Bank Reconciliation Statements 1
Bank Reconciliation Statements • Bank reconciliation is a comparison between the bank balance recorded in the books of the business (i. e. Bank Ledger Account) and the balance appearing on the bank statement • The bank reconciliation is a method of identifying errors and omissions and correcting them for the final accounts • In the books of a business, money paid into and out of the bank balance is entered into the bank columns of the cash book 2
Bank Reconciliation Statements • 3 Reasons for a Bank Reconciliation 1. Errors may have been made by the business or the bank 2. Items known by the bank but not identified to the business until it receives a bank statement i. e. Unrecorded Items – Examples: Bank charges, interest, direct debits, unpaid cheques 3. Timing differences – Cheques written but not cleared by the bank i. e. Outstanding Cheques 3
Bank Reconciliation Statements • Objective of a Bank Reconciliation Statement 1. To reconcile the difference between – The Cash book balance & the bank statement balance _____________________ It is important to remember that the debits and credits are reversed in bank statement because the bank will be recording the transaction from its view point 4
Bank Reconciliation Statements – The Need for Bank Reconciliations 1. To check the Accuracy of the cash book by agreeing the balance to an independent source (i. e. The bank statement) 2. To identify cash book errors 3. To identify cash book omissions 5
Bank Reconciliation Statements – Adjusting for Unrecorded Items –– These are items that the business only see when they receive the bank statement and that have not been recorded in the cash book as a result - e. g. Bank Interest, Direct Debits – Direct Debit: Variable Amount (D for Different) – Standing Order: Fixed Amount (S for Same) – Dishonoured Cheques: A cheque that bounces. Journal to Correct Cr Bank x Dr Receivables Ledger Control Account x Being Bounced Cheque Adjusted For 6
Bank Reconciliation Statements – Adjusting for Timing Differences– Items recorded in the cash book, but due to the banks automated clearing system (BACS), these items have not yet been recorded in the bank statement – E. g: Outstanding Cheques & Outstanding Lodgements 7
Bank Reconciliation Statements – Outstanding Cheque are cheques issued by the business but not yet presented to the Bank – Cheque has a life of 6 months before it goes “stale” – A cheque that goes “stale” will need to be written back Dr Bank x Cr Expense x Being Write Back of Stale Cheque 8
Bank Reconciliation Statements – Outstanding Lodgements are cheques received by the business but again the lodgement has not yet cleared through the banks clearing system 9
Bank Reconciliation Statements Preparation of a Bank Reconciliation Statement Step 1: Update the cash book with necessary corrections and adjustments. Step 2: Enter outstanding items in the reconciliation statement i. e. items recorded in the cash book but not yet presenting on the bank statement Step 3: Correct any errors made by the bank on the reconciliation statement and complete the reconciliation 10
Bank Reconciliation Statements - Reporting – – – “Bank” in the Financial Statements Bank Ledger Nominal Account – Debit Balance B/d at end of period is an asset – Cash at Bank in Current Assets Petty Cash – Cash in Hand in Current Assets Bank Ledger Nominal Account – Credit Balance B/d at end of period is a liability – Bank Overdraft under Current Liabilities Remember Current Assets are presented in order of Increasing liquidity and Cash in Hand is more liquid than cash at bank An overdraft cannot be offset against a positive bank balance unless there is a legally enforceable right to do so 11
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