Bank Renconciliation

BANK RECONCILIATIONS

1At the end of this chapter, learners should be able to:

Define what a reconciliation is
Explain the purpose of the bank reconciliation
reconcile the bank statements to cash journals
Prepare a bank reconciliation statement
Integrate  the following into the reconciliation process:

outstanding cheques, cheques not presented for payment, deposits not appearing on the bank statement, stop orders and debit orders, direct transfers and deposits, bank charges, interest received or charged, correction of errors/omissions, r/d cheques and post dated cheques received or issues

IMPORTANT TERMINOLOGY

Term

Definition

Stale cheque

A cheque that is more than 6 months old

 

Dishonoured (r/d) cheque

A cheque that is rejected by the bank for some reason e.g. insufficient funds.

r/d= referred back to drawer

 

Post dated cheque

Cheques dated for a time in the future i.e. today is 20 February 2010 but the cheque is dated 28 February 2010.

 

Reconciliation

Comparing information in the books to a document received from another source to identify differences.

 

Overdraft

A negative balance on a bank cheque a/c. an amount owed to the bank on a cheque a/c

 

 

DEFINING A RECONCILIATION

It is an Internal Control measure or process
Involves comparison of books as prepared by different parties (business and bank)
Internal records (books prepared by the business)
External information source (Bank Statement)
Noting and rectifying differences

IMPORTANCE OF A BANK RECONCILIATION

Not reconciling the books of the business to that of the bank may expose the business to several risks:

Employees may be stealing from the accounts of the business
The bank might have made a mistake on your account as the business

Therefore, it is important to do regular bank reconciliations to be able to pick up on mistakes, by the bank or the business, and correct them appropriately

BANK RECONCILIATION PROCEDURE

a.The business receives a bank statement from the bank
b.The business must compare the bank statement to the bank account in the general ledger
c.Should there be differences between the bank statement and the books of the business, the business should account for these discrepancies in the Bank reconciliation statement

TYPES OF DISCREPENCIES

1. Something appears in the bank statement and not in our books- ENTER MISSING TRANSACTIONS IN CPJ/CRJ to update our books.

 

 

Enter on CRJ(dr on bank)

Enter on CPJ(cr on bank)

Direct deposits

R/D cheques

EFT by the business

Bank charges

Interest on current acc.

Int. on overdraft

Stale cheques

Debit orders

 

Stop orders

2. Something appears in the books of the business and not in the bank statement- RECORD MISSING TRANSACTIONS IN THE BANK RECONCILIATION STATEMENT and cheque the following month if the bank updated its own records.

 

 

DR

CR

Dr/cr balance as per bank statement

-

+

Cr outstanding deposits

 

n

Dr outstanding cheques

 

 

                     no. 100

 

 

                     no. 120

 

 

Dr/cr errors by the bank

-

+

Dr/cr balance as per bank account

+

-

{the totals should always balance}

Total

total

 

ILLUSTRATIVE EXAMPLE

QUESTION 1:

1.1. prepare the bank account for November 2008.make any entries that would affect the cash journals directly in the bank account [17]

1.2. prepare the bank reconciliation statement on 30 November 2008 [08]

(REFER TO WORD DOCUMENT WITH THE TRANSACTIONS AND ANSWER)