College of Business and Social Sciences Department of Accounting ACC 111 Preparation of Bank Reconciliation Statement

COLLEGE OF BUSINESS AND SOCIAL
SCIENCES
DEPARTMENT OF ACCOUNTING
ACC 111

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
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
• 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.

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COLLEGE OF BUSINESS AND SOCIAL

• Bank reconciliation is the agreement of the

Receipts Debit Credit

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