Bank Reconciliation Statements

In our businesses’ own books, the accountant will enter the bank columns of the
Cash Book, showing money banked and paid out. Our bank will also record items
paid into and out of our bank account with them.

If all the items entered in our Cash Book were the same as those entered in our
account with the bank, then obviously the bank balance per the bank’s books would
equal each other.

On the other hand, there may be items paid into and out of our account at the
bank which have not been recorded by us in our Cash Book. To see what these are,
if any, we will need a copy of our account as kept at the bank. The bank will
provide the business with such a copy, known as a Bank Statement.

The following are items found in the Bank Statement and not shown in the
Cash Book. (One will only know these when the business receives the Bank
Statement)

(1) Bank Charges

The Bank will charge the business for the services it provides for it. This
amount is deducted by the bank from the amount of money the business
invested. The owner of the business will only know about this expense when the
bank statement is received. This amount is written under the debit column
since it deducts the amount invested in the bank by the business. The words
“Bank Charges” are written as details in the Bank Statement.

(2) Standing Orders

The business might instruct the bank to write a cheque or make a transfer on a
regular basis to pay the landlord for rent or a company for the payment of a
car’s instalments. The bank, without having to be reminded, will deduct the
amount and will include it on the debit column in the Bank Statement. The
business might forget to deduct it and will be reminded to deduct it from the
Cash Book when the Bank Statement is received. The words “Standing Order:
Rent” for example, are written as details in the Bank Statement.

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(3) Credit Transfers direct in the businesses’ Bank Account

Someone owed the business a certain amount of money and instead of paying by
cheque or in cash he/she decided to instruct the bank to withdraw the amount
owed from his/her account and to deposit it in the businesses’ account. The
business will only know of this until it receives the bank statement.

Once the business has identified the items missing from its Cash Book, it can
now complete writing it up. In other words, the Cash Book is now up to date.
Yet although a Cash Bok may be written up to date by the business, it obviously
cannot alter the bank’s own records. Even after writing up entries in the Cash
Book there may still be a difference between the Cash Book balance and the
Bank Statement Balance.

The following are items that are found in the Cash Book but are not shown
on the Bank Statement. These are:

(1) Cash deposit not yet entered

The business decided to deposit a certain amount of money in the bank. The
accountant therefore credited the Cash A/c and debited the Bank A/c with
the amount of money invested in the bank. In the Bank A/c as details the
accountant wrote the words “Cash” (Contra Entry). Since the bank had sent the
Bank Statement before the business had deposited the money in the bank, this
cash deposit was not yet included in the Bank Statement that was sent to the
business.

(2) Unpresented cheques

The business had to pay a supplier a certain amount of money an so they

withdrew the amount from the Bank A/c after giving the supplier a cheque. The
business credited the Bank A/c and as details wrote the name of the supplier.
It happened that the supplier did not present the cheque to the bank to be
cashed or deposited and so the bank did not deduct the amount. Nothing that
has to do with this transaction will be found in the Bank Statement until the
supplier presents the cheque to the bank.

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(3) Bank Lodgement not yet entered

This time the business received a cheque from a customer and debited the
Bank A/c writing the name of the customer under the detail’s column on the
debit side. The business did not g to the bank to present the cheque for
payment and was not entered in the Bank Statement.

If the balance according to the business in the Cash Book differs from the
balance according to the Bank Statement, one can prove that although the
balances are different they can be ‘reconciled’ with each other. This could be
done by drawing up a Bank Reconciliation Statement. It will either start with
the Bank Statement Balance and the reconcile it to the Cash Book Balance or it
will start with the Cash Book Balance and then reconcile it to the Bank
Reconciliation Statement balance.

If the two balances cannot be reconciled, then there will be an error

somewhere. This will have to be located and then corrected.

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 Bank Reconciliation Statements: Key terms

Bank Reconciliation
Statement

A Statement prepared to explain the difference (s) between the Cash Book
balance and the Bank Statement.

Unpresented
Cheques

A cheque issued by a business that has not been presented to the bank by the
payee (the person receiving the cheque). It has not yet been recorded on a
business’s bank statement.

Standing Order

A bank’s customer gives instructions for the automatic payment to another

organization/ individual of a fixed amount at regular intervals, at given dates.

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 Direct Debit

Authority is given to a bank by one of its customers to make payments on its

behalf to another organisation/ individual. The amount paid will be the sum
requested by that organisation up to a specific limit.

Credit Transfer

The automatic transfer of funds into a business’s bank Account by one of the
business’s customers.

Bank Charges

Payments deducted automatically from a current account at regular intervals as

a reward to the bank for operating the account.

Bank Overdraft

What results when more money that has been paid out of the business’s bank
account than the amount that was paid in.

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 Bank Statement

A copy of a customer’s bank account sent to the customer at regular intervals.

Dishonoured
Cheque

A cheque that the bank refuses to honour (pay).

Cheques which are not passed for payment by the drawer’s bank are said to
have ‘bounced’ or been ‘dishonoured’. The drawer’s bank will write ‘refer to
drawer’ on the cheque.

Reasons why a cheque might ‘bounce’ or is ‘dishonoured’ :-

Cheque contains an error/ mistake or is unsigned.

Cheque is ‘stale’ (more than six months old).

Signature differs from specimen held at the bank.

Drawer does not have sufficient funds in the account.

Cheque has been altered and has no signature.

Cheque is post-dated.

Cheque has been ‘stopped’ by the drawer that is, Stop payment.

(Drawer has instructed the bank not to make payment).

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Example 1

The bank columns in the Cash Book of G.Borġ for the month of April 2020
appeared as:

Cash Book (Bank column only)

2020 Bank 2020 Bank
€ €
Apr 1 Balance c/d 495 Apr 5 M. Mallia 47
Apr 8 P. Abela 76 Apr 26 C. Calleja 106
Apr 15 R. Said 54 Apr 28 D. Sammut 42
Apr 20 F. Gatt 88 Apr 30 Balance c/d 634
Apr 30 Cash 116

829 829

He receives the following Bank Statement from his bank:

Bank Statement as on 30th April 2020

Date Dr. Cr. Balance
2020 € € €
April 1 Balance b/d 495 Cr.
April 8 Cheque (P. Abela) 76 571 Cr.
April 9 M. Mallia 47 524 Cr.
April 15 Cheque (R. Said) 54 578 Cr.
April 26 Cheque (R. Gatt) 88 666 Cr.
April 29 Standing Order: Rent 50 616 Cr.
April 30 Bank Charges 40 576 Cr.

You are required to:

(a) Write the Cash Book up to date and state the new balance as on
30th April 2020.
(b) Draw up a Bank Reconciliation Statement as on 30th April 2020.

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(a)
Cash Book (Bank column only)
2020 Bank 2020 Bank
€ €

Cash Book Balance Bank Statement

(up to date) Balance
€ €

-----------------------------------------------------------------------------------

------------------------------------------------------------------------------------

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 Bank Reconciliation Statement as on 30th April 2020
€

Balance as per Cash Book

_____

_____

_____

Balance as per Bank Statement

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Example 2

On 31st March 2020, M. Pace received a Bank Statement dated 28th March 2020
from his bank which showed that he had a balance in his favour of €120.

His Cash Book meanwhile showed that his balance at the bank was €130.

Upon examination the following matters were discovered:

(a) A cheque payment for €20 entered in the Cash Book did not appear in the
Bank Statement.

(b) Bank Charges €10 appeared in the Bank Statement but not in the
Cash Book.

(c) A credit customer had paid directly into the Bank Account. There was no
entry about this €50 in the Cash Book.

(d) The bank had made a standing order payment for rent €20. There was no
entry in the Cash Book.

(e) M. Pace had made a deposit of €50 which did not appear in the Bank
Statement.

You are required to:

(a) Write the Cash Book up to date and state the new balance as on
31st March 2020.
(b) Draw up a Bank Reconciliation Statement as on 31st March 2020.

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(a)
Cash Book (Bank column only)
2020 Bank 2020 Bank
€ €

Cash Book Balance Bank Statement

(up to date) Balance
€ €

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 Bank Reconciliation Statement as on 30th April 2020
€

Balance as per Cash Book

_____

_____

Balance as per Bank Statement

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