This is a statement prepared to reconcile the adjusted cashbook balance and the bank statement balance.
A bank account is maintained in the business to record all the cheque receipts and payments, cash deposits and withdrawals. On the other hand the bank maintains an account for each customer (the business is a customer in the bank). The bank records all activities affecting the customer.
Periodically, the bank generates a bank statement showing the deposits, withdrawals and the daily balances.
Ideally the balance in the cashbook in the business should be equal to the balance in the bank statement. But this is not the case due to the following reasons.

  • The bank operations are different from the business operations
  • The bank is independent from the business
  • Time when the statements are sent to customers is different from the time the business closes its accounts
  • A business may take a day or two to deposit some cheques that it has already entered in the cashbook.
  • A cheque may take a few days to be entered in the account of the business held at the bank after it is deposited.
  • Bank interest paid and bank charges often aren’t known by business until a bank statement is received.
  • Bank interest received won’t be known until it receives a bank statement.
  • Standing orders may not be written up in the cashbook of the business until they are identified on the bank statement.
  • The amount of a direct is sometimes not known and so should not be entered in the cashbook until it is confirmed how much was paid out of the bank account.
  • Customers may pay their accounts by direct transfer from their bank account or paying cash directly into the business bank account and the business may only learn of their having done so some time later.
  • There may have been an error made in the cashbook entries.
  • The bank may have made an error in operating the account, such as adding funds to it instead of to the account of the person depositing the funds.
  • A cheque paid into the bank may have ‘bounced’ (i.e. there were insufficient funds in the writer of the cheque’s bank to make the payment.

These reasons lead to some transactions appearing in the cashbook and not in the bank statement and other transactions appearing in then the bank statement and not in the cashbook.

Transactions in the cashbook and not in the bank statement

(a) Uncredited cheques and deposits
These are the cheques received from debtors, recorded in the cashbook but does not appear in the bank statement. This is because of the time difference.
Cash deposited in the bank, recorded in the cashbook but does not appear in the bank statement due to the time difference

(b) Unpresented cheques
Cheques paid to creditors and suppliers, recorded in the cashbook but do not appear in the bank statement. This is due to the fact that the creditors have not presented them in the bank for payment. This is an aspect of time.

(c) Errors in the cashbook

  • Accounting errors where debits are recorded as credits, while credits are recorded as debits
  • Transposition of figures while recording transactions in the cashbook. Kshs. 54,000 recorded as Kshs. 45,000 and Kshs. 50,400 recorded as Kshs. 40,500. Recording wrong figures in respect of a transaction
  • Omissions of transactions in the cashbook
  • Arithmetic errors in the cashbook when calculating discounts and closing balances

Transactions in the bank statement and not in the cash book
These are transactions that originate from the bank or are transacted within the banking circles and the business will only know when communication is received from the bank.

  • Dishonored cheques: These are cheques issued by debtors, but when they are presented for payment, they are not honoured for various reasons. (Lack of funds, incorrect names, errors in the amounts in figures and words, wrong signatures, stale cheques).
  • Standing orders: The bank makes periodic payments of fixed amount at a specific date on behalf of the customer. The customer authorizes the bank to do so. But this does not go through the business.
  • Credit transfers: This is a fund being deposited in the customer’s account through EFT.
    Electronic Funds Transfer. Some of the customers pay their accounts through the bank and hence it will only be recorded in the business when the statement is received.
  • Direct debits: Funds are paid out the customer’s account due to some earlier arrangement with the recipient (payee). E.g. subscriptions.
  • Bank charges and commissions: These are the charges by the bank for services rendered to the customer. They would only appear on the bank statement, as the bank knows the amounts.
  • Errors in the bank statement
    – Arithmetic errors
    – Debits are recorded as credits
    – Credits record as debits
    – Transposition of figures
    – Omissions of transactions
    – Recording wrong figures in respect of a transaction
    The cashbook and bank statement relate to the same business and hence the need for the reconciliation statement.

Preparation of the bank reconciliation statement.

(i) Analyze all the differences
– Transactions in bank statement and not in cash book
– Transactions in the cashbook and not in the bank statement.

(ii) Prepare the adjusted cashbook with: –
Transactions in the bank statement and not in the cashbook (do not include the errors in bank statement)

(iii)Correcting errors in the cashbook
Note: The bank statement can’t be adjusted. It is document from a third party.

Transactions in the bank statement and not in the cash book

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