UNIVERSITY OF TECHNOLOGY, JAMAICA

SCHOOL OF BUSINESS ADMINISTRATION

FUNDAMENTALS OF ACCOUNTING
BANK RECONCILIATION

At the end of each month, the bank will send a statement to the firm. This gives a summary of the
transactions recorded in the firm’s account at the bank. Generally, the balance reported in the bank statement
will not be the same as that obtained in the bank account in the cashbook. This is due largely to the nature
or the timing of some of the transactions recorded in both the bank statement and the cashbook.

Therefore, the firm will have to prepare a bank reconciliation statement, in order to verify the difference in the
balance between the cashbook and the bank statement

Among the reasons for the difference in the balances in the cashbook and that in the bank statement are:

TRANSACTIONS RECORDED IN THE BANK STATEMENT BUT NOT IN THE CASHBOOK

a) Credit Transfer

The bank may receive deposits to the firm=s account from a source other than the firm itself. This is also called
a bank giro transfer, and would be shown as a credit entry on the bank statement.

b) Interest Earned

Some banks pay an interest on the closing balance in the firm’s current account, provided that they will write a
limited amount of cheques. This is usually done to discourage excessive withdrawal from the account.

c) Bank Charges

The bank will charge a fee for holding the firm’s account, and for other services rendered, e.g. for an overdraft
arrangement

d) Standing Order

The firm may instruct the bank to make regular payments from its account. This may include payments for
insurance premium, mortgage, or loan.

e) Direct Debit

The firm may make an arrangement with someone to make withdrawals from the account at the bank. This
includes open cheque payments, or post dated cheques.

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f) Dishonoured Cheque

A cheque that was previously deposited to the firm=s account may be subsequently cancelled or dishonoured by
the bank. This may be due in part to insufficient funds in the drawer’s account, or an apparent error in the
preparation of the cheque.

TRANSACTIONS RECORDED IN THE CASHBOOK BUT NOT IN THE BANK STATEMENT

a) Late Lodgements

Money received by the firm and deposited to the bank may not appear on the bank statement. This could be due
to the timing of the lodgement, or a delay in posting it to the firm’s account. It is also known as a deposit in
transit

b) Un-presented Cheques

Cheques drawn by the firm may not be shown as being cashed on the bank statement. Cheques may remain as
being un-presented for a period of six months.

ERRORS

Aside from the bona fide transactions recorded in both the cashbook and the bank statement, there may be
several entries that are made in error. Those that are located in the cashbook may be easily corrected. However,
errors made in the bank statement may take some time before they are corrected.

All the errors should be taken into consideration when preparing the bank reconciliation statement.

STEPS IN PREPARING THE BANK RECONCILIATION STATEMENT

1. Compare the cashbook with the bank statement, indicating those transactions that are recorded in both of
them. Also, identify those items that are recorded in the cashbook or the bank statement only, as well as items
recorded in error.

2. Use the items that are recorded in the bank statement only to update the cashbook. Starting with the closing
balance in the cashbook, the general entries would be as follows:

Updated Cashbook
DATE DETAILS FO AMT DATE DETAILS FOL AMT
L

Bal b/d A Standing Order

Credit Transfer Direct Debit
Interest Earned Bank Charges
Dishonoured Cheque
Bal c/d B

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Items of errors reported in the bank statement may also be treated as bona fide entries in the cashbook, for the
sake of completing the reconciliation. Later when they are corrected, the reversed entry must be made in the
cashbook. Errors located in the cashbook may be correction immediately.

Note that the location of the balance b/d and the balance c/d may not always be as shown above, since these are
determined by the status of the account.

3. Complete the process of reconciliation as follows:

Balance as per updated cashbook B

Add Un-presented Cheques UC
XX
Less Late Lodgements (LL)
Balance as per bank statement YY

The process above could be done in the inverse, i.e. starting with the balance in the bank statement, adding late
lodgements, deducting un-presented cheques, and resulting with the balance as per updated cashbook.

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LECTURE QUESTION

John Anderson started a peanut project in St Elizabeth. The following is a summary of his bank transactions for
the month of May 2012:

CASHBOOK
DATE. DETAILS AMT DATE DETAILS AMT
May 1 Bal b/d 40,000 May 1 Insurance (0001) 4,000
May 15 Sales (0167) 30,000 May 8 Rent (0002) 5,000
May 22 D. Mattes (3164) 20,000 May 9 Purchases (0003) 10,000
May 30 G. T. Taylor (5186) 35,000 May 16 K. Owen (0004) 20,000
May18 M. Price (0005) 15,000
May 24 C. Francis (0006) 12,000
May 31 Bal c/d 59,000
---------- ----------
125,000 125,000
====== ======

June 1 Bal b/d 59,000

However, the statement received from the bank showed the following details

DATE DETAILS DR CR BALANCE

May 1 Balance 40,000
6 0001 4,000 36,000
11 0002 5,000 31,000
14 0003 10,000 21,000
19 0167 30,000 51,000
25 3164 20,000 71,000
26 Credit Transfer 15,000 86,000
28 81924 8,000 78,000
30 Standing Order 15,000 63,000
31 Interest 2,000 65,000

We now need to prepare the bank reconciliation statement.

Step No.1 Compare the cashbook with the bank statement

A careful examination of both the cashbook and the bank statement reveals the following:

a) Cheque 5168 received from G. Taylor was recorded in the cashbook but not yet recorded in the bank
statement. This is a late lodgement
b) Cheques 0004-6 paid out from the cashbook have not yet been cashed. These are un-presented cheques

c) On May 26 the bank added 15,000 to our balance. This is recorded as a credit transfer

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d) On May 28 the bank paid out 8,000 by way of cheque # 81924. This is obviously an error since our cheques
are numbered 0001-6

e) On May 30 the bank paid out 15,000 from our account. This is recorded as a standing order

f) On May 31 the bank added 2,000 to our account as interest.

Step No. 2 Update the cash book with entries made in the bank statement only

UPDATED CASHBOOK

DATE DETAILS AMT DATE DETAILS AMT

June 1 Bal b/d 59,000 June 1 Error (81924) 8,000
Credit Transfer 15,000 Standing Order 15,000
Interest 2,000 Balance c/d 53,000
------------- -------------
76,000 76,000
========= ========

June 1 Balance b/d 53,000

Step No. 3 Complete the reconciliation with the items from the cashbook only

Balance as per Updated Cashbook 53,000

Add Un-presented Cheques 0004 20,000

0005 15,000
0006 12,000
47,000
100,000
Less Late Lodgement 5186 (35,000
Balance as per bank statement 65,000

ALTERNATIVE APPROACH

Another approach that could be taken is to ignore the process of updating the cashbook. In this case, the original
balance in the cashbook is reconciled directly with the balance in the bank statement

As a means of ensuring that the items are posted correctly in this approach, the general rule is: starting with the
balance in the cashbook, add all credits (whether in the bank statement or the cashbook) and deduct all the
debits.

Thus the bank reconciliation statement would be done as follows:

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Balance as per cashbook 59,000

Add: Credit Transfer 15,000

Interest Earned 2,000 17,000
76,000
Less: Error (81924) 8,000
Standing Order 15,000 (23,000)
53,000
Add Un-presented Cheques
(0004) 20,000
(0005) 15,000
(0006) 12,000 47,000
100,000
Less Late Lodgement (5186) (35,000)

Balance as per bank statement 65,000

OVERDRAFT BALANCES

In the event of an overdraft situation, the same procedures may be followed, provided that the overdraft amount
is shown as a negative figure.

Every effort should be made to prepare the bank reconciliation statement each month. Failure to do so over a
period of time will result in an unascertained cash balance. This will have implications for management’s
decisions regarding the availability and use of its cash. The bank reconciliation statement also serves as a tool
for internal control in the organization. All transactions must be recorded in a transparent manner; hence it will
highlight areas of fraud, theft, or inaccuracies.

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TUTORIAL QUESTIONS

1. Discuss the need for the bank reconciliation statement

2. Explain the following terms : credit transfer, dishonoured cheque, standing order
3. The following is the bank columns of the cashbook for December 2014 and the bank statement for that
month for Denise Hunt:

BANK COLUMN OF CASHBOOK

DATE DETAILS AMT ($) DATE DETAILS AMT ($)
Dec-01 Balance b/d 3,419 Dec-08 B Young 462
Dec-07 F Lamb 101 Dec-15 F Gray 21
Dec-22 G Brock 44 Dec-28 T Errant 209
Dec-31 W Terry 319 Dec-31 Balance c/d 3,437
Dec-31 S Miller 246
4,129 4,129

The bank statement for the corresponding period was as follows:

DATE DETAILS DR CR BAL
Dec-01 Balance b/d 3,419
Dec-07 Cheque 101 3,520
Dec-11 B Young 462 3,058
Dec-20 F Gray 21 3,037
Dec-22 Cheque 44 3,081
Dec-31 Credit transfer: T Morris 93 3,174
Dec-31 Bank charges 47 3,127

Required:
a) Write up an updated cashbook and state the new balance as on December 31, 2014
b) Draw up a bank reconciliation statement as on December 31, 2014

4. Mary Tyler Moore obtained a balance of $3,000 in her cashbook for the month of June. However her
bank statement showed a balance of $5,900. A detailed review showed the following, prepare the
updated cashbook and the bank reconciliation statement:

i. A direct debit of $800 was made by the bank

ii. Bank interest of $700 was earned by the firm
iii. A cheque from Julie Andrews for $140 was returned as un-cleared by the bank
iv. A standing order for $400 was paid to Larry Hangman by the bank
v. Service charges of $60 was made by the bank
vi. Cheques to Ginger Rogers $600 and Fred Astaire $580 were paid by the firm but not yet
cashed
vii. A payment from Lucille Ball for $520 was received by the bank
viii. The bank had posted $2800 to Moore’s Account in error
ix. Jack Lord, a debtor, paid his account of $480 directly to the bank
x. Deposits of $1380 were made to the bank but did not appear on the bank statement.

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5. Prepare the updated cashbook and the bank reconciliation statement. The bank columns in the cash book
for June 2014 and the bank statement for that month for Danielle Hogan are as follows:

CASHBOOK
DATE DETAILS AMT ($) DATE DETAILS AMT ($)
Jun-01 Balance b/d 1,410 Jun-05 L Holmes 180
Jun-07 J May 62 Jun-12 J Rebus 519
Jun-16 T Wilson 75 Jun-16 T Silver 41
Jun-28 F Slack 224 Jun-29 Blister Disco 22
Jun-30 G Baker 582 Jun-30 Balance c/d 1,591
2,353 2,353

Bank statement
DATE DETAILS DR CR BAL
Jun-01 Balance b/d 1,410
Jun-07 Cheque 62 1,472
Jun-08 L Holmes 180 1,292
Jun-16 Cheque 75 1,367
Jun-17 J Rebus 519 848
Jun-18 T Silver 41 807
Jun-28 Cheque 224 1,031
Jun-29 SLM Standing order 52 979
Jun-30 Flynn: trader’s credit 64 1,043
Jun-30 Bank charges 43 1,000

6. The bank statement for L King for the month of March 2015
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 Bank statement
DATE DETAILS DR CR BAL
Mar-01 Balance b/d 4,200 O/D
Mar-08 T MacLeod 184 4,384 O/D
Mar-16 Cheque 292 4,092 O/D
Mar-20 W. Milne 160 4,252 O/D
Mar-21 Cheque 369 3.883 O/D
Mar-31 G Frank: Trader’s Credit 88 3,795 O/D
Mar-31 TYF: Standing order 32 3.827 O/D
Mar-31 Bank charges 19 3,846 O/D

CASHBOOK
DATE DETAILS AMT ($) DATE DETAILS AMT ($)
Mar-16 G Philip 292 Mar-01 Balance b/d 4,200
Mar-21 J Corker 369 Mar-06 T MacLeod 184
Mar-31 S O’Hare 192 Mar-30 W. Milne 160
Mar-31 Balance c/d 4,195 Mar-30 John Doe 504
5,048 5,048

Required:
a) Write up an updated cashbook
b) Draw up a bank reconciliation statement

7. The following is the bank account for Tony Treble for the month of November 2014

CASHBOOK
DATE DETAILS AMT ($) DATE DETAILS AMT ($)
Nov-01 Balance b/d 25,000 Nov-06 NHT 6,000
Nov-07 T Cowan 15,000 Nov-06 Farers 5,000
Nov-09 Devon House 7,000 Nov-30 HILO Supermarket 4,500
Nov-21 Busby Grange 10,000 Nov-30 Courts Ja. Ltd 12,000
Nov-24 Boscobel Beach 20,000 Nov-06 Vandals 4,000
Nov-29 Club A Bar 20,000 Nov-06 Pagoda 15,000
Nov-30 Tuff Gong 25,000 Nov-06 Bob Pansy 4,000
Nov-06 Derrick Morgan 3,500
Nov-06 Marcia Tulloch 10,000
Nov-30 Balance c/d 58,000
122,000 122,000

However, his bank statement from the National Commercial Bank showed the following details

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 Bank statement
DATE DETAILS DR CR BAL
Nov-01 Balance b/d 25,000
Nov-02 Direct Debit 4,000 21,000
Nov-10 Farers 5,000 16,000
Nov-12 T Cowan 15,000 31,000
Nov-17 Devon House 7,000 38,000
Nov-21 HILO Supermarket 4,500 33,500
Nov-22 Courts Ja. Ltd 12,000 21,500
Nov-26 Boscobel Beach 20,000 41,500
Nov-29 Vandals 4,000 37,500
Nov-29 Boscobel Beach (refer to
drawer) 20,000 17,500
Nov-30 Derrick Morgan 3,500 14,000
Nov-30 Bank charges 2,000 12,000
Nov-30 Credit Transfer 17,000 29,000

Required:
a) Write up an updated cashbook
b) Draw up a bank reconciliation statement

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