Topic 7b - bank reconciliation

Why might the cash book and bank statements differ?

The cash book hasn’t been updated with items that appear on the bank statement

There are timing differences caused by unpresented cheques and outstanding lodgements

The bank has made an error

What are unpresented cheques?

They are cheques issued - we have sent them to someone and recorded them in the cash book - but they haven’t yet been recorded on the bank statement because the person who received it hasn’t cashed it into the bank

Credit side of the cash book

What are outstanding lodgements?

Amounts we have paid into the bank and recorded into the cash book but have not yet been recorded on the bank statement because it takes a few days for money paid into the bank to clear

Debit side of the cash book

What is the layout of a bank reconciliation statement

Name

Bank reconciliation statement as at…

Add: unpresented cheques

Less: Outstanding lodgements

Balance as per bank statement

What happens with out of date cheques

They are more than 6 months old

Written back to the cash book

Cash book will be debited

Other double entry account will be credited

What happens with returned/bounced/unpaid/dishonoured cheques?

Credit the cash book

Debit the trade receivables account in sales ledger

Not the same as an unpresented cheque

What happens with bank errors

Should be queried with the bank

Acknowledged on the bank reconciliation statement

What happens with bank charges and interest

Credited in the cash book

What happens with reconciliation of opening cash book and bank statement balances

May need to make an opening bank reconciliation statement

If they don’t appear they will go on the bank reconciliation statement for this month too

Why do we make bank reconciliation statements?

Enables any errors in the cashbook to be identified and corrected

Enables any errors in the bank statement to be identified and investigated by the bank

Enables missing entries in the cashbook to be accounted for

Acts as a deterrent to fraud because the bank statement is an independent record, prepared by the bank which verifies the entries in the cash book

Enables any out of date cheques to be identified and cancelled in the cash book

What is a standing order?

Payments made automatically on behalf of customers - set amounts paid in a linear way eg monthly

What is a direct debit?

Payments made to the bank on behalf of customers

The authority to draw money from the account is given to the payee. It is usually variable such as a phone bill

What is a bank charge?

Charges made by banks to cover the cost of maintaining the drawers account

What are credit transfers?

Amounts paid into an account directly through the banking system instead of issuing a cheque

What is a dishonoured cheque?

Cheques that have not gone through the drawers bank account. This is because the drawer has insuffiecient funds in their own account to honour the cheque