Bank reconciliation statement

CHAPTER 1

1.3 BANK RECONCILIATION STATEMENT

Every month, individuals and businesses maintaining a Current Account with a bank statement

received from the bank. Upon receiving the bank statement, the focus is normally on the ending

balance besides the transactions on whatever deposits and payments made. The business expects the

ending balance appearing in the bank statement is the same as the amount in the Cash Book (bank

column). Thus, the purpose of Bank Reconciliation is to do necessary adjustments to our records in the

cash book and come up with the same ending balance as recorded by the bank.

It is an analysis explaining the difference between a business’s book balance of cash and its bank

statement balance. The Bank Reconciliation Statement must be prepared monthly to justify amounts

reported in the Bank Statement and the Bank account kept by the business.

1.3.1 Bank Statement

Bank Statement is normally debited for payments or charges, and credited for receipts by the business.

Examples of payments and charges cheques drawn in favor of creditors or suppliers, bank charges, direct debits and standing order/instructions. Examples of receipts: deposits of cash or cheques,

dividend, interest on current account and bank GIRO credits or credit transfer.

EXAMPLE 1.4

Poli Bank Shah Alam Statement of Account Account No. 654321 Date: 30 April 2019

Date Particulars Debit Credit Balance

April 1 Balance b/f

April 3 Cash deposit

April 4 Transfer from branch

April 6 Cheque book

April 8 70010 5.00

550.00 800.50 Cr

7,000.00 7,800.50 Cr

2,500.00 10,300.50 Cr

10,295.50 Cr

9,745.50 Cr

April 10 70011

April 12 70012

April 15 Bank GIRO Credit

April 20 Direct Debit

April 25 Interest

April 28 Bank Charges 700.00

430.00

574.00

10.00

CHAPTER 1

9,045.50Cr

8,615.50 Cr

645.00 9,260.50 Cr

8,686.50 Cr

166.70 8,853.20 Cr

8,843.20 Cr

1.3.2 Cash Book (Bank Column)

Cash book or bank account is normally debited with receipts (deposits of cash or cheques). credited

with payments (cheques drawn in favour of creditors or suppliers) of the business.

Balance b/d Cash deposit Credit transfer Ilham Co.

800.50 7,000.00 2,500.00 200.00 Bank charges Amin Trading-70010 Kuat Bhd-70011 Aris-70012 Iwan-70013 Balance c/d

5.00 550.00 700.00 430.00 350.00 8,465.50

Sample of Bank Account

RM

10,500.50 RM

10,500.50

1.3.3 Differences Between Bank Statement Balance and Bank Account Balance

Three reasons why the balance in bank statement and the balance in the company’s cash book (bank)

could be different. The reasons as follows:

a) Items recorded in the Bank Account but not recorded by the bank:

i. Uncredited lodgement: Or deposits not yet credited. This happens when a business deposits

money or cheques but the amount does not appear in the bank statement since the deposits

has not yet been processed by the bank; but has already been recorded by the business.

CHAPTER 1

ii. Unpresented cheques: Cheques drawn for payment to creditors or others have not been cashed

or banked, i.e., when cheques are drawn for payment and sent to creditors, the record in the

business books has been made, but for some reasons the creditor is still carrying the cheque

around and have not presented it to the bank for clearance.

b) Items recorded in the Bank Statement but not recorded by the business:

i. Direct debit: The bank debited the account of the business for payments such as insurance

premiums, rates, fees, subscriptions etc.

ii. Standing instructions order: This is quite similar to the direct debit in that the bank will debit

the account of the business for payments such as insurance premiums, rates, subscriptions,

etc.

iii. Bank service charge: This is a fee charged by the bank for operating the account for the

business and or issuing the cheque book.

iv. Bank GIRO credit or credit transfer: The business account is credited with amount paid by

creditor or other organization direct into the business bank account.

v. Interest revenue on current account: This interest is credited to the account of the business

and is paid by certain bank based on large enough balance of cash in the account.

vi. Dishonoured cheques: A cheque, that the bank will not honor upon presentation by the

business for clearance. However, the business has already accepted the cheque for the cash

book settlement of a debt.

c) Errors:

i. Errors made by the bank: A cheque payment by a debtor had been debited to the business

account by the bank, or a bank may make an error in recording the amount to be debited or

credited.

ii. Errors made by the business: Error in recording the amount to be debited or credited, or

transactions are being debited to the cash book instead of being credited.

CHAPTER 1

1.3.4 Preparation of Adjusted Bank/Cash Book Account

Step 1 Updating the Bank Account

i. Matching of entries on the bank statement with those in the bank account. This is done by ticking

items that appear both in the bank statement and in the bank account.

ii. Items appearing in the bank statement but not in the bank account are transferred to the bank

account.

iii. There would still be items in the bank account left unticked and they would be treated as either

uncredited lodgment (if it is a debit item) or as unpresented cheques (if it is a credit item) and these

items would be dealt with in the bank reconciliation statement later on.

iv. Any errors relating to the bank account would be dealt with at this stage.

v. Complete the necessary double entry and carry down the balance of the bank account.

Step 2 Preparing the Bank Reconciliation Statement

i. Start with balance as per updated bank account balance

Bank Reconciliation Statement as at …..

Balance as per updated bank account Add: Unpresented cheques Less: Uncredited lodgements Balance as per bank statement

ii. Start with balance as per bank statement

Bank Reconciliation Statement as at …..

Balance as per updated bank account Add: Uncredited lodgements Less: Unpresented cheques Balance as per bank statement

xxx

xxx

(xxx)

xxxx

xxx

xxx

(xxx)

xxxx

CHAPTER 1

Step 3 Treatments of Error, Overdraft and Opening Balance Disagreements

The explanation below are meant for bank reconciliation statement that starts with the updated bank

account balance:

i. Opening balance disagreements: the normal procedure is to account for the opening difference,

i.e. by matching and ticking against the entries in the previous period’s bank account.

ii. Errors made by the bank: if as a result of the error, the bank balance has been understated, for

example, if the bank had wrongly debited the bank statement, subtract the amount, the reverse

treatment is necessary if the bank had wrongly credited the bank statement and as a result the

bank statement balance had been overstated.

iii. Overdraft: for such cases the uncredited lodgment will be added whilst the unpresented cheques

subtracted.

EXAMPLE 1.5

Use example 1.4

SOLUTION

Balance b/d Bank Giro Credit Interest

Bank Account

RM

8,465.50 Direct Debit 645.00 Bank Charges 166.70 Balance c/d

9,277.20

Bank Reconciliation Statement as at April 2019

Balance as per bank account (updated) Add: Unpresented cheques

Less: Uncredited lodgements Balance as per bank statement

RM

574.00 10.00 8,693.20

9,277.20

8,693.20 350.00 9,043.20 (200.00) 8,843.20