Professional Documents
Culture Documents
Bank Reconciliation Notes
Bank Reconciliation Notes
12 Bank Reconciliation
Introduction
In this chapter we will discuss an important procedure that a business should
carry out to protect its cash. This procedure is known as a bank
reconciliation.
Bank Statement
A bank statement is a document prepared by the bank that lists the banking
transactions of a business for a period of time.
When a business carries out a bank reconciliation it will use a bank statement.
The bank statement records the deposits and withdrawals made by a
business, any bank charges and the balance remaining in the bank account
after each transaction. A bank statement will be sent to the business at
regular intervals of time, for example, monthly.
Example
The WA Stationery Store has arranged to receive a bank statement each month.
Set out on below is an extract of the bank statement sent to the business in
early February, 2018. This bank statement sets out the cash transactions of the
business, which the bank is aware of, for the month of January 2018.
Example continued
A bank statement is set out in a three column ledger format. The three
column format has the usual debit and credit sides of a ledger account plus an
additional “balance” column to record the amount remaining in the ledger
account after each transaction. The last entry in the balance column, $1,930
CR or credit, is the cash balance at the end of the month. Deposits are clearly
labelled and the withdrawals are identified by their cheque numbers.
The transactions recorded in a bank statement are set out from the bank's
viewpoint. From the bank’s viewpoint, a deposit is a loan, a liability, and is
recorded as a credit entry in the bank statement. A payment by cheque, a
withdrawal, is a reduction in this liability and is recorded as a debit entry in the
bank statement.
1 Some cash inflows recorded in the cash receipts journal and deposited
with the bank may not be entered on the bank statement covering that
period of time. These receipts are known as deposits not credited.
3 A bank will usually charge a fee for any service that it provides to a
business. A bank does not send out a bill demanding payment. Instead,
a bank withdraws money from the account of the business. When the
business receives its bank statement it will see an entry for a bank
charge on the statement and that money has been withdrawn from its
account. The business will make an appropriate entry in its cash
payments journal.
4 The bank will charge the business interest if the balance of the account is
in overdraft.
7 A business can arrange to have money owing to it paid directly into its
bank account. For example, a business can arrange to have an amount
owing from a customer paid directly into its bank account instead of
receiving a cheque from this customer.
Example
Below are the cash records of the WA Stationery Store for the month of
January 2018. The cash journals have not yet been totalled:
Cash at Bank
2018
Jan 1 Balance b/d 1,400
If the totals of the cash receipts and cash payments journals were transferred
to the cash at bank ledger account, the apparent balance at the end of the
month would be $1,874 debit:
Cash at Bank
2018 2018
Jan 1 Balance b/d 1,400 Jan 31 Payments 2,167
31 Receipts 2,641 Balance c/d 1,874
4,041 4,041
Feb 1 Balance b/d 1,874
Bank Reconciliation 239
Example continued
This $1,874 cash at bank balance compares with the $1,930 final balance in
the bank statement shown on page 52 and in the bank statement extract
below.
Step 1
In this example, the opening balance of both records is the same, $1,400. If
they are different then the previous bank reconciliation statement entries will
have to be checked against the current bank statement. This situation is
covered in the example starting on page 72.
Step 2
The cash receipts journal entries are checked against the corresponding
entries in the credit column of the bank statement.
A tick is placed beside the entries that are common to both records. These
ticks should be made in both sets of records.
An asterisk is placed next to any entry that appears in the cash receipts
journal but not in the bank statement.
240 Accounting 1
Step 2 continued
Any entries that have not been ticked off in the credit column of the bank
statement are circled.
Statement of Account
Oz Bank Account Number
PERTH WA 6000 684539
ABN 98 134 452 467
WA Stationery Store Page Number
47 Industry Street 31
PERTH WA 6000
Step 3
The circled entry in the credit column of the bank statement shows that a
$330 dividend from Alpha Limited has been paid directly into the bank
account of the WA Stationery Store.
Bank Reconciliation 241
Step 3 continued
The dividend received is entered in the cash receipts journal. The cash
receipts journal is then totalled.
Step 4
The cash payments journal entries are checked against the corresponding
entries in the debit column of the bank statement.
A tick is placed beside the entries that are common to both. Again, the
ticks should be made in both sets of records.
An asterisk is placed next to any entry that appears in the cash payments
journal but not in the bank statement.
242 Accounting 1
Step 4 continued
Any entries that have not been ticked off in the debit column of the bank
statement are circled.
Step 5
The circled entry in the debit column of the bank statement is a $24 bank fee.
A bank will automatically subtract bank fees from the business bank account.
The bank fees are a cash outflow and must be entered in the cash payments
journal. The cash payments journal is then totalled.
Bank Reconciliation 243
Step 5 continued
Step 6
The cash receipts and cash payments journal totals are posted to the cash at
bank ledger account. This account is then balanced off:
Cash at Bank
2018 2018
Jan 1 Balance b/d 1,400 Jan 31 Payments 2,191
31 Receipts 2,971 Balance c/d 2,180
4,371 4,371
Feb 1 Balance b/d 2,180
Step 7
The final balance of the cash at bank ledger account of $2,180 debit does not
agree with the final balance of the bank statement of $1,930 credit.
Step 7 continued
After writing a heading for the bank reconciliation statement, the starting point
is the final balance of the bank statement:
WA Stationery Store
Bank Reconciliation Statement
as at 31 January 2018
Final balance of the bank statement 1,930
Step 8
The entry in the cash receipts journal marked with an asterisk, the $680
received on 31 January 2018, is a deposit not credited:
A deposit not credited is a receipt that a business knows about but the bank
was not aware of at the time the bank statement was prepared. When the
bank learns about this transaction it will add this deposit to the final balance of
the bank statement. We will do the same.
WA Stationery Store
Bank Reconciliation Statement
as at 31 January 2018
Final balance of the bank statement 1,930
Add deposit not credited 680
2,610
Bank Reconciliation 245
Step 9
The entries marked with asterisks in the cash payments journal, cheque
number 115, for $143, and cheque number 118, for $287, are unpresented
cheques:
Unpresented cheques are payments that a business has made but the bank
was not aware of when the bank statement was prepared.
When the bank finds out about these payments it will subtract these payments
from the final balance of the bank statement. We will do the same.
WA Stationery Store
Bank Reconciliation Statement
as at 31 January 2018
Final balance of the bank statement 1,930
Add deposit not credited 680
2,610
Less unpresented cheques
number 115 143
number 118 287 430
Final balance of the cash at bank account $2,180
The amount remaining after the unpresented cheques have been subtracted
is equal to the final balance of the cash at bank account.
Example
Below are the cash records of Urgent Couriers for the month of March 2017.
Cash at Bank
2017
Mar 1 Balance b/d 1,600
Example continued
Statement of Account
Industry Bank
PERTH WA 6000
ABN 31 467 249 248
Required
Solution
Step 1
The bank reconciliation process is carried out in the same way as before.
The cash receipts journal entries are checked against the bank statement credit
column entries.
The items that appear in both the cash receipts journal and the bank statement
are ticked off.
The deposit not credited of $460 is identified and the cash receipts journal is
totalled:
Step 2
The cash payments journal entries are checked against the bank statement
debit column entries.
The items that appear in both the cash payments journal and the bank
statement are ticked off:
The unpresented cheques for $242 and $198 and the $180 of interest on
overdraft (DEBIT INT TO 28 FEB) are identified.
250 Accounting 1
Step 2 continued
The cash payments journal is updated with the $180 of interest on overdraft
and the journal is totalled:
Step 3
The cash journal totals are posted to the cash at bank ledger account:
Cash at Bank
2017 2017
Mar 31 Receipts 2,417 Mar 1 Balance b/d 1,600
Balance c/d 1,838 31 Payments 2,655
4,255 4,255
Apr 1 Balance b/d 1,838
Bank Reconciliation 251
Step 4
Urgent Couriers
Bank Reconciliation Statement
as at 31 March 2017
Final balance of the bank statement 1,858 DR
Step 5
Urgent Couriers
Bank Reconciliation Statement
as at 31 March 2017
Final balance of the bank statement 1,858 DR
Less deposit not credited 460
1,398
Step 6
When the bank becomes aware of the unpresented cheques it will pay out
these cheques and increase the overdraft balance of the business. Therefore,
in the bank reconciliation statement, the unpresented cheques are added:
Urgent Couriers
Bank Reconciliation Statement
as at 31 March 2017
Final balance of the bank statement 1,858 DR
Less deposit not credited 460
1,398
Add unpresented cheques
number 1946 242
number 1949 198 440
Final balance of the cash at bank account $1,838 CR
Payments by Authority
A payment by authority occurs when a bank makes a payment or a regular
series of payments on behalf of a business. For example, a business, rather
than sending a cheque, can arrange to have its plant and equipment lease
(rental) charges paid directly from its bank account.
Example
The bank statement of Steelcraft for November 2016 contains an entry for one
of these payments:
Statement of Account
Industry Bank
PERTH WA 6000
ABN 31 467 249 248
GST has been charged on the $66 We Insure direct payment. The GST paid
can be calculated by dividing the total payment by 11. That is, $66 divided by
11 will give the GST paid of $6.
Bank Reconciliation 253
Example continued
The $66 total payment is recorded in the bank column of the cash payments
journal, the $6 GST payment is recorded in the GST credits column and the
$60 insurance payment is recorded in the “other payments” column as prepaid
insurance:
Dishonoured Cheques
A cheque is dishonoured when the bank on which the cheque is drawn
refuses to pay the proceeds of the cheque into the payee's account.
Example
On 1 July 2018 Commerce Traders sold goods to Inept Traders for $400.
Commerce Traders was subsequently informed that the cheque received from
Inept Traders had been dishonoured. The July 2018 bank statement received
by Commerce Traders includes an entry recording the dishonoured cheque:
Example
In this example we will prepare the bank reconciliation statement for the WA
Stationery Store for February 2018.
The bank reconciliation statement of this business for January 2018 was
prepared earlier in this chapter and is set out below:
WA Stationery Store
Bank Reconciliation Statement
as at 31 January 2018
Final balance of the bank statement 1,930
Add deposit not credited 680
2,610
Less unpresented cheques
number 115 143
number 118 287 430
Final balance of the cash at bank account $2,180
The cash records of the business for February 2018 are set out below:
Cash at Bank
2018
Feb 1 Balance b/d 2,180
Example continued
Statement of Account
Oz Bank Account Number
PERTH WA 6000 684539
ABN 98 134 452 467
WA Stationery Store Page Number
47 Industry Street 32
PERTH WA 6000
Step 1
The January 2018 bank reconciliation statement entries are checked against
the bank statement entries for February 2018.
The unpresented cheque, number 118, for $287, has also been entered in the
February bank statement and is ticked off in both records. The other
unpresented cheque, number 115, for $143, has not been recorded in the
February bank statement and, therefore, is still an unpresented cheque. An
asterisk is placed next to this cheque. This cheque will be carried forward into
the February bank reconciliation statement:
WA Stationery Store
Bank Reconciliation Statement
as at 31 January 2018
Final balance of the bank statement 1,930
Add deposit not credited 680
2,610
Less unpresented cheques
number 115 143
number 118 287 430
Final balance of the cash at bank account $2,180
Step 2
The other steps in the bank reconciliation process are the same as before.
The cash journals are checked against the bank statement and the
deposit not credited and the unpresented cheques are identified. In
addition, the cash payments journal is updated with the payment by
authority to WIN Insurance of $440. The journals are then totalled:
Step 3
The cash journals are posted into the general ledger and the cash at bank
account is prepared:
Cash at Bank
2018 2018
Feb 1 Balance b/d 2,180 Feb 28 Payments 2,661
28 Receipts 1,528 Balance c/d 1,047
3,700 3,700
Mar 1 Balance b/d 1,047
Step 4
WA Stationery Store
Bank Reconciliation Statement
as at 28 February 2018
Final balance of the bank statement 1,738
Add deposit not credited 150
1,888
Less unpresented cheques
number 115 143
number 122 698 841
Final balance of the cash at bank account $1,047
When the WA Stationery Store prepares its March 2018 bank reconciliation
statement it will have to refer back to the February 2018 bank reconciliation
statement.