BANK RECONCILIATION PREPARED BY FRANCIS ZULU

BANK RECONCILIATION

A. Definition and Context

▪ A bank reconciliation is a comparison of a bank statement entries and balances sent monthly, weekly or
even daily by the bank with entries and balances of the cash book.
▪ A bank reconciliation statement is a statement drawn up to agree the cash book balance as shown by the
bank account and the cash at bank as shown by the bank statement from the bank.
▪ The cash book for the business contains both the cash account and the bank account. The cash paid into
and out of the bank are entered into the bank columns of the cash book. At the same time the bank will
record the flow of funds into and out of the business bank account on a bank statement which will be
sent to the business at the of a defined period.
▪ Reconciliation is not limited to cash book and bank statement, as it is common practice for a business to
issue a monthly statement to each credit customers itemizing: a) the balance owed at the beginning of
the month; (b) new debts incurred during the month; (c) payments made during the month; and (d) the
balance owed at the end of the month.
▪ In theory, the entries appearing on a business's bank statement should be exactly the same as those in
the business cash book. The balance shown by the bank statement should be the same as the cash book
balance on the same date. If the two balances are not equal, then investigations must be carried out to
find the cause of the differences. The cash book (bank column) will be updated with the items on
the bank statement but not in the cash book and bank reconciliation statement will be
prepared using the items which are in the cash book (bank column) but not on the bank
statement.
▪ However, in practice, the bank statement and the cash book rarely show the same balance brought
forward due to several reasons. There is quite a long list of possible causes, including: (i) a business may
take a day or two to deposit some cheques that it has already entered in the Cash Book; (ii) a cheque
may take a few days to be entered in the account of the business held at the bank after it is deposited
(because the bank won’t recognise the amount received until a few days later, in case there is a problem
with it); (iii) bank interest paid and bank charges often aren’t known by a business until a bank statement
is received; (iv) bank interest received won’t be known by a business until it receives a bank statement;
(v) standing orders may not be written up in the Cash Book of the business until they are identified on
the bank statement; (vi) the amount of a direct debit is sometimes not known and so should not be
entered in the Cash Book until it is confirmed how much was paid out of the bank account; (vii) customers
may pay their accounts by direct transfer from their bank account or by paying cash directly into the
business bank account and the business may only learn of their having done so sometime later; (ix) there
may have been an error made in the Cash Book entries; (x) the bank may have made an error in operating

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the account, such as adding funds to it instead of to the account of the person depositing the funds; (xi)
a cheque paid into the bank may have ‘bounced’ (i.e. there were insufficient funds in the writer of the
cheque’s bank account to make the payment).

B. Common causes of differences

B1. Items that cause the differences and are used to update the cash book
1. Bank charges or interest. The bank charges the business for the banking services. The bank might
deduct charges for interest on an overdraft or for its services, which you are not informed about until you
receive the bank statement. These amounts are debited straight away to the business’s bank account
without having to contact the business. The business is ignorant of the bank charges, until when in receipt
of the bank statement. Similarly, the bank may have credited the business account with interest earned
which will need to be reflected in the cash book. Bank charges are credited to the cash book whereas
bank interests are debited to the book.

2. Dishonored cheques. Cheques that once were received, recorded in the cash book but the bank refuses
to honour (pay) them for one reason or the other. Such cheques are returned to the customer (trade
receivable) who paid the amount, and the earlier receipt is reversed. A cheque deposited in the business
bank account is returned by the bank as unpaid or dishonoured for reasons such as: (i) lack of sufficient
funds on drawer’s account; (ii) amount in words differing from amount in figures; (iii) drawer’s signature
being different from the specimen signature available at the bank; and (iv) cheque presented beyond six
months of dat of issue (stale cheque). The dishonoured cheques are credited to the cash book.
3. Standing orders. These are written instructions to the bank to pay a specified fixed amount on business
behalf on a stated date at regular interval (eg monthly, quarterly etc) for loan repayment, insurance
premium, rent and pension contribution. When the time is due for the matter, the bank acts on the
standing order and pay the amount. The bank continually pays according to the business last instructions
without contacting business as often. Such payment amounts appear in the bank statement as debit
entries but do not appear in the cash book as the business has no proof that they have been made, until
when in receipt of the bank statement. Since the amounts are shown on the debit side of the bank
statement and so they will be recorded on the credit side of the updated cashbook.
4. Direct debits. These are written instructions to the bank to pay a specified amount on business behalf
on a stated date. Amounts debited on the bank statement but are not yet on the cashbook bank account.
Consequently, if the business is to update the cashbook, the amounts should be recorded on the credit
side as they represent payments made directly by the bank on business behalf. These could include such

payments as electricity bills and DSTV.

5. Direct credits. Amounts credited on the bank statement but are not on the cashbook bank account.
When updating the cashbook, the amounts will have to be recorded on the debit side as they represent
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receipt of cash directly through the bank. These receipt amounts could comprise of dividends received
from investments, interest received on fixed deposit account, and/or a debtor’s payment by credit
transfer. Such information is shown in the bank statement and not in the business cash book.
6. Error or mistake made by the business. Errors in calculation, or recording receipt and payments, are
more likely to have been made by the business than by the bank, but it is conceivable that the bank may
also mistakes too. For instance, the cashbook is debited with cheque issued to a creditor.

B2. Items that cause the differences and are used for reconciliation (to correct the cash book
balance to the bank statement)
1. Unpresented cheques. These are cheques the business issued to suppliers (creditors) and immediately
credited in the bank account in the cash book to pay for goods or services, but the cheques have not
been taken to the bank for cashing by the suppliers the business paid. The cheques are already recorded
in the business cash book but have not been reflected on the bank statement.
2. Uncredited cheques and deposit in transit. These are cheques that are deposited into the bank
account at the bank but take time before being posted to the business account by the bank. Such
deposits are usually made on the last day of the month or year. The processing of the deposit slips by
the bank takes place the following day. So, the bank statement for the month or year under review
does not show entries for such deposits, even though they have already been recorded in the cash
book. The cash book will thus show a record of these cheques, which may not appear on the bank
statement. Also, banks accept cheques for collection whereby customers accounts are credited only
when money is actually received from the banks against which cheques were drawn.
3. Errors or mistakes made by the bank. These are errors made by the bank and shown on the bank
statement. For instance, the bank erroneously debits the business’s account with dividends received by
the bank on the business behalf.

C. Benefits of the bank reconciliation

▪ A bank reconciliation is needed to identify and account for the differences between the cash book and
the bank statement.
▪ Bank reconciliation is mandatorily prepared because it is a form of internal control that auditors will
rely on to certify the verifiability of the bank balance shown in the balance sheet.
▪ Errors and unprocessed transactions can be revealed in the course of the bank reconciliation exercise.
Financial information is more reliable when it is free from error. To reveal the volume of transactions
that the bank have not processed in their accounting system by the end of the period under review,
eg a month. To correct the errors that may have been made in the accounting records.

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▪ To provide a verifiable balance at the bank that is to be included in the balance sheet without any
undue delay to the preparation of financial statements at the year-end. Cash book balances and bank
statement balances are agreed thereby confirming the correct bank balances.
▪ Errors detected on the bank statement are immediately brought to the attention of the bank for
appropriate actions.
▪ Delays in clearing deposits and presenting cheques are identified and dealt with.
▪ All the used and unused cheque leaves are accounted for.
▪ Stale cheques are identified and written back.

D. Steps in drawing a bank reconciliation statement

Step 1: Correct any errors in the cash book.
Step 2: Compare the bank account in the cash book and the bank statement for the period under review.
Tick similar items which appear on both opposite sides of the cash book and bank statement.
Step3: Update the cash book by recording items appearing in the bank statement that do not appear in the
cash book. These are likely to be bank charges, bank interest, standing orders, direct credit and direct
debits, dishonoured cheques. The debit items in the bank statement are the ones credited in the cash
book as payments, while the credit items in the bank statement are those debited in the cash book as
receipts.
E. Formats
Updated cash book as at December
Details DR (ZMW) Details CR (ZMW)
Balance b/d xxx Corrected error xxx
Dividend received Xxx Bank charges xxx
Interest received Xxx Suspense xxx
Credit transfer Xxx Standing order xxx
Corrected error Xxx Dishonoured cheque xxx
Suspense xxx
Balance c/d xxx
xxx xxx
Balance b/d xxx

Bank reconciliation statement as at December (Method 1)

Details ZMW ZMW
Balance as per updated cash book xxx
Add: Unpresented cheques xxx

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xxx
Less: Uncredited cheques or deposits in transit (xxx)
Balance as per bank statement xxx

Bank reconciliation statement as at December (Method 2)

Details ZMW ZMW

Balance as per bank statement xxx

Add: Uncredited cheques or deposits xxx

in transit
xxx

Less: Unpresented cheques (xxx)

Balance as per updated cash book xxx

Example 1

The bank columns in the cashbook for May 2021 and the bank statement for that month for Utuntu
Enterprises are as follows:

CASH BOOK
Debit side Credit side
ZMW ZMW
May 1 Balance b/d 3 250 May 6 Chola 165
May 8 Chawanzi 720 May 13 Chishimba 454
May 17 Mwewa 685 May 17 Mukolima 38
May 29 Hamududu 372 May 30 Temwani 44
May 31 Kulionesha 582 May 31Balance c/d 4 908
5 609 5 609
BANK STATEMENT

2021 DEBIT CREDIT BALANCE

ZMW ZMW ZMW
May 1 Balance b/d 3 250
May 8 Cheque 720 3 970
May 9 Sunkutu 220 3 750
May 17 Cheque 685 4 435
May 18 Chishimba 454 3 981
May 19 Mukolima 38 3 943
May 29 Cheque 372 4 315
May 30 GYM:Standing order 63 4 252
May 31 Akayombokwa: Trader’s credit 85 4 337
May 31 Bank charges 52 4 285

Required:
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(a) Write the cashbook up to date to take the above into account, and then
(b) Draw up a bank reconciliation statement as at 31 May 2021.

Example 2

1. Pushing’a Mafaelo Ltd prepared the following summary of receipts and payments account for the month
of April 2021:
ZMW’000 ZMW’000
Receipts 1 478 Balance b/d 770
Balance c/d 662 Payments 1370
2140 2140

Pushing’a mafaelo Ltd make all payments by cheques and all monies received are banked immediately.

Before preparing bank reconciliation an investigation revealed the following:

(i) The balance brought forward from March 2021 in the cash book should be ZMW750,000 and not
ZMW770,000.
(ii) A cheque drawn for ZMW128,000 for advertising had been incorrectly entered in the cash book as
ZMW125,000.
(iii) Dividends received in the month of April of zMW89 000 were credited by the bank but no entries were
made in the cash book.
(iv)Business rates are paid directly by the bank under a standing order arrangement. An amount of
ZMW120,000 was paid on 30 April 2020 and no entries have been made in the cash book.
(v) A cheque received from Kalyafye for ZMW207,000 had been returned by the bank and marked
‘insuffficient funds’. No adjustment has been made in the cashbook.
(vi)A cheque for ZMW35,000 for miscellaneous consumables was entered in the cashbook as a receipt
instead of as a payment.
(vii) Cheques received totalling ZMW807,000 had been entered in the cashbook and paid into the bank,
but had not been credited by the bank until 3 May.
(viii) Cheques drawn amounting to ZMW345,000 had not been presented to the bank for payment.
(ix) Bank service charges of ZMW67,000 appearing on the bank statement have not been entered in the
cashbook.

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Required:

(i) Calculate the closing balance that should appear on the cashbook taking into account the
appropriate information from the investigation.
(ii) Prepare a bank reconciliation statement as at 30 April 2020.

Task 1
The bank columns in the cash book for January 2021 and the bank statement for that month for Nipano Tuli
Trading are as follows:
Cash Book
Details DR (ZMW) Details CR (ZMW)
Jan 1: Balance b/d 6,500 Jan 6: Kunda 330
Jan 8: Bwalya 1,440 Jan 13: Mwila 908
Jan 17: Mulenga 1,370 Jan 17: Nana 76
Jan 29: Banda 744 Jan 30: Lusaka Club 88
Jan 31: Mutale 1,164 Jan 31: Balance c/d 9,816
11,218 11,218

Bank statement
January Details Debit (ZMW) Credit (ZMW) Balance (ZMW)
2021
1 Balance b/d 6,500
8 Cheque 1,440 7,940
9 Moyo 440 7,500
17 Cheque 1,370 8,870
18 Mwila 908 7,962
19 Nana 76 7,886
29 Cheque 744 8,630
30 TJ: Standing order 126 8,504
31 Mwalula: Trader’s credit 170 8,674
31 Bank charges 104 8,570

Required
Update the cash book and draw up a bank reconciliation statement as at 31st January 2021.

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Task 2
At 30 September 2021, the balance in the cash book of Popoka Co was ZMW805.15 debit. A bank statement
on 30 September 2021 showed Popoka Co to be in credit by ZMW1,112.30.

On investigation of the difference between the two sums, it was established that:
(a) The cash book had been undercast by ZMW90.00 on the debit side.
(b) Cheques paid in not yet credited by the bank amounted to ZMW208.20.
(c) Cheques drawn not yet presented to the bank amounted to ZMW425.35.

Required
(a) Show the correction to the cash book.
(b) Prepare a statement reconciling the balance per bank statement to the balance pe cash book.

Task 3

On 30 June 2021, Banono's cash book showed that he had an overdraft of ZMW300 on his current account
at the bank. A bank statement as at the end of June 2021 showed that Banono was in credit with the bank
by ZMW65.
On checking the cash book with the bank statement, you find the following:

(i) Cheques drawn, amounting to ZMW500, had been entered in the cash book but had not been
presented.
(ii) Cheques received, amounting to ZMW400, had been entered in the cash book, but had not been
credited by the bank.
(iii) On instructions from Banono the bank had transferred interest received on his deposit account
amounting to ZMW60 to his current account, recording the transfer on 5 July 2021. This amount had,
however, been credited in the cash book as on 30 June 2021.
(iv) Bank charges of ZMW35 shown in the bank statement had not been entered in the cash book.
(v) The payments side of the cash book had been undercast by ZMW10.
(vi) Dividends received amounting to ZMW200 had been paid direct to the bank and not entered in the
cash book.
(vii) A cheque for ZMW50 drawn on deposit account had been shown in the cash book as drawn on current
account.

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(viii) A cheque issued to Walyakake for ZMW25 was replaced when out of date. It was entered again in the
cash book, no other entry being made. Both cheques were included in the total of unpresented
cheques shown above.
Required
(a) Show the appropriate adjustments in the cash book.
(b) Prepare a statement reconciling the amended balance with that shown in the bank statement.

Task 4

The bank statement for Chipantepante for the month of March 2021 is as follows:

Bank statement

March 2021 Details Debit (ZMW) Credit (ZMW) Balance (ZMW)

1 Balance b/d 4,200 O/D

8 Mwinga 184 4,384 O/D

16 Cheque 292 4,092 O/D

20 Munthali 160 4,252 O/D

21 Cheque 369 3,883 O/D

31 Chintu: Trader’s credit 88 3,795 O/D

31 Standing order 32 3,827 O/D

31 Bank charges 19 3,846 O/D

Cash book

March Details DR (ZMW) March Details CR (ZMW)

2021 2021
16 Nchito 292 1 Balance b/d 4,200
21 Simeza 369 6 Mwinga 184
31 Sangwa 192 30 Munthali 160
31 Balance c/d 4,195 30 Kalenga 504
5,048 5,048

(a) Write the updated cash book

(b) Prepare a bank reconciliation statement as at 31 March 2021.

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Task 5

The following is a summary of a cash book as presented by Aikona Man Ltd for the month of

October:

ZMW ZMW

Receipts 1,469 Balance b/d 761

Balance c/d 554 Payments 1,262

2,023 2,023

All receipts are banked and all payments are made by cheque.

On investigation you discover:

(i) Bank charges of ZMW136 entered on the bank statement have not been entered in the cash book.
(ii) Cheques drawn amounting to ZMW267 had not been presented to the bank for payment.
(iii) Cheques received totalling ZMW762 had been entered in the cash book and paid into the bank, but
had not been credited by the bank until 3 November.
(iv) A cheque for ZMW22 for sundries had been entered in the cash book as a receipt instead of as a
payment.
(v) A cheque received from Kabova for ZMW80 had been returned by the bank and marked ‘No funds
available’. No adjustment has been made in the cash book.
(vi) A standing order for a business rates instalment of ZMW150 on 30 October had not been entered in
the cash book.
(vii) All dividends received are credited directly to the bank account. During October amounts totalling
ZMW62 were credited by the bank but no entries were made in the cash book.
(viii) A cheque drawn for £66 for stationery had been incorrectly entered in the cash book as ZMW60.
(ix) The balance brought forward in the cash book should have been ZMW711, not ZMW761.

Required:

(a) Show the adjustments required in the cash book.

(b) Prepare a bank reconciliation statement as at 31 October.

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