Running Head: BANK RECONCILIATION 1

Bank Reconciliation

© 2019 Ochieng’ Steve Biko

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Bank Reconciliation

Introduction

Most companies or businesses have bank accounts through which they receive cash and

cheques deposited by customers/clients for goods and services these businesses offer to these

customers. Accordingly, the bank which a business has an account with must record of all

transactions between customers and any given business. Commercial banks usually send bank

statements to their customers (businesses and individuals). The bank statement is a document that

contains all financial transactions which took place between a bank and business during a given

period (usually one month). Similarly, a company or business must record all transactions affecting

the cash balance. Companies record these transactions in a special book known as the cashbook.

What causes the difference?

In most cases, bank statement and cashbook balances do not agree at any given time due

to some reasons. The main contributors to the difference in the two cash balances include time

lapses (caused by outstanding cheques), bank’s hidden charges and recording errors. Time

lapses make it impossible for both the bank and businesses to record transactions at the same time.

For example, a company may pay suppliers using a cheque today, yet the bank may take several

days to make the payment to the supplier (Weygandt, Kimmel, & Kieso, 2010). So, the supplier

must wait for the cheque to ‘mature.’ Recording errors include errors of both omission and

commission. For instance, if an accounting staff in a bank correctly records a cheque received

from the customer as Ksh. 1,250.00 yet, a corresponding accounting staff in a company records it

as 125.00 or 1520.00, an error of omission or commission occurs respectively which can cause

differences in the cash balances.

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Bank Reconciliation Procedure

Bank reconciliation is a simple process which involves adjusting the bank statement’s

balance and the cashbook balance to make them read the same balance.

Example

Assume XYZ bank statement reads that the cash balance of company ABC is Ksh. 16,000, yet the

cash balance as per ABC’s books of accounts is Ksh. 12,000 as of January 31, 2018. Given the

following information, prepare a bank reconciliation statement for ABC Company.

Deposits in Transit: Ksh.2,000 (received by the bank on February 1, 2018)

Outstanding Cheques: Ksh. 6,000 (Ksh. 4,000 paid by the bank)

Bank debited a ‘bounced’ cheque of Ksh. 510 from Mr. Reilly who is a customer of ABC company.

Bank’s printing charges Ksh. 40

ABC’s cash balance earned an interest of Ksh. 50.

The bank collected a notes receivable of Ksh 1,020 from a customer of ABC company and the cost

of collecting the amount was Ksh. 20.

One of the bank accounting staff correctly recorded by the bank as Ksh.1,250 yet the one of

company’s accounting staff mistakenly recorded it as Ksh.1,750

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ABC COMPANY
Bank Reconciliation
January 31, 2018

Cash balance per bank statement Ksh.16,000

Add: Deposits in transit Ksh.2,000
Ksh.18,000
Less: Cheques Outstanding Ksh.6,000
Adjusted cash balance as per bank Ksh.12,000

Cash balance per books Ksh.12,000

Add: Collected note receivable Ksh.1,020
Add: Interest earned on deposit Ksh.50
Less: Bank’s collection fee Ksh.20
Less: + error in recording cheque Ksh.500
Less: ‘Bounced’ cheque Ksh.510
Less: Cheque Printing service charge Ksh.40
Adjusted cash balance per books Ksh. 12,000
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References

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2010). Financial Accounting, 6e ISV Update. John

Wiley & Sons.