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COLLEGE OF BUSINESS AND SOCIAL
SCIENCESDEPARTMENT OF ACCOUNTING
ACC 111
PREPARATION OF BANK
RECONCILIATION STATEMENT
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INTRODUCTION
Bank reconciliation is the agreement of the
balance on a companys cashbook with the
balance shown on the bank statement sent by
the bank in respect of such account. If the
cashbook and the bank statement show the same
balance, then there may be no need for
reconciliation. The treatment of items in both the cashbook and
bank statement can be summarized as follows:
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Description Bank Column of Cashbook In bank statement
Receipts Debit Credit
Payment Credit DebitCash at Bank Debit Balance Credit Balance
Bank overdraft Credit Balance Debit Balance
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From the above, it can be seen that the
cashbook and bank statement should
normally contain the same information, but in
practice, this cannot be achieved, as there are
certain reasons that could cause differences
between the cashbook and the bank
statement. A bank reconciliation statement isthen prepared to reconcile the cashbook with
the bank statement.
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CAUSES OF DIFFERENCES BETWEEN
CASHBOOK AND BANK STATEMENT
ITEMS IN THE CASHBOOK ONLY:
UNPRESENTED CHEQUE: These are chequespaid out by the firm, but yet to be presentedby the payees to the bank for payment. Thecheques would have been credited to thecashbook when they were issued, however,
due to the fact that they are yet to bepresented to the bank for payment, they willnot appear in the bank statement.
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UNCREDITED CHEQUES/LODGEMENTS: these
are cheques/ cash lodged into the bank
account by the firm but which are yet to be
credited by the bank. A common reason for
uncredited cheques is the delay caused by the
clearing system the period from the time the
cheque is paid into the firms bank account tothe time the cheque is honoured by the
paying banker.
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ITEMS IN BANKSTATEMENTSONLY
There are various items debited in the bankstatement, which to be recorded in the firmscashbook. They include:-
Bank Charges, commission on turnover (COT),commission on draft and value added tax (VAT).
Interest on loan and overdraft.
Direct debits: These are payments made directly
out of the bank account to persons who had beenauthorized by the firm to draw money from theaccount. They are usually used for payinginsurance premium.
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Standing order: These are regular paymentsmade by the bank on the instruction of thecustomer. Payment usually made by standing
order includes subscription.
Dishonoured cheque: These are chequesearlier credited by the bank but which werelater dishonoured by the paying banker. Uponthe dishonoured, the cheque is debited to theaccounts of the firm by the bank.
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RECEIPTS IN BANKSTATEMENT ONLY
These are various items credited in the bankstatement, which are yet to be recorded in thefirms cashbook. They include:-
Interest received on deposit and current account Dividend received
Traders credit: These are amounts receiveddirectly into the bank account from debtors
accounts who had been instructed to pay directlyinto the firms account. Traders credit arenormally effected by the firms debtors,instructing their own
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bankers to transfer the amount to the bankers of
the firm who will then receive the amount on
the firms behalf.
Others include:-
Errors in the cashbook.
Errors in the bank statement.
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PROCEDURESFOR PREPARING BANK
RECONCILIATIONSTATEMENT
The preparation of a bank reconciliation statementis a periodic exercise depending on the activitiesof the organizations. It could be prepared daily,
weekly, monthly or even annually.The procedure is firstly to adjust on the bank
balance disclosed in the cashbook and items,which are entered in the bank statement but not
in the bank columns of the cashbook. Theadjusted amount will represent the true bankbalance in the cashbook.
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Secondly, adjust on the bank statement
balance the amount of any unpresented
cheque and lodgment not yet credited by the
bank. These adjusted bank statement balance
would then agree with the bank balance in the
cashbook. The format for a bank reconciliation
statement is shown below:-
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FORMAT
Starting with the adjusted cashbook
N N
Balance as per cashbook (adjusted figure) XXAdd: Unpresented cheque XX
XXX
Less: Uncredited cheque XX
Balance as per bank statement XXX
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Starting with the bank statement
N N
Balance as per bank statement XX
Add: Uncredited cheque XX
XXX
Less: Unpresented cheque XX
Balance as per adjusted cashbook XXX
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Note: Where the adjusted cashbook gives rise to an overdraft,
the procedures for preparing a bank reconciliation statement will
just be a reverse of a normal situation e.g.
N N
Balance as per cashbook (adjusted figure) XX (OD)
Add: Uncredited cheque XX
XXX Less: Unpresented cheque XX
Balance as per bank statement XXX
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WHAT TO DO WITH THE
RECONCILIATION STATEMENT
Notify the bank of its error(s) for correction
Review the bank statement for the period
immediately following the reconciliation dateto confirm if the unpresented cheque has
been presented and if the uncredited
cheques/lodgment has been credited.
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If the unpresented cheque remains unpresented fortoo long, get in touch with the payee to find out why
the cheque has remained unpresented. It is possiblethat the payee is no longer in a position to present thecheque to the bank for payment. This would be thecase if, for example, the payee has died or hasmisplaced the cheque. In such circumstances, the bank
should be notified not to honor the cheque. This wouldensure that payment is not made to the wrongpersons.
If the uncredited cheques/lodgments remain
uncredited for an unreasonable period; this should betaken up with the bank for appropriate action. It ispossible that the cheques/lodgments have beencredited by the bank to the account of anothercustomer.
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ILLUSTRATION 1
Onome & Osagie Company has the following transactions in their cashbook andtheir bank statement for April 2004.
Cashbook
Lodgment into bank Paymentsordered
N N
Cheque 6789 14000 Cheque 123456 4000 Cheque 4591 12000 Cheque 123457 6000
Cheque 4826 9500 Cheque 123458 7500
Cheque 4725 19000 Cheque 123459 12500
Cheque 4228 9000 Cheque 123460 8000
Cash 66000 Cheque 123461 1500
Bal c/d 90000 129500 129500
Bal b/d 90000
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Bank Statement
Debit Credit Balance
N N N
Cheque 123459 12500 (12500)
Cheque 123458 7500 (20000)
Cheque 4826 9500 (10500)
Cheque 6789 14000 3500 Cheque 123460 8000 (4500)
Cheque 4826 contra 9500 (14000)
ICAN Standing order 250 (14250)
C.O.T 500 (14750)
Commission 1750 (16500)
Cheque 4228 9000 (7500)
Cheque 123457 6000 (13500)
Cash 66000 52500
You are required to: Prepare an adjusted cashbook and reconcile the adjustedcashbook with the bank statement.
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Solution
ONOME & OSAGIE
Adjusted cashbookN N
Bal b/d 90000 ICANStanding order 250
C.O.T. 500Commission 1750
Bal c/d 87500
90000 90000
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ONOME & OSAGIE COMPANY
Bank Reconciliation Statement as at
April 2004N NBalance as per bank statement 52500
Add: Uncredited cheque
Cheque 4591 12000
Cheque 4826 9500Cheque 4725 19000
40500
93000
Less: Unpresented Cheque
Cheque 123456 4000Cheque 123461 1500 5500
87500
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ILLUSTRATION 2
On the 31st of December 1994, the cashbook of Amisco, aretailer, showed an overdraft ofN20,000. The bank balancewas N193,000 CR
You are given the following additions/information:
A cheque for N28,000 received by Amisco and entered inhis cashbook on 31st December 1994 was not credited bybank until 2nd January 1995.
A credit transfer ofN114,000 in settlement of a debt by acustomer has not been entered in the cashbook.
Cheque drawn by Amisco on 26th December 1994amounting to N268,000 where not paid by bank until 31stDecember, 1994.
In December 1991 the bank debited Amiscos account byN14,000 for bank charges. No entry has been made in
Amiscos books.
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A dividend ofN58,000 was paid directly to bank.
Standing order on insurance for N20,000 was paid by
the bank. A cash payment of N12,000 was recorded in the bank
column of the cashbook.
A cheque ofN63,000 lodged by Amisco was credited toADEMISCOS account.
A dishonoured cheque cheque of N123,000 was notrecorded in the cashbook.
A cheque for rate ofN67,000 on 10th December 1994had been entered in the cashbook as N76,000.
You are required to: Prepare an adjusted cashbook
Bank reconciliation statement at 31st December, 1994.
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SOLUTION 2
AMISCO LTD
ADJUSTED CASHBOOKN NCredit transfer 114,000 Balance b/d 20,000
Dividend 58,000 Bank charges 14,000
Correcting of error (76,000-67,000) 9000 Standing order 20,000
Cash reverted by error 12,000 Dishonoured cheque 123,000Bal c/d 16,000
193,000 193,000
Bal b/d 16,000
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AMISCO
Bank Reconciliation Statement As At 31st
December 1994N N
Balance as per cashbook 16,000
Add: Unpresented Cheque 268,000284,000
Less: Uncredited cheque 28,000
63,000 91,000Balance as per bank statement 193,000
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OR
Bank Reconciliation Statement
N N
Balance as per bank statement 193,000
Add: Uncredited cheque (28,000 + 63,000) 91,000284,000
Less: Unpresented cheque 268,000
Balance as per adjusted cashbook 16,000
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ASSIGNMENT
Vicman cashbook showed a debit balance of 3,344 on 31st
Jan, 2002. His bank statement for January, 2002 however
showed a credit balance of 3,424. On investigation, it was
discovered that:
The opening balance on the cashbook for the month had
been wrongly brought down as 1505, instead of 1550.
Payment for rent 250 had been debited in the cashbook
A customer had paid 600 directly into the bank
The bank had paid a standing order of 300 to an
insurance company
A cheque for 870 deposited on 25th January was not
credited until 3rdFeb. 2002.
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Cheques paid to suppliers totaling 1875, had not
been presented for payment
Cost of cheque book and other charges by bank
totaling 90 had not been entered in the cashbook
The bank had paid a cheque of 680 in error fromVicmans account.
You are required to
Prepare an adjusted cashbook
Bank reconciliation statement as at 31st January,
2002.