Exam code:4AC1
Purpose of a bank reconciliation statement
What is the purpose of a bank reconciliation statement?
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If the balance on the bank statement is different to the bank balance in the cash book, then the business produces a bank reconciliation statement
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This is a statement which explains why the balances are different
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The cash book can be updated with missing transactions that are on the bank statement
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However, the business cannot update the bank statement with missing transactions that are in the cash book
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A bank reconciliation statement is needed to show these
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It contains details of any:
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Unpresented cheques
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Uncredited deposits
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Errors
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Preparing a bank reconciliation statement
How do I prepare a bank reconciliation statement?
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STEP 1
Update the cash book using the bank statement-
Calculate the updated balance
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STEP 2
Start the bank reconciliation statement with the updated balance in the cash book-
If the balance is on the credit side then this means the bank should be overdrawn
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Put the value in brackets and treat it as a negative number
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STEP 3
Add any unpresented cheques-
These are the credit entries in the cash book that are missing from the bank statement
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If there is more than one, then
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Add these amounts together in a separate column of the bank reconciliation statement
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Put the total in the end column
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Add the total to the balance in the cash book
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STEP 4
Subtract any outstanding lodgements-
These are the debit entries in the cash book that are missing from the bank statement
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If there is more than one, then
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Add these amounts together in a separate column of the bank reconciliation statement
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Put the total in the end column
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Subtract the total from the balance in the cash book
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STEP 5
Deal with any bank errors-
If the error has decreased the balance on the bank statement then subtract this amount from the balance in the cash book
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If the error has increased the balance on the bank statement then add this amount to the balance in the cash book
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STEP 6
Check that this amount is equal to the bank balance shown on the bank statement-
If the balance is negative, then the bank balance should be overdrawn
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This means the bank balance should have a debit balance
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Examiner Tips and Tricks
Compare the cash book and the bank statement. If a transaction appears on both of them, then put a tick next to the transaction in the cash book and on the bank statement. Then you just need to use the unticked entries in the cash book to complete a bank reconciliation statement.
Can I start the bank reconciliation statement with the balance shown on the bank statement?
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You can create the bank reconciliation statement using the reverse order:
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Start with the balance shown on the bank statement
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Subtract the unpresented cheques
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Add the outstanding lodgements
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Check that it is equal to the balance shown in the cash book
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Examiner Tips and Tricks
Always double-check whether the balance is positive or negative. This is the main reason why students lose marks in an exam!
Worked Example
Leo is a sole trader. On 31 March 2024, his bank statement showed that his business bank account was $345 overdrawn. On the same date, his cash book showed a credit balance of $395. Leo identified that some transactions were entered into his cash book but did not appear on his bank statement. These transactions are shown in the following extract of the cash book.
Extract of Cash Book (Bank columns)
|
Date |
Details |
$ |
Date |
Details |
$ |
|
Mar 9 |
Jacob |
500 |
Mar 5 |
Pru |
200 |
|
29 |
Commission receivable |
300 |
23 |
Wages |
750 |
Leo also noticed an error on his bank statement. A cheque paid for $100 for office expenses had been mistakenly processed twice by the bank.
Prepare the bank reconciliation statement for Leo at 31 March 2024.
Answer
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The cash book has a credit balance
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Therefore this is a negative amount
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The credit entries are the unpresented cheques
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Add their total to the cash book balance
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The debit entries are the outstanding lodgements
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Subtract their total from the cash book balance
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The error has caused his bank balance to be lower than it should be
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Therefore, subtract the amount of the bank error from the cash book balance
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Leo’s business bank account is overdrawn
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So the bank reconciliation statement will end with a negative amount
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Leo
Bank Reconciliation Statement at 31 March 2024
|
$ |
$ |
|
|
Balance per bank statement |
(395) |
|
|
Unpresented cheques |
||
|
Pru |
200 |
|
|
Wages |
750 |
|
|
950 |
||
|
Outstanding lodgements |
||
|
Jacob |
500 |
|
|
Commission |
300 |
|
|
(800) |
||
|
Bank error |
(100) |
|
|
Balance per cash book |
(345) |
Alternatively, it can be presented starting with the balance in the cash book.
Leo
Bank Reconciliation Statement at 31 March 2024
|
$ |
$ |
|
|
Balance per cash book |
(345) |
|
|
Unpresented cheques |
||
|
Pru |
200 |
|
|
Wages |
750 |
|
|
(950) |
||
|
Outstanding lodgements |
||
|
Jacob |
500 |
|
|
Commission |
300 |
|
|
800 |
||
|
Bank error |
100 |
|
|
Balance per bank statement |
(395) |
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