Bank charges of €136 entered on the bank statement

had not been entered in the cash book.2)Cheques drawn amounting to €267 had not been

presented to the bank for payment.

EXERCISE 4:

€ €

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3) A cheque for €22 had been entered as a receipt in the cash book instead of as a payment.

4) A cheque drawn for €6 had been incorrectly entered in the cash book as €66.

Required: prepare the revised cash book.

Revised Cash Book Adjustment for cheque 60 B/ce b/d

554 Bank charges

136 B/ce c/d 674 Cheque

44 734

734 B/ce b/d

674

Solution:

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QUESTIONS?