Download - Topic Eight
Bank Reconciliation Statement
Topic seven lessonsImportance of control accounts in
identification and correction of errorsControl accounts can help identify errors that
could otherwise not be identified by the trial balance
Control accounts helps improve internal control systems
Bank reconciliations are part of internal controls.
They help to check control over cash balancesWe shall appreciate the importance of
performing regular bank reconciliations
After studying this topic, you should be in a position to:
Describe a bank reconciliation statement
Explain why we prepare bank reconciliations
Prepare bank reconciliations Pass correction entries to clear
reconciling differences
To ascertain accuracy of the cash book To identify errors made by the bank in
good time To identify dishonored cheques and
adjust customers accounts promptly To identify omitted expenses. To review stale cheques where payees
have not banked for more than six months
Prevent errors and frauds
Useful tips Bank reconciliations should be
performed regularly Reconciling differences should be
investigated Errors in the cash book should be
corrected promptly Errors by the bank should be reported
promptly Bank reconciliations should be reviewed
by a responsible company official
Common reconciling differencesOutstanding cheques:-
Are cheques payments that are yet to be effected by the bank. Payees might have not banked the cheques. No adjustment is required in the cash book unless for cheques that have become stale
Deposits in transit:Relates to deposits made mainly towards year end. They are most likely to be recorded by the bank in the subsequent period. If proof of subsequent recording by the bank can be done, no adjustment is required in the cash book
Errors in the cash book :Recording errors might be made by accountants for payments and receipts resulting to either over or under banking. Entries should be passed to make corrections for these errors.
Errors in the bank:-Bank officials could also make errors. When such are identified, a quick follow up should be done to ensure that they are corrected by the bank. No adjustments are required in the cash book.
Bank charges:-
Banks will charge for the services offered. Accountants might fail to identify these charges except after performing bank reconciliations. Such expenses should be posted in the cash book.
Direct depositsSome customers could be making direct payments into the company’s bank accounts. At year some of these receipts will not have been posted. The cash book should be adjusted for direct deposits.
Direct transfersBanks offer collection and payment system. Direct transfers arise where the company has contracted the bank to be making some regular payments directly to service providers such as for insurance. In such a case, the accountant might fail to post such payments and the cash book should be adjusted accordingly.
To learn how to prepare bank reconciliations, we shall make use of an illustration.
IllustrationRakesh superstores’ senior accountant noted that as at 31 July 2011, the cash book ledger did not tally with the bank statement. Whereas the cash book ledger had a balance of $10,483.25, the bank statement balance was $12,486.80. On further enquiries the following was noted.
The bank made an error in recording a deposit made by Rakesh. Instead of recording the amount in the cheque of $6,600, they recorded $6,260.
As at 31 July 2011, the following cheques issued to various payees had not been paid by the bank.Cheque no Amount ($)367 2,517.75 396 3,357.00 381 1,678.50 373 1,678.50 386 4,196.25 394 3,357.00
Total 16,785.00
Some customers made direct deposits into the bank account which were yet to be recorded by Rakesh. The listing of these deposits are as follows;Ref Amount ($)Abdul (2,000.00)Yusuf (1,500.00)
The cashier had made an error on 18 July 2011. Instead of posting a cheque payment (Cheque no. 365) to Duncan Stores of $6,550, he posted the payment as $6,200.
Bank charges amounting to $180 had not been posted as at the close of the month.
Direct transfers by the bank for monthly insurance premium of $400 had not been posted. However, the insurance expense for the month had been properly posted.
The bank did not credit a deposit of $871.45 made by Rakesh on 12 July 2011. The bank manager admitted that this was an oversight on the part of the bank and confirmed that the error had been corrected.
The bank had not recorded the following deposits made by Rakesh on 31 July 2011.
Cheque No. Amount ($)
1214 7,600.00
138 8,540.00
Required:-
Reconcile the bank statement with the cash book
Pass entries to correct the cash book
See next slide for suggested solutions
Rakesh SuperstoresStatement of correction of the bank
statement
For the month ended 31 July 2011
Amount($)
Bal indicated 12,486.80
Short banking 340.00
Deposits in transit 871.45 Correct bank statement balance 13,698.25
Rakesh SuperstoresBank Reconciliation Statement
For the month ended 31 July 2011Amount ($)
Bal as per bank statement 12,486.80 Corrected bank statement bal 13,698.25 Less:1. Outstanding cheques (16,785.00)2. Direct deposits (3,500.00)Add:-
1. Deposits in transit 16,140.00
2. Errors in the cash book 350.003. Bank charges 180
4. Direct transfers 400 Cash book balance 10,483.25
Rakesh SuperstoresStatement of corrected cash book
balanceFor the month ended 31 July 2011
Amount ($)Balance as per the records 10,483.25 Direct deposits 3,500.00
Errors in the cash book
(350.00)Bank charges (180.00)Direct transfers (400.00)
Corrected cash book balance
13,053.25
Rakesh SuperstoresStatement of Reconciled bank balance
For the month ended 31 July 2011Amount ($)
Bank statement balance 13,698.25 Deposits in transit 16,140.00
Outstanding cheques
(16,785.00)
Reconciled bank balance 13,053.25
Similar principles apply Important notes are
i. Bank overdraft overstated by debits in cash book not recorded by the bank
ii. Bank overdraft understated by credits in cashbook not in the bank
iii. Debits in the bank not in the cash book will cause cash book OD to be understated
iv. Credits in the bank not in the cash book will cause cash book OD to be overstated
Reconciliation will be performed as illustrated above subject to the above four tips
Necessary to restate the cash book As noted earlier, errors should be
investigated and adjusted in the accounts promptly
Backlog of errors in the bank reconciliation dilutes controls over cash and bank
We shall use our earlier illustration to demonstrate how to pass correction entries.
Errors identified in the cash book based on the reconciliations were; Omission of direct deposits
amounting to $3,500 Misposting of payments by $350
($6,550 - $6,200) Omission of bank charges $180 Omission of bank transfers for
insurance premiums $400
See the next slide for correction entries
Rakesh SuperstoresCash book ledger correction entriesFor the month of July 2011
Description Debit ($)Credit ($)
1 Cash 3,500 Accounts receivable
Abdul 2,000
Yusuf 1,500
Being un-posted receipts from credit customers2 Accounts payable- Duncan Stores 350
Cash 350 Being understatement in posting of cheque payment (Cheque no. 365)
3 Bank charges 180
Cash 180 Being posting of bank charges for the month of July 2011
4 Accounts payable-Insurance 400
Cash 400 Being insurance payments
In this topic we have learnt; the importance of preparing bank reconciliations How to prepare bank reconciliations
Have identified major sources of reconciling differences such as; Outstanding cheques Deposits in transit Errors in the cash book Errors in the bank Bank charges omitted in the cash book Direct deposits unrecognized in the cash book Direct transfers in the bank not recognized in the cash
book We have identified correction entries necessary to
update the cash book with some reconciling items
Questions