AF1246 IFA_12 BANK RECONCILIATION

Introduction to Bank Reconciliation

  • Bank reconciliations are necessary due to timing differences in recording cheques and transactions between the Cash Book (CB) and Bank Statement (BST).

Purpose of Bank Reconciliation Statements

  • Confirms differences in bank balances are due to timing, not errors.

  • Typically prepared monthly after receiving the bank statement.

Nature of Cash Book and Bank Statement

  • Cash Book (Bank Column):

    • Deposits: Recorded as Debit (↑ business cash/asset).

    • Withdrawals: Recorded as Credit (↓ business cash/asset).

  • Bank Statement:

    • Deposits: Recorded as Credit (↑ bank’s liability).

    • Withdrawals: Recorded as Debit (↓ bank’s liability).

Reasons for Differences in Balances

  1. Unpresented Cheques: Issued by the business but not yet presented.

  2. Uncredited Deposits: Deposited cheques not yet recorded by the bank.

  3. Standing Orders: Regular payments authorized by the business.

  4. Direct Debits: Automatic payments deducted by the bank.

  5. Credit Transfers: Payments received credited directly to the bank.

  6. Dishonoured Cheques: Cheques that cannot be processed due to issues with the payer.

Steps to Prepare Bank Reconciliation

Step 1: Check Balances

  • Verify if opening BST balance equals opening CB balance.

Step 2: Compare Items

  • Tick items common to both CB and BST; identify uncredited and unpresented items.

Step 3: Update Cash Book

  • Record any items found only in BST into the CB.

Step 4: Create Reconciliation Statement

  • Prepare the Bank Reconciliation Statement showing adjustments.

Formats of Bank Reconciliation Statement

  1. Format 1: Begins with credit balance of BST, adds uncredited items and subtracts unpresented items.

  2. Format 2: Begins with debit balance of CB, adds unpresented items and subtracts uncredited items.

Example Situations

  • Bank Overdraft: Reflects direct bank debits as a liability; adjust CB and BST accordingly.

  • Dishonoured Cheque Example: Shows how dishonoured cheques affect balances.

Purpose of Preparing Bank Reconciliation Statement

  1. Identify unrecorded items and errors in the CB.

  2. Ensure complete entries in the CB.

  3. Discover bank errors.

  4. Identify dishonoured cheques.

  5. Monitor stale cheques.

  6. Prevent fraud and embezzlement.

References

  • Hong W.A.P. and Chuan K.B. (2012). Principle of Accounts, 1st edition, Singapore: Pearson.

  • Wood F. and Sangster A. (2005). Business Accounting, 10th edition, UK: Pearson.