Chapter 9

Bank Reconciliation

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ICPA FA1/FA2/F3
FA1

I RECONCILIATION

2. Reconcile the cash book

a) Reconcile a bank statement with the cash book. [S]

FA2

D RECORDING TRANSACTIONS AND EVENTS

2. Cash and bank

b) Report cash and bank balances in the final accounts. [S]

F RECONCILIATIONS

2. Bank reconciliation

a) Explain the purpose of reconciliation between the bank ledger account and the
corresponding bank statement. [K]

b) Identify errors and omissions in the bank ledger account and bank statement.

c) Identify timing differences. [K]

d) Make the correcting entries in the bank ledger account. [S]

e) Prepare the reconciliation between the bank statement balance and the corrected
bank ledger account. [S]

f) Identify the bank balance to be reported in the final accounts. [K]

FFA/F3

4. Bank reconciliations

a) Understand the purpose of bank reconciliations. [K]

b) Identify the main reasons for differences between the cash book and the bank
statement. [K]

c) Correct cash book errors and/or omissions. [S]

d) Prepare bank reconciliation statements. [S]

e) Derive bank statement and cash book balances from given information. [S]

f) Identify the bank balance to be reported in the final accounts. [S]

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 1. Bank account and bank statement

Bank account is the ledger account of a business where all transactions into and
from bank is recorded by the business. On the other hand, bank statement is
account of bank where all transactions into and from business account is recorded
by the bank. So, same transaction is recorded by both parties. So the entries and
balance in bank account and bank statement should match. But due to error and
timing difference (bank clearing system) the balance of both does not match. So,
end of each day/week/month/year (depending of business need) business match bank
account with bank statement and identify the reason for difference and record it
in a separate statement called bank reconciliation statement.

Bank reconciliation is done in two steps. Cash book/bank account update &
reconciliation.

2. Cash book/bank account update:

Sometimes business know about a transaction after receiving the bank statement.
That time they have to record in the bank account. Items that need to record from
bank statement to cash book are

Dishonor cheque- If any customer cheque is dishonored, business is informed by it

through bank statement. So it need to record in bank account.

Bank charge/interest deducted- Bank deducts its charge or interest on overdraft

balance from business account & business know about it by bank statement.

Bank interest deposited- If bank deposit interest on bank account balance it is

also known by business through bank statement.

Standing order/direct debit- Automatic receipt and payment through standing order,
direct debit & credit transfer is also informed by business through bank
statement.

Errors in cash book- Sometimes there may be errors in cash book for recording
receipt and payments, this can be identified when they matched with bank
statement.

So after receiving bank statement, business first needs to update bank account by
items in the bank statement which is not in cash book. An important point should
be remembered, bank account and cash book entries are always opposite. These are
illustrated below:

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Item Recorded by Recorded by

Bank Business

Money deposited into bank Cr Dr

Money withdrawn from bank Dr Cr

Bank charge/interest deducted Dr Cr

Dishonor Cheque Dr Cr

Balance in bank account Cr Dr

Overdraft in bank account Dr Cr

3. Bank reconciliation

After updating cash book, its balance may not match with bank account due to three
reason- Bank error, unpresented cheque, and outstanding deposit.

Bank error- Sometimes error may be made by bank. That time it has to inform bank
and recorded in the bank reconciliation statement.

Unpresented Cheque- When business pay cheque to its supplier it record the cheque
immediately in the cash book but due to clearing system it takes at least 3 days
to debit from the bank. It is also called “outstanding cheque”.

Outstanding lodgement- When business receive cheque it record the cheque

immediately in the cash book but due to clearing system it takes at least 3 days
to credit into the bank. It is also called “deposit not credited”, “unpresented
deposit” etc.

Unpresented cheque and outstanding lodgement are not error, they are timing
difference. So they are recorded in the bank reconciliation statement to adjust
the difference between bank account and bank statement. The format of bank
reconciliation statement is given below:

Bank statement balance A/(A)

Add/(less): Bank error B/(B)

Corrected bank statement balance C/(C)

Add: Outstanding lodgement D

Less: Unpresented cheque (E)

Updated bank account balance F/(F)

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This can also start with bank account balance that time the format reverse.

Updated bank account balance F/(F)

Add: Unpresented cheque G

Less: Outstanding lodgement (H)

Corrected bank statement balance C/(C)

Add/(less): Bank error B/(B)

Original bank statement balance A/(A)

Now we will look at bank account

Bank Account

Details Amount Details Amount

Balance B/D I Balance B/D I
Direct Credit J Direct Debit M
Standing order receipt K Standing order payment N
Bank interest L Dishonor cheque O
Bank interest P
Bank charge Q
Cash book error R Cash book error R
Balance C/D F Balance C/D F

Illustration 1

A business has balance in the bank account $1,500 debit. That does not match with
bank statement balance $1,470 credit. From bank statement it found following
information:

Bank deducted charge of $50 & interest $60. A customer cheque of $100 was
dishonored. A customer deposited $150 directly into bank. Bank also deposited $40
interest in his account. Standing order payment of $80 has been made from the bank
account. Two cheques of $270 & $290 are deposited to bank account but not appear
in the bank statement, also cheque valued $500 paid by business but not debited by
bank. Bank incorrectly deposited $400 into business bank account. A cheque of $360
paid by business correctly debited & recorded by bank as $630.

Update cash book and prepare bank reconciliation statement?

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Step 1- Updating cash book

Bank Account

Details Amount Details Amount

Balance B/D 1,500 Standing order payment 80
Direct Credit 150 Dishonor cheque 100
Bank interest 40 Bank interest 60
Bank charge 50
Cash book error 270
Balance C/D 1,130
1,690 1,690
Step 2- Bank reconciliation statement

Updated bank account balance 1,130

Add: Unpresented cheque 500

Less: Outstanding lodgement ($270+$290) (560)

Corrected bank statement balance 1,070

Add: Bank error 400

Original bank statement balance 1,470

Opposite way:

Bank statement balance 1,470

Less: Bank error (400)

Corrected bank statement balance 1,070

Add: Outstanding lodgement ($270+$290) 560

Less: Unpresented cheque (500)

Updated bank account balance 1,130

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 4. Question pattern

In bank reconciliation 4 types of question may come up.

1. Original cash book balance will be given and will ask to find out correct
bank statement balance.
2. Original cash book balance will be given and will ask to find out correct
cash book balance.
3. Original bank statement balance will be given and will ask to find out
correct cash book balance.
4. Original bank statement balance will be given and will ask to find out
original cash book balance.

Bank account balance need to report in the Statement of Financial Position. It is

the corrected cash book balance which goes to SOFP not bank statement balance.

Your Task 1

At 31 December 2016, the balance in the cash book of ITR Co was $505.50 credit.
Following item found on investigation.

1. Bank charged interest of $60.

2. Outstanding lodgement was $400
3. Unpresented cheque was $600.
4. A customer deposit of $400 omitted from the cash book.
a) What is the correct cash book balance?
b) What is the bank statement balance?

Your Task 2

At 31 December 2016, the balance in the cash book of ITR Co was $780.50 credit.
Following item found on investigation.

1. Bank deposited interest of $60.

2. Outstanding lodgement was $300.
3. Unpresented cheque was $900.
4. A customer cheque of $600 dishonored.
5. Direct debit payment made by bank of $300.
a) What is the correct cash book balance?
b) What is the bank statement balance?
c) What amount will be reported in SOFP?

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Your Task 3

At 31 December 2016, the balance in the bank statement of ITR Co was $1,520.50
debit. Following item found on investigation.

1. Direct credit was $250.

2. Outstanding lodgement was $1,300.
3. Unpresented cheque was $800.
4. A customer cheque of $50 dishonored.
5. Standing order payment made by bank of $300.
6. Bank incorrectly debited $60 from account.
a) What is the correct cash book balance?
b) What is the original cash book balance?
c) What is the correct bank statement balance?
d) What amount will be reported in SOFP?

Your Task 4

At 31 December 2016, the balance in the bank statement of ITR Co was $1,950.50
credit. Following item found on investigation.

1. Direct credit was $250.

2. Outstanding lodgement was $1,300.
3. Unpresented cheque was $800.
4. A customer cheque of $50 dishonored.
5. Standing order payment made by bank of $300.
6. Bank incorrectly credited $160 into account.
7. A deposit of $80 recorded in the cash book as $800.
a) What is the correct cash book balance?
b) What is the original cash book balance?
c) What is the correct bank statement balance?
d) What amount will be reported in SOFP?

Exam Style Question 1

The following bank reconciliation statement has been prepared by a trainee
accountant:
$
Overdraft per bank statement 3,860
Less: Unpresented cheques (9,160)
5,300
Add: Outstanding lodgements 16,690
Cash at bank 21,990
What should be the correct balance per the cash book?
A $21,990 balance at bank as stated
B $3,670 balance at bank
C $11,390 balance at bank

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D $3,670 overdrawn

Exam Style Question 2

Sally’s balance in her cash book is $160 debit. However, her bank statement shows
a different amount. On investigation, Sally discovered the following:
1. A cheque that Sally paid into the bank for $40 is still outstanding
2. A cheque for $60 paid by Sally to Molly has not yet been presented
3. Sally has forgotten to record a cash withdrawal of $30
4. When Sally inspects her bank statement she sees that the bank has deducted
charges of $15 from her account
What is the balance on Sally’s bank statement?
A $95
B $135
C $185
D $225
Exam Style Question 3

At 1 October 20X1, Bakari’s bank overdraft was $3,270. During the year to 30
September 20X2, he issued cheques with a total value of $189,642. His total
lodgements during the year were $191,729. In addition, bank charges of $827 were
incurred.
What is Bakari’s bank balance brought forward at 1 October 20X2 as per his
accounting records?
A $2,010 credit
B $4,530 debit
C $356 credit
D $6,184 debit
Exam Style Question 4

Margaret compared her bank statement with the bank account in her general ledger
and found they did not agree. She found two possible reasons for this.
(1) Some cheques have not been lodged by her suppliers
(2) The bank debited fees on her account
Which of the reasons require an entry in the bank account in the general ledger?
A 1 only
B 2 only
C Both 1 and 2
D Neither 1 nor 2
Exam Style Question 5

Samantha has prepared the following bank reconciliation statement at 31 March:

$
Balance on bank statement 1,250 (overdrawn)
Outstanding cheques 748
Outstanding lodgement 2,200
Balance on ledger account 202 (debit)
How should the bank balance be reported in Samantha’s statement of financial
position as at 31 March?

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A $1,250 as a current asset
B $1,250 as a current liability
C $202 as a current asset
D $202 as a current liability

Exam Style Question 6

Sarah’s bank ledger control account at 30 April shows a balance at the bank of
$2,280. Comparison with the bank statement at the same date reveals the following
differences:
$
Unpresented cheques 780
Bank charges not in cash book 40
Receipts not yet credited by the bank 450
Dishonoured cheque not in cash book 120
What is the correct bank ledger control account balance at 30 April?

A $1,340
B $2,120
C $2,360
D $1,950

Exam Style Question 7

Annabel’s cash book shows her to be $2,030 overdrawn. A bank reconciliation,
however, shows that a standing order
payment for $365 had been entered in the cash book twice, and that a dishonoured
customer’s cheque for $275
had been debited in the cash book rather than credited.
What is Annabel’s true overdraft position?
A $1,845
B $1,940
C $2,120
D $2,215

Exam Style Question 8

Jenny has a bank balance of $550 at the start of the week. During the week the
following transactions occur:
Day 1 She sells goods on credit for $876
Day 2 She receives a cheque for $400 from a credit customer
Day 3 She purchases office equipment with a list price of $1,000 but receives a
10% discount for paying immediately by cheque
How much does Jenny have in the bank at the end of the week?
A $2,826
B $400
C $50
D $126

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