AACT1013 FINANCIAL ACCOUNTING AND REPORTING 1

TOPIC 8 BANK RECONCILIATION

Learning Objectives
 Recognise the need to reconcile the cash book with the bank statement periodically
 Identify the main reasons for any discrepancies between the cash book and the bank
statement, such as errors, unanticipated receipts and payments and timing differences
 Correct cash book errors
 Reconcile the corrected cash book balance with the bank statement through adjustments
for uncleared and uncredited cheques

1 Introduction
o A business uses the cash receipts and cash payment day book (Cash Book) to record
every receipt of money into its bank account and every payment from its bank account.
o In theory, the balance on the account shown in the cash book should be the same as
the amount of money that is actually in the bank account.
o In practice, however, this is not the case, and the cash book balance rarely, if ever,
agrees with the amount that is in the bank account according to the bank.
o There are several reasons for this:

1.1 Cheques, receipts, charges and interest

With cheques, there are timing differences between recording the receipt or payment in the
cash book and the actual transfer of money into or out of the bank account.
 Making payments by cheque
 When a business pays a supplier by cheque, the payment will usually be
recorded in the cash book when the cheque is written and sent.
 The supplier should receive the cheque through the post a day or later but
might not pay the cheque into the bank immediately.
 When the cheque is paid in, the transfer of money from the payer’s bank
account to the payee’s bank account does not happen instantly. There is a
further delay, usually of two or three days, due to the time it takes for the cheque
to be ‘cleared’ through the banking system.
 Thus, it could take a week or more from the recording of a cheque payment in
the business’ books to appear in the bank’s record.

 Receiving payments by cheque

 When a business receives a payment by cheque, it should record the receipt
in the cash book immediately.
 The payment of cheque into the bank will take two or three days, due to the
‘clearing’ delay and so there will be a further difference between the business’
record and the bank’s record.

 Dishonoured cheques
 When a customer pays cheque, the payer’s bank might refuse to honour it.
 As far as the business is concerned, the cheque received from customer will
be entered in the cash book.
 When it finds out that the cheque has been dishonoured, it will have to reflect
this in the cash book.

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 In the meantime, both the bank and the business will have different balances
due to the timing of recording the dishonoured cheques.

 Bank charges
 A bank charges for its services.
 Bank charges are deducted from the money in the account and notified to the
business on the bank statement.
 Until the business receives a bank statement, the business does not know how
much the bank charges are and so cannot record them in the cash book.
 Bank charges are recorded as a cash payment in the cash book when the bank
statement is received.
 Similarly, if a business has a deposit account and received interest on its bank
balances, the amount of interest receivable is not known, and so cannot be
recorded, until after a bank statement has been received.

2 Bank statement
o Account holders with a bank receive a bank statement at regular intervals, typically
every month.
o A bank statement shows all the payments and receipts through the account that have
been processed by the bank since the previous bank statement.
o A bank statement is shown as below:

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Notes on the bank statement

 When a business has money in its bank account
 The money is shown as a debit balance in nominal ledger, the bank account.
 To the bank, however, the situation is a ‘mirror image’ / opposite.
 To the bank, when a customer has money in bank account, the bank
‘owes’ the customer.
 The customer’s bank balance is therefore a liability in the accounting
system of the bank.
 Thus, this is recorded as a credit entry in the bank statement. This is
from the bank’s point of view.
 When a bank account is overdrawn
 The business owes money to the bank. In the business’ nominal ledger, the
bank account, this is recorded as a credit balance.
 To the bank, however, the situation is again the opposite.
 The customer owes the bank money.
 Thus, the customer is a receivable (asset) of the bank.
 In the bank statement, if the account is overdrawn, it will be shown as
a debit balance / ‘o/d’.
 For each transaction, the bank statement shows the date it was processed by the bank
and the money was actually paid into or out of the account. The amount of the receipt
or payment is shown, together with the resulting balance on the account.
 For payments by cheque, the cheque number is shown.

3 Bank reconciliation statement

o A bank statement is used to check that the cash book details are correct. This done by
checking the details in the bank statement and the details in the cash book and making
sure that they agree with each other.
o For the reasons explained earlier, the balance on the account shown by the bank
statement will rarely be the same as the current balance in the cash book in the nominal
ledger.
o Since the balance in the bank statement and the balance in the cash book are different,
the difference in the two balances must be checked and explained.
This is a bank reconciliation.
o Bank reconciliation statement is prepared at regular intervals usually at the end of each
month to reconcile the differences between the bank balances and the bank statement
balances.
o Bank reconciliations are important because they are a check on the accuracy of
the cash book.
 If any errors have been made, they should be identified and corrected.
 The cash book should be updated to include any receipts or payments that
have not yet been recorded such as bank charges.

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3.1 Preparing a bank reconciliation

A bank reconciliation involves several steps.
Step 1
The opening balance on the bank statement and the opening balance in the cash book
should be the same.

Step 2
Individual transactions in the bank account should be matched with the same
transactions in the bank statement.
When the transactions are matched, it is usual to mark it in both the bank account and the
bank statement with a tick.

Step 3
The difference in the two closing balances must be explained by transactions in the
bank statement and transactions in the bank account that have not yet been ticked.
 There might be some receipts or payments shown in the bank statement that are not
yet recorded in the cash book. The bank account should be updated to record all
these transactions on the date the reconciliation takes place.
 Errors might occur in the bank account because a cash receipt or payment is entered
as the wrong amount. This should be discovered when comparing the bank account
with the bank statement.
 When an error occurs, the bank account should be amended, and the correct amount
entered.

Step 4
After updating the bank account, there will be a new balance on the bank account, but
it is likely to be different from the balance on the bank statement. There will be some
items in the bank account that have not been ticked because they do not appear on the
bank statement.
These items will be:
I. Outstanding lodgements
(Receipts recorded in the bank account but not yet in the bank statement)
Payments received and entered in the bank account, but not yet appearing on the bank
statement because the bank has not yet processed them.
II. Unpresented cheques
(Payments recorded in the bank account but not yet in the bank statement)
Payments by cheque entered in the bank account but not yet appearing on the bank
statement because the bank has not yet processed them.

Step 5
Prepare a bank reconciliation statement.
This is a statement that sets out the reasons for the difference between the two closing
balances.

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Bank reconciliation statement as at [date]

RM RM
Balance as per bank statement (original)
Add: Outstanding lodgements

Less: Unpresented cheques

Balance as per bank account (corrected)

Exercise 1:
Given below are the cash book and bank statement of XYZ Limited as at 30 April 2017.
CASH BOOK AS AT 30 APRIL
Cash Book (bank column)
RM RM
20/4 Muthu 500 1/4 Balance b/d 1,700
27/4 Tan 1,500 8/4 Mr M 1,900
28/4 Bakar 300 12/4 Mr N 500
30/4 Balance c/d 3,100 17/4 Mr O 700
18/4 Mr P 600
5,400 5,400

BANK STATEMENT FOR THE MONTH ENDED 30 APRIL

Apr Items Debit (Dr) Credit (Cr) Balance
RM RM RM
1 Balance b/f 1,700Dr
10 Mr M 1,900 3.600Dr
15 Mr N 500 4,100Dr
16 Transfer to XYZ Co 400 4,500Dr
23 Muthu 500 4,000Dr
Bank charge 50 4,050Dr
28 Tan 1,500 2,550Dr
29 Bank interest 100 2,650Dr
Transfer credit from Ching Co 200 2,450Dr
30 Balance c/f 2,450Dr

Required: Prepare a Bank Reconciliation Statement and adjusted Bank account.

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Exercise 2:
Information from the records and bank statement of Max Ltd as of August 31, 2019 is as below:

Balance as per bank statement, 31 August RM9,610

Bank balance as per general ledger, 31 August RM7,430
Cheque issued but not yet cleared as at 31 August RM2,417
Cheque deposited but not yet cleared as at 31 August RM500
A cheque made by a customer was returned by bank by 31 August RM281
Interest earned in August was earned per bank statement RM30
Cheque for one of the suppliers was recorded as RM268 in cash payment book
and bank statement showed RM240
Credit transfer made by Martin was credited to bank account on 30 August was RM486
not recorded in cash book

Required: Prepare a Bank Reconciliation Statement and adjusted Bank account.

Exercise 3:
XYZ Ltd has the following transactions:
(i) The bank overdraft as per cash book on March 31, 2017 was RM6,000
(ii) Interest on overdraft for six months ending March 31, 2017 RM200 is debited in the Bank
Statement.
(iii) Bank charges for the above period also debited in the Bank Statement amounted to RM50
(iv) Cheque issued, but not cashed, prior to March 31, 2017 amount to RM1,500
(v) Check deposited into bank, but not cleared and credited before March 31, 2017 were for
RM2,500
(vi) Interest on investment collected by the bankers and credited in the Bank Statement amounted
to RM1,800.

Required: Prepare a Bank Reconciliation Statement and adjusted Bank account.

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Exercise 4:
Carol works as a cashier for Hunt Ltd. Her responsibilities include entering and maintaining the
firm’s cash book and preparing a bank reconciliation statement at end of the month. Below are the
cash book and bank statement for the company as at July 2017.

CASH BOOK AS AT JULY 2017

Cash Book (bank column)

Date Details RM Date Details RM
1-Jul Balance b/d 756.20 2-Jul T Apple 50.00
3-Jul Curtain Ltd 220.00 2-Jul Broad & Co 130.00
15-Jul Morris & Son 330.00 2-Jul Geely & Co 10.00
31-Jul Pot Ltd 63.00 8-Jul Winter Co 27.50
14-Jul Liverpool Ltd 89.00
14-Jul JT Sport Ltd 49.00
15-Jul Kick Ltd 250.00
26-Jul Ball Ltd 122.00
Balance c/d 641.70
1369.20 1369.20

BANK STATEMENT FOR THE MONTH ENDED JULY 2017

BANK STATEMENT
Date Details Debit (RM) Credit (RM) Balance (RM)
1-Jul Balance 756.20 Cr
4-Jul Cheques 220.00 976.20 Cr
9-Jul T Apple 50.00 926.20 Cr
14-Jul Geely & Co 10.00 916.20 Cr
16-Jul Liverpool Ltd 89.00 827.20 Cr
19-Jul Cheques 330.00 1,157.20 Cr
24-Jul Kick Ltd 250.00 907.20 Cr
26-Jul Ball Ltd 122.00 785.20 Cr
30-Jul JT Sport Ltd 49.00 736.20 Cr
31-Jul Bank charges 12.95 723.25 Cr
31-Jul Ricardo Ltd 179.75 903.00 Cr

Required: Prepare a Bank Reconciliation Statement and adjusted Bank account.