CHAPTER EIGHT

BANK RECONCILIATIONS
Learning Objectives
 Understand the purpose of bank reconciliations.
 Identify the main reasons for differences between the cash book and
the bank statement.
 Correct cash book errors and/or omissions.
 Prepare bank reconciliation statements.
 Derive bank statements and cash bank balances from given
information.
 Identify the bank balance to be reported in the final accounts.
Introduction

In this chapter, you’ll learn how to prepare a bank reconciliation

statement and why you need to do this when a bank statement is
received from the bank. You will also learn how to deal with
dishonoured cheques in the ledger accounts.
A bank reconciliation compares the bank’s balance with the
company’s balance and explains any differences to make them agree.
A bank reconciliation is a comparison of a bank statement (sent
monthly, weekly or even daily by the bank) with the cash book.
 Differences between the balance on the bank statement and the
balance in the cash book will be errors or timing differences, and they
should be identified and satisfactorily explained.
Control features of a bank account
The use of a bank contributes significantly to good internal control
over cash.
A company can safeguard its cash by using a bank as a depository and
as a clearinghouse for cheques received and written.
 Use of a bank minimizes the amount of currency that a company
must keep on hand.
Also, use of a bank facilitates the control of cash because it creates a
double record of all bank transactions—one by the company and the
other by the bank.
The asset account cash maintained by the company should have the
same balance as the bank’s liability account for that company.
A bank reconciliation compares the bank’s balance with the
company’s balance and explains any differences to make them agree.
Bank statement and cash book
A bank statement shows the depositor’s bank transactions and balances.
In theory, the entries appearing on a business's bank statement should be
exactly the same as those in the business cash book.
The balance shown by the bank statement should be the same as the
cash book balance on the same date.
The cash book of a business is the record of how much cash the business
believes that it has in the bank.
In the same way, you might keep a private record of how much you think
you have in your own bank account, perhaps by making a note in your
cheque book of income received and the cheques you write.
Prepared from the bank’s perspective.
Every deposit the bank receives is an increase in the bank’s liabilities
(an account payable to the depositor).
Lists in numerical sequence all paid cheque along with the date the
cheque was paid and its amount.
Bank includes with the bank statement memoranda explaining other
debits and credits it made to the depositor’s account.
A cheque that is not paid by a bank because of insufficient funds in a
bank account is called an N S F cheque (not sufficient funds).
The bank statement
It is a common practice for a business to issue a monthly statement to
each credit customer, itemising:
(a) The balance owed at the beginning of the month
(b) New debts incurred during the month
(c) Payments made during the month
(d) The balance owed at the end of the month
Why is a bank reconciliation necessary?
A bank reconciliation is needed to identify and account for the
differences between the cash book and the bank statement
Why might your own estimate of your bank balance be different from
the amount shown on your bank statement?
There are three common explanations.
(a) Error. Errors in calculation, or recording income and payments, are
more likely to have been made by you than by the bank, but it is
conceivable that the bank has made a mistake too.
(b) Bank charges or bank interest. The bank might deduct charges for
interest on an overdraft or for its services, which you are not informed
about until you receive the bank statement.
(c) Timing differences
(i) There might be some cheques that you have received and paid into
the bank, but which have not yet been 'cleared' and added to your
account. So although your own records show that some cash has been
added to your account, it has not yet been acknowledged by the bank –
although it will be soon once the cheque has cleared.
(ii) Similarly, you might have made some payments by cheque, and
reduced the balance in your account in the record that you keep, but
the person who receives the cheque might not bank it for a while.
Reconciling the Bank Account
The bank and the depositor maintain independent records of the
depositor’s checking account.
People tend to assume that the respective balances will always agree.
In fact, the two balances are seldom the same at any given time, and
both balances differ from the “correct” or “true” balance.
Therefore, it is necessary to make the balance per books and the
balance per bank agree with the correct or true amount—a process
called reconciling the bank account.
Reconciling the Bank Account
Reconcile balance per books and balance per bank to their “correct” or
“true” balance.
Reconciling Items:
Reconciling the Bank Account
Reconciliation Procedure
The need for agreement has two causes:
1. Time lags that prevent one of the parties from recording the transaction in
the same period as the other party.
Time lags occur frequently. For example, several days may elapse between the
time a company mails a cheque to a payee and the date the bank pays the
check
2. Errors by either party in recording transactions. The incidence of errors
depends on the effectiveness of the internal controls maintained by the
company and the bank.
Bank errors are infrequent. However, either party could accidentally record a
K450 cheque as K450 or K540.
RECONCILIATION PROCEDURE
The bank reconciliation should be prepared by an employee who has
no other responsibilities pertaining to cash.
If a company fails to follow this internal control principle of
independent internal verification, cash embezzlements may go
unnoticed.
For example, a cashier who prepares the reconciliation can embezzle
cash and conceal the embezzlement by misstating the reconciliation.
Thus, the bank accounts would reconcile, and the embezzlement
would not be detected.
RECONCILIATION PROCEDURE
In reconciling the bank account, it is customary to reconcile the
balance per books and balance per bank to their adjusted (correct or
true) cash balances.
The starting point in preparing the reconciliation is to enter the
balance per bank statement and balance per books on the
reconciliation schedule
 The following steps should reveal all the reconciling items that cause
the difference between the two balances
Step 1. Deposits in transit. Compare the individual deposits listed on
the bank statement with deposits in transit from the preceding bank
reconciliation and with the deposits per company records or duplicate
deposit slips.
Deposits recorded by the depositor that have not been recorded by the
bank are the deposits in transit.
Add these deposits to the balance per bank.
Step 2. Outstanding cheques. Compare the paid cheques shown on the
bank statement with
(a) cheques outstanding from the previous bank reconciliation, and
(b) cheques issued by the company as recorded in the cash payments
journal (or in the cheque register in your personal cheque book).
Issued cheques recorded by the company but that have not yet been
paid by the bank are outstanding cheques.
Deduct outstanding cheques from the balance per bank
Step 3. Errors. Note any errors discovered in the foregoing steps and list
them in the appropriate section of the reconciliation schedule.
For example, if the company mistakenly recorded as K169 a paid
cheque correctly written for K196, it would deduct the error of K27
from the balance per books.
All errors made by the depositor are reconciling items in determining
the adjusted cash balance per books.
In contrast, all errors made by the bank are reconciling items in
determining the adjusted cash balance per bank.
Step 4. Bank memoranda. Trace bank memoranda to the depositor’s
records.
List in the appropriate section of the reconciliation schedule any
unrecorded memoranda.
For example, the company would deduct from the balance per books a
K5 debit memorandum for bank service charges.
Similarly, it would add to the balance per books K32 of interest earned.
 The bank reconciliation
Differences between the cash book and the bank statement arise for three
reasons:
Errors – usually in the cash book
Omissions – such as bank charges not posted in the cash book
Timing differences – such as unpresented cheques
Note! When the differences between the bank statement and the cash book
are identified, the cash book must be corrected for any errors or omissions.
Any remaining difference can then be shown to be due to timing
differences.
RECONCILING ITEMS

It is extremely unlikely that the balance on the ledger account and the balance on the
bank
statement will agree. This can be due to the following reasons:
Cheques issued by the company are immediately entered into the cashbook, but they
will not appear on the bank statement until they are presented to the bank. These are
called unpresented cheques.
 Receipts by the business are immediately entered in the cashbook and then banked.
This can take a number of days to clear. These are called outstanding lodgements.
 There may be items in the bank statement that have not been processed through the
cash book e.g. BACS transfer, standing orders, direct debits, dishonoured cheques, bank
interest and bank charges.
Proforma bank reconciliation
K
Balance per bank statement X
Less: Unpresented cheques (X)
Add: Outstanding lodgements X
Balance per adjusted cash book X
Preparation process
1. Compare the cashbook and bank statement and tick matching items
2. Post corrections to the cash book i.e. items on the bank statement
that have not been processed through the ledger
3. Put in items that are in the cashbook that have yet to be presented
to the bank as a reconciling item.
*Unless otherwise told, assume figures on the bank statement are
correct.
Example
Mary Kay has prepared her cashbook for the month of April 2010:
Dr Cash Book Cr
Date Narrative K Date Narrative K
1 April Balance b/f 14,500 1 April Cheque 1437 450
3 April Cheque 345 3,650 1 April Cheque 1438 600
5 April Cheque 95464 1,200 1 April Cheque 1439 750
12 April Cheque 741 1,100 1 April Cheque 1440 150
29 April Cheque 6532 3,000 12 April Cheque 1441 250
12 April Cheque 1442 350
27 April Cheque 1443 395
27 April Cheque 1444 165
27 April Cheque 1445 245
30 April Balance c/f 20,095
23,450 23,450
1 May Balance b/f 20,095
Mary Kay received her bank statement on 26 April 2010:
Zanaco Bank Plc
54 The Bank,
Lusaka,

To: Mary Kay Account No. 34563244 26 April 2010

STATEMENT OF ACCOUNT
Date Details Paid out Paid in Balance
2010 KKK
1 April Opening balance 14,500 C
4 April 1437 450 14,050 C
5 April 1438 600 13,450 C
8 April 345 3,650 17,100 C
10 April 95464 1,200 18,300 C
11 April Standing order - L.S.F 750 17,550 C
12 April 1439 750 16,800 C
14 April Direct debit - D Gravity 750 16,050 C
17 April 1441 250 15,800 C
18 April BACS transfer 3,500 19,300 C
20 April 1442 350 18,950 C
20 April 741 1,100 20,050 C
24 April Bank charges 500 19,550 C
D = Debit C = Credit
Prepare for Mary Kay a bank reconciliation for the month of April and
update the cash book as necessary. solutions

Dr Cash book adjustment Cr

Unadjusted balance b/f 20, 095 standing order 750
Bacs transferred 3, 500 Direct debit 750
Bank charges 500
Adjusted Balance c/f 21, 595
23 595 23, 595
Balance per bank statement 19 550
Less unpresented cheques
1440 150
1443 395
1444 165
1445 245 ( 955)

Add outstanding lodgements 6532 3000

Balance per adjusted cashbook 21, 595
Example
At 30 September 2019, the balance in the cash book of Wordsworth Co
was K805, 150 debit. A bank statement on 30 September 2019 showed
Wordsworth Co to be in credit by K1, 112, 300. On investigation of the
difference between the two sums, it was established that:
(a) The cash book had been undercast by K90, 000 on the debit side*.
(b) Cheques paid in not yet credited by the bank amounted to K208,
200, called outstanding lodgements.
(c) Cheques drawn not yet presented to the bank amounted to K425,
350 called unpresented cheques.
* Note. 'Casting' is an accountant's term for adding up.
Required
(a) Show the correction to the cash book.
(b) Prepare a statement reconciling the balance per bank statement to
the balance per cash book.
Solutions
(a) CORRECTED CASH BOOK
K ‘000’
Cash book balance brought forward 805, 150
Add
Correction of undercast 90, 000
Corrected balance 895, 150
(b) BANK RECONCILIATION
K
Balance per bank statement 1, 112, 300
Add
Outstanding lodgements 208, 200
1,320, 500
Less
Unpresented cheques (425, 350)
Balance per cash book 895, 150
Example 2
The information below relates to the Cash account in the ledger of Kamono farms
Company.
Balance June 1—K9,947; Cash deposited—K37,120.
Balance June 30—K10,094; Cheques written—K36,973.
The June bank statement shows a balance of K9,525 on June 30 and the following
memoranda.
Credits Debits
Collection of K850 note plus interest K34 K884 NSF cheque: R. Makanda K245
Interest earned on checking accounts K26 Safety deposit box rent K35

At June 30, deposits in transit were K2,581,& outstanding cheques totalled K1,382.
Required
(a) Prepare the bank reconciliation at June 30.
(b) Prepare the adjusting entries at June 30, assuming
(i) The NFS cheque was from a customer on account, and
(ii) No interest had been accrued on the note
Solution
K

Cash balance per books 10,094

Add: Collection of note receivable (K850 + K34) 884
Interest earned 26 910
11,004
Less: NSF cheque 245
Safety deposit box rent 35 280
Adjusted cash balance per books 10,724
Solution cont’
KAMONO FARMS COMPANY
Bank Reconciliation June 30
K
Cash balance per bank statement 9,525
Add: Deposits in transit 2,581
12,106
Less: Outstanding cheques 1,382
Adjusted cash balance per bank 10,724
Solution cont’
June 30 Cash 884
Notes Receivable 850
Interest Revenue 34
30 Cash 26
Interest Revenue 26
30 Miscellaneous Expense 35
Cash 35
30 Accounts Receivable (R. Makanda) 245
Cash 245
Example 3
Poorten Company’s bank statement for May 2017 shows the following data.
Balance 5/1 K12,650 Balance 5/31 K14,280
Debit memorandum: Credit memorandum:
NSF cheque 175 Collection of note receivable K505
The cash balance per books at May 31 is K13,319. Your review of the data
reveals the following.
1. The NSF cheque was from Copple Co., a customer.
2. The note collected by the bank was a K500, 3-month, 12% note. The bank
charged a K10 collection fee. No interest has been accrued.
3. Outstanding checks at May 31 total K2,410.
4. Deposits in transit at May 31 total K1,752.
5. A Poorten Company cheque for K352, dated May 10, cleared the
bank on May 25. The company recorded this check, which was a
payment on account, for K325.
Required
(a) Prepare a bank reconciliation at May 31.
(b) Journalize the entries required by the reconciliation.
Solution
K K
Cash balance per books 13,319
Add: Collection of note receivable (K500+15) 515
interest, less collection fee (10) 505
13,824
Less: NSF cheque 175
Error in recording cheque 27 202
Adjusted cash balance per books 13,622
Solutions
POORTEN COMPANY
Bank Reconciliation May 31, 2017
K
Cash balance per bank statement K14,280
Add: Deposits in transit 1,752
16,032
Less: Outstanding chequs 2,410
Adjusted cash balance per bank 13,622
(b)
May 31 Cash 505
Miscellaneous Expense 10
Notes Receivable 500
Interest Revenue 15
(To record collection of note by bank)
31 Accounts Receivable—Copple Co. 175
Cash 175
(To record NSF check from Copple Co.)
31 Accounts Payable 27
Cash 27
(To correct error in recording cheque)
Example 4 more complicated
On 30 June 2020, Mojo's cash book showed that he had an overdraft of
K300, 000 on his current account at the bank. A bank statement as at
the end of June 2020 showed that Mojo was in credit with the bank by
K65, 000 On checking the cash book with the bank statement you find
the following.
(a) Cheques drawn, amounting to K500, 000 had been entered in the
cash book but had not been presented.
(b) Cheques received, amounting to K400, 000 had been entered in the
cash book, but had not been credited by the bank.
(c) On instructions from Mojo the bank had transferred interest
received on his deposit account amounting to K60, 000 to his current
account, recording the transfer on 5 July 2020. This amount had,
however, been credited in the cash book as on 30 June 2020
(d) Bank charges of K35, 000 shown in the bank statement had not
been entered in the cash book.
(e) The payments side of the cash book had been undercast by K10,
000.
(f) Dividends received amounting to K200, 000 had been paid direct to
the bank and not entered in the cash book.
(g) A cheque for K50, 000 drawn on deposit account had been shown in
the cash book as drawn on current account.
(h) A cheque issued to Jones for K25, 000 was replaced when out of date.
It was entered again in the cash book, no other entry being made. Both
cheques were included in the total of unpresented cheques shown
above.
Required
(a) Indicate the appropriate adjustments in the cash book.
(b) Prepare a statement reconciling the corrected cash book balance with
that shown in the bank statement.
(a) The errors to correct are given in notes (c) (e) (f) (g) and (h) of the
question. Bank charges (note (d)) also call for an adjustment.
(Note that debit entries add to the cash balance and credit entries are
deductions from the cash balance.)
(Note that debit entries add to the cash balance and credit entries are
deductions from the cash balance.)
 Adjustments in cash book
Debit Credit
K K
Item
(c) Cash book incorrectly credited with interest on 30 June
It should have been debited with the receipt 60 000
(c) Debit cash book (current a/c) with transfer of interest
from deposit a/c (note 1) 60 000
(d) Bank charges 35, 000
(e) Undercast on payments (credit) side of cash book 10, 000
(f) Dividends received should be debited in the cash
book 200, 000
(g) Cheque drawn on deposit account, not current account
Add cash back to current account 50, 000
(h) Cheque paid to Jones is out of date and so cancelled
Cash book should now be debited, since previous
credit entry is no longer valid (note 2) 25,000
395,000 45,000
Cash book: balance on current account as at 30 June 2020 (300,000)
Adjustments and corrections:
Debit entries (adding to cash) 395, 000
Credit entries (reducing cash balance) (45, 000)
Net adjustments 350, 000
Corrected balance in the cash book 50, 000
EXAMPLE Exam type
LG Ltd has prepared its October 2021 bank reconciliation for auditors to review. As
at 31 October 2021 the ledger balance was K2,450 (Credit) but the bank statement
showed that the company has funds amounting to K3,743.
The following are useful information:
(1) The company arranged for the bank to transfer the dollar equivalent of K500,000 to
a supplier in the United States. Charges on the transfer of 0.5% have not been
recorded in the books of LG Ltd.
(2) The CEO of LG Ltd arranged for an amount of K3,000 to be transferred from his
personal bank account into the company’s account. The bank made the transfer on
31 October 2021, but LG Ltd has not made any entry in its books.
(3) A Cheque for Electricity Company amounting to K5,600 issued and recorded
correctly in the bank statements appeared in LG ledger as K6,500.
(4) The following cheques issued by LG Ltd in October 2021 did not
appear on the bank statement:
Cheque # 20450 - K2,000
Cheque # 20456 - K4,800
Cheque # 20500 - K5,250
(5) Income earned on investment with an advice by the bank of K2,457
was not recorded by the bank until 3 November 2021.
(6) Three cheques received and booked by LG Ltd amounting to K4,800
were not credited by the bank.
Required:
(i) Prepare the bank account in LG Ltd nominal ledger including any
adjusting entries based on the information above.
(ii) Prepare a reconciliation of the bank statement balance to the
corrected balance on the bank account in LG Ltd nominal ledger.
Solutions
I) Bank Account in LG Ltd nominal ledger K
Balance b/f (2,450)
Transfer charges (0.5% x 500, 000) (2,500)
Transfer from CEO 3,000
Electricity Overstated (6500-5600) 900
Balance c/f (1,050)
ii)Bank Reconciliation Statements K
Balance per ledger (1, 050)
Add unpresented cheques
#450 2,000
#456 4,800
#500 5,250 12,050
11,000
Less:
Uncredited cheques 4,800
Interest not booked 2,457 (7,257)
Balance per bank statement 3,743
EXAM QUESTION
(a) The following is an extract of the cash book of JB Enterprises for the
month of April 2021:
Cash book (bank column)
K K
Balance b/f 39,100 Cash payments 176,400
Cash receipts 199,050 Balance c/f 61,750
238,150 238,150
QUESTION CONT’
The bank statement for the month of April 2021 was received on 2 May 2021 and showed a
credit balance of K43,220.
On investigation the following were discovered:
1. Bank charges amounting to K5,140 had not been recorded in the cash book.
2. Standing orders amounting to K2,100 had not been recorded in the cash book.
3. Cheques amounting to K33,400 issued to suppliers had not yet been presented to the bank
for payments.
4. The opening balance in the cash book was wrongly recorded as K39,100 instead of
K31,900.
5. A cheque amounting to K2,765 issued to a supplier was wrongly recorded as a receipt in
the cash book.
QUESTION CONT’
6. Cheques amounting to K22,460 were deposited on 29 April 2021 but credited by
the bank on 4 May 2021.
7. Cheques from customers amounting to K4,300 were returned by the bank
marked “refer to the drawer” but entry had been made in the cash book.
8. The bank wrongly debited JB Enterprises account in error with a cheque
amounting to K5,200. The cheque was supposed to be debited to another client of
the bank.
Required:
(i) Prepare the corrected cash book for the month of April 2021.
(ii) Prepare the bank reconciliation statement as on 30 April 2021 starting with
balance as per bank statement.
SOLUTION
(a) Bank reconciliations
(i) Corrected cash book
K K
Balance b/f 61,750 Bank charges 5,140
Standing orders 2,100
Opening balance overstated (39,100 – 31,900) 7,200
Cheque wrongly debited (2,765 + 2,765) 5,530
Dishonoured cheques 4,300
Corrected balance c/f 37,480
61,750 61,750
(ii) Bank reconciliation
K
Balance as per bank statement 43,220
Add:
Uncredited cheques 22,460
Bank error 5,200
70,880
Less:
Unpresented cheques (33,400)
Balance as per corrected cash book 37,480
Reconciling the Bank Account
Bank Reconciliation Illustrated
Illustration:

presented below is the bank statement for Laird Company. It shows a balance per bank of

K15,907.45 on April 30, 2019. On this date the balance of cash per books is K11,709.45.

From the foregoing steps, Laird determines the following reconciling items for the bank.

Step 1. Deposits in transit (+): April 30 deposit (received by bank on May 1). 2,201.40

Step 2. Outstanding checks (−): No. 453, K3,000.00; No. 457, K1,401.30;
No. 460, K1,502.70. 5,904.00
Step 3. Bank errors (+/−): None.
Reconciling items per books are as follows:
Step 1. Other deposits (+): Unrecorded electronic receipt from
customer on account on April 9 determined from the bank statement.
1,035.00
Step 2. Other payments (−): The electronic payments on April 3 and 7 were
previously recorded by the company when they were initiated. Unrecorded
charges determined from the bank statement are as follows:
Returned NSF check on April 29 425.60
Debit and credit card fees on April 30 120.00
Bank service charges on April 30 30.00
Step 3. Company errors (+): Check No. 443 was correctly written by Laird for
K1,226 and was correctly paid by the bank on April 12. However, it was
recorded as K1,262 on Laird’s books. 36.00
Cash balance per bank statement
15,907.45
Deposit in transit
2,201.40
Outstanding checks
(5,904.00)
Adjusted cash balance per bank •double underline
Cash balance per books
• $11,709.45
Error in check No. 443
36.00
NSF check
(425.60)
Debit and credit card fees
(120.00)
Bank service charge
(30.00)
Collection of accounts receivable
1,035.00
Adjusted cash balance per books
• double underline