1. FINANCIAL ACCOUNTING Week 10: Lecture 10 1

2. L EARNING G OALS By the end of the lecture you will be able to: Understand the purpose of the Bank Reconciliation Statement Be familiar with the nature of the Cash Book and Bank Statement Identify the reasons for differences between the Cash Book and the Bank Statement Balance Solve Exercises 2

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4. T HE PURPOSE OF THE BANK RECONCILIATION STATEMENT The purpose of the Bank Reconciliation is to reconcile (resolve – make two parts agree) the difference between: The cash book balance : the company’s records of its bank account transactions and The bank statement balance : the bank’s records of the bank account transactions that the company is doing The content of the cash book should be exactly the same as the record provided by the bank (bank statement) and therefore the records in the cash book should also appear in the bank statement. 4

5. T HE PURPOSE OF THE BANK RECONCILIATION STATEMENT Due to the timing difference, omissions and errors made by the bank or the firm itself, the balance of the bank statement and the bank account in the cash book rarely agree. Bank reconciliation statements can be used to explain the reasons for the differences and to identify errors and omissions in both documents, so that corrections can be made as soon as possible. THE RECONCILIATION IS CARRIED FREQUENTLY, USUALLY AT A MONTHLY BASIS 5

6. The debits and credits in the cash book are reversed(opposite) in the bank statements because the bank will be recording the transaction from its point of view : When there is an increase in the company’s money the accountant of the company makes a debit entry in the cash book but the Bank makes a credit entry because this increase in money is a liability for the Bank to the company or the individual customer. When there is a reduce in the company’s money the accountant of the company makes a credit entry in the cash book but the Bank makes a debit entry because this reduction in money is a decrease of the liability- obligation that the Bank has to the company or the individual customer. 6

7. N ATURE OF THE CASH BOOK AND BANK STATEMENT Cash Book Debit represents an increase Credit represents a decrease Bank Statement Dr Cr Balance (represents decrease) (represents increase) (represents the amount owned to the clients - liability) 7

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9. B ANK R ECONCILIATION S TATEMENT 9

10. R EASONS FOR DIFFERENCES BETWEEN THE CASH BOOK BALANCE AND THE BANK STATEMENT BALANCE 1) Unrecorded items These are items which arise in the Bank Statements before they are recorded in the Cash Book. Such unrecorded items may include: * interest * bank charges * dishonored cheques * interest allowed by the bank: interest received for deposits. They are not recorded in the Cash Book because the business does not know that these items have arisen until they see the Bank Statement. The Cash Book must be adjusted to reflect these items!!! 10

11. 11 2) Timing Differences These items have been recorded in the cash book, but due to the bank clearing process have not yet been recorded in the bank statement: * Outstanding / unpresented cheques : cheques given to suppliers but they have not presented to the bank for money. * Outstanding / uncleared deposits: cheques received by the business but not yet cleared by the bank. The bank statement balance needs to be adjusted for these items: € Balance per Bank Statement X Less: Outstanding / Unpresented cheques (X) Add: Outstanding / Unpresented deposits X Balance per cash book revised X

12. 3) Errors * Errors in the cash book The business may make a mistake in their cash book. The cash book balance will need to be adjusted for these items * Errors in the bank statement The bank may make a mistake e.g. record a transaction relating to a different person within our business bank statement. The bank statement balance will need to be adjusted for these items 12 NOTE THAT THE BANK BALANCE ON THE STATEMENT OF FINANCIAL POSITION IS ALWAYS THE BALANCE PER THE REVISED CASH BOOK

13. Other methods of payment except from cheques are:  The Standing orders (S/O): They are standing instructions from the firm to the bank to make regular payments. For example paying every month a loan installment.  Direct debit or autopay: Is the instruction given by the depositor to his / her creditor’s bank to collect the money with a variable amount directly from the depositor’s bank account from time to time.  Direct credit: They are money received from customers directly through the banking system. 13

14. E XERCISE 1: 14 On which side of the cash book should the following unrecorded items be posted?  Bank charges  Standing orders  Direct Debits  Direct Credits  Dishonored cheques  Bank interest allowed

15. Cash Book Bank Interest allowed S OLUTION : Direct Credits Bank Charges Direct Debits Standing Orders Dishonored cheques 15

16. E XERCISE 2: In preparing a company’s bank reconciliation statement, the accountant finds that the following items are causing a difference between the cash book balance and bank statement balance: 1)Direct Debit €530 2)Deposits not credited €1200 3)Cheque paid in by the company and dishonored €234 4)Outstanding cheques €677 5)Bank charges €100 6)Error by Bank €2399 – cheque incorrectly credited to the account 16

17. S OLUTION : Which of these items will require an entry in the cash book? A) 3,4 and 6 B) 1,3 and 5 C) 1,2 and 4 D) 2,5 and 6 17

18. Two steps : 1. Check the bank statement and the cash book to identify the items which have been omitted. 2. Prepare the bank reconciliation statement. T O RECONCILE THE BANK STATEMENT WITH THE U NADJUSTED CASH BOOK 18

19. The following information has been extracted from the records of J.Franco: DR Bank Account CR € cheque no. € 1 Dec B/ce b/d 16491 1 Dec Alexander 782 857 2 Dec Able 6 Dec Burgess 783 221 Baker 2065 14 Dec Barry 784 511 10 Dec Charlie 2312 17 Dec Cook 785 97 14 Dec Delta 419 24 Dec Hay 786 343 21 Dec Echo 327 29 Dec Rent 787 260 23 Dec Cash Sales 529 31 Dec Fred-chq 119 31 Dec B/ce c/d 19973 22262 22262 19 E XERCISE 3:

20. High Street Bank Bank statement – J.Franco Date Details Dr Cr Balance 1 dec B/ce b/d 16491 5 dec 782 857 5 dec bank charges 47 15587 6 dec deposit 2065 17652 10 dec standing order 137 17515 11 dec 783 212 17303 13 dec deposit 2312 19616 17 dec 784 511 19104 17 dec deposit 419 19523 17 dec deposit 327 19850 17 dec deposit 528 20387 28 dec 786 343 20035 30 dec 310923 297 19738 31 dec B/ce c/d 19738 20 withdrawalsdeposits €€€

21. Revised /corrected Cash Book B/ce as per wrong cash book 19973 5/12 bank charges 47 11/12 cheque 783 error 9 10/12 S/O 137 17/12 deposit differ 1 B/ce c/d revised 19797 19982 19982 21 S OLUTION :

22. Bank Reconciliation Statement as at 31 st December Balance as per Bank Statement 19738 Add: 31/12 Outstanding Deposit- Fred 119 Less: 6/12 Outstanding cheque 785 (97) Less: 29/12 Outstanding cheque 787 (260) Add: 30/12 Bank Error: wrong cheque 310923 297 Balance per Cash Book 19797 22 €

23. The following is a summary of Ami’s cash book as presented to you for the month of December’2012: Cash Book Receipts 1469 B/ce b/d 761 B/ce c/d 554 Payments 1262 2023 2023 All receipts are banked and payments are made by cheque. On investigation discovered: 1)Bank charges of € 136 entered on the bank statement had not been entered in the cash book. 2)Cheques drawn amounting to € 267 had not been presented to the bank for payment. 23 E XERCISE 4: € €

24. 3) A cheque for €22 had been entered as a receipt in the cash book instead of as a payment. 4) A cheque drawn for €6 had been incorrectly entered in the cash book as €66. Required: prepare the revised cash book. Revised Cash Book Adjustment for cheque 60 B/ce b/d 554 Bank charges 136 B/ce c/d 674 Cheque 44 734 734 B/ce b/d 674 24 Solution:

25. QUESTIONS? 25