Bank Reconciliation Statements

THE CASH BOOK AND BANK RECONCILIATION

STATEMENTS

 The Cash Book – Introduction

Cash transactions are the simplest and most universal form of business transaction.

For example:

A sells B some goods for RWF150.

From A’s point of view, he has gained RWF150 in cash but sold the goods.

This, in book-keeping terms, is the double aspect of every transaction.

A debits “cash a/c” with RWF150 and credits “sales a/c” with RWF150.

From B’s point of view, he has decreased cash by RWF150 but has gained the goods.

In book-keeping terms, B debits “purchase account” with RWF150 and credits his “cash account” with RWF150.

To record cash transactions, a cash book is used.  By convention receipts (debits) are on the left hand side and payments (credits) are on the right hand side.

Cash may be kept in hand or at the bank.  Separate books can be kept, but usually one Cash Book is kept for both cash and bank.  It is important to differentiate between cash and bank.  Separate columns are used so that the balance of cash in hand and cash at bank can be found as required.

Use of Cash Book

Payments:

Payments by cash are entered in the cash column on the credit side

Payments by cheque are entered in the bank column on the credit side in date and cheque number order.

Receipts:

Receipts are normally all entered in the cash column on the debit side, then when paid into the bank the amount banked is credited to the cash (i.e. a payment out of cash) and debited to bank (i.e. a receipt by bank).  The entries are referenced to one another in the folio column with a “C” meaning Contra.

In some cases where bankings are made daily, the receipts can be debited straight into the bank column.

Discount:

When payment is made within a period of credit, a cash discount is sometimes allowed.  This means, for example, that a credit of RWF100 may be settled for RWF95 if payment is made within seven days (a 5% cash discount).

The Book-Keeping Entry is:

Enter the amount of the cheque in the bank column (RWF95),the discount in the discount column (RWF5), both on the credit side.

General Balances

Cash is a material object.  It is therefore a debit balance (i.e. one has some of the asset cash) or it is a nil balance (i.e. one has none).  The bank is different because one can (with the bank’s  approval) overdraw an account and thus owe the bank.  The bank overdraft is shown as a credit balance (i.e. a liability to the bank).

Autonomous Items

In the bank transactions arise which are at the instigation of persons other than the operator of the account.

  • Bank Charges and Commission
  • Bank Interest
  • Standing Orders
  • Credit Transfers (Bank Giro)
  • Returned Cheques
  • Direct Debits

Entries of these items must be made when notified by the bank.

Bank Reconciliation Statements – Introduction

The bank statement shows all the transactions of which the bank has knowledge, and should normally show the same entries as the customer’s cash book.  Therefore, it would be reasonable to assume that the balance shown on the bank statement should be the same as the bank balance in the cash book at any given date.  In practice, you will find that they seldom agree.

The main reason (apart from errors) for the difference is that either the bank statement or the cash book is not up to date.  The purpose of a bank reconciliation statement is to reconcile differences due to this cause.  It can then be seen whether or not there are any errors.

Differences

There are two types of differences:

Items in Cash Book   Not on Bank Statement

Items on Bank Statement Not in Cash Book

Items that are in the cash book but have not yet reached the bank’s records:  These items are either cheques drawn but not yet presented for payment by the payee (un-presented cheques), or cash and cheques paid into the bank but not yet recorded on the bank statement (lodgements not credited).  To find these items, all entries in the cash book (bank) are ticked to the items of the bank statement, any entries left in the cash book are either errors or the items mentioned above.  Errors in the cash book must first be corrected by entries in the cash book.  The un-presented cheques and the lodgements not credited will appear in the reconciliation.

Autonomous Items

These items were mentioned in the cash book note.  They will appear on the bank statements, but not all of them will appear in the cash book.  After the cash book and statement have been ticked, these items will appear as unchecked on the bank statement.  After their authenticity has been checked, they must be put into the cash book by suitable entries.

Examples of these items would be:

 

  • Bank Interest
  • Bank Charges
  • Standing Orders
  • Direct debits
  • Giro Credits

Procedure

Check that all bank statements are there.

On the bank statement, underline the last entry of the date on which the reconciliation is to be made.

Taking the debit side of the cash book, tick all the items to the credit side of the bank statements.  By observation of dates and adding items together as necessary, it can be ensured that the items ticked are the same items.

Taking the credit side of the cash book, tick all the items to the debit side of the bank statement.  By observation of dates and cheque numbers it is usually possible to ensure that the items ticked are the same items.

Any errors and/or omissions must be written in to the cash book.

The reconciliation can now be written out.  It starts with the balance per the bank statement and ends with the balance in the cash book (bank).

Lodgements not credited are added to the balance at bank as if they have been credited by the bank.  Conversely, lodgements not credited are deducted from a bank overdraft as, if they had been credited by the bank and as if the bank overdraft had fallen.

Un-presented cheques are deducted from a balance at bank, but added to a bank overdraft

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