ACCOUNTING

REwiNd:

Bank Reconciliation
LESSON 1: Pre-knowledge segment
In Grade 10 the bank reconciliation was introduced for the first time. It involved basic journal entries in the cash receipts and cash payments journal, a bank account in the general ledger and a bank reconciliation statement that had to be completed after you compared the bank statement with the businesses books. The need for a bank reconciliation arises as different entries appear on the bank statement when compared to the businesses books. In Grade 11 we dealt with the bank reconciliation in more detail. We looked at various reasons behind the different entries in different books and we completed the bank reconciliation statement. In the business world, control of cash is facilitated by depositing cash sales and other receipts intact into the current bank account and ensuring that all payments are made by cheque. This makes it easy to verify the balance on the bank statement (an external document) with the bank account (internal record). In Grade 12 we deal with the interpretation of the bank reconciliation in a more theoretical manner.
NOTES:

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LESSON 1 ThEmE: BANk RECONCiLiATiON STATEmENTS Section 1: Procedure for Preparing Bank Reconciliation Statements Section 2: Bank Reconciliation Entry Types Section 3: Bank Reconciliation Entry Types (cont.) Section 4: Bank Reconciliation Entry Types (cont.) multiple-choice Questions Additional Activities: Additional Activities Answers

Section 1: introduction Procedure for Preparing Bank Reconciliation Statements

In this lesson, we will cover bank reconciliation statements. By the end of this lesson, you will be able to do the following: Prepare a bank reconciliation statement. Remember, this has already been covered in Grade 11. Analyse and interpret the bank reconciliation statement. This is of utmost importance for Grade 12. Explain the code of ethics as it applies mutually in an accountable and transparent way to all parties in the financial environment. Demonstrate knowledge of internal control processes.

Procedure for preparing bank reconciliation statements

The primary purpose of doing bank reconciliation is to determine exactly how much money we have in the bank. However, bank reconciliation also serves as a means of external control to ensure that our records of receipts and payments correspond to those of an external institution such as the bank. When preparing a bank reconciliation statement, you would have in front of you the following: The bank statement that you have received from the bank Your cash payments journal Your cash receipts journal The previous months bank reconciliation statement

Bank Statement
dR CR

Cash Payment Journal

Previous Bank Reconciliation Statement

Cash Receipts Journal

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Once you have this information in front of you, you will work according to the following procedure: Compare the bank column of the CRJ to the credit column of the Bank Statement Compare the bank column of the CPJ to the debit column of the Bank Statement Compare previous bank reconciliation statement to the current bank reconciliation statement. This is very important because there may be items that did not go through last month that go through this month Tick items that are common as these agree Unticked items on the B/S must be entered in the journals. Thereafter, total the journals Post to the bank account in the general ledger and balance Unticked items in the CPJ and CRJ, which have been processed in your records, but not in the records of the bank, and unticked items in the previous bank reconciliation statement, are entered in the current bank reconciliation statement
REmEmBER

Remember, the bank reconciliation statement is nothing more than an extension of your bank statement: it shows items that would have been entered had they

been processed. One more thing to remember: Why is there a discrepancy between your bank account as it appears in your ledger and the bank statement? Because of timing differences, and as a result of bank account adjustments entries that the bank has made that we are unaware of. That was a quick recap of what you have done in Grade 11. What we are now going to do, is take each transaction, and see how it is handled when doing the bank reconciliation statement.

Section 2: Bank Reconciliation Entry Types

In this section, we will look at the entries in the bank reconciliation, and refer throughout to the following table, which indicates where transactions are to be entered:

Transaction
Direct deposit into the bank account as reflected on the bank statement Stop / debit orders / electronic payments appearing on the bank statement Bank charges and interest on overdraft Cancellation of cheques (stale, stop payment, stolen or altered cheques) Interest on favourable bank balance Cheques issued, but not appearing on the bank statement

CRJ

CPJ

Bank dR

Recon CR

No entry

The first transaction is a direct deposit. An example is that of a tenant who lives in a remote area, who instead of sending money by post, which may not be secure, deposits the money directly into the bank account. As a result, it appears in the bank statement, but it is not in the CRJ where it must be entered. The second transaction is a stop or debit order, or electronic payment (EFT Electronic Funds Transfer). This appears in the bank statement, but not in the CPJ. It must therefore be entered it into the CPJ. This procedure ensures that the business records like the bank account are in agreement with the bank statement. The next step is to look at bank charges and the interest on overdraft. Notice that these have been separated, and this is for a very important reason. Interest on overdraft is not a bank charge. Any other charges levied by the bank would be accumulated under one umbrella account, namely the bank charges account. These would include service fees, cash deposit fees, duty on debit entries and credit card levies. However, both these

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charges, and interest on overdraft appear in the bank statement, but not in the CPJ. This is where they will have to be reflected. In the case of a cancelled, stolen or altered cheque, the cheque in question must be cancelled. When a check is written, it is reflected in the cash payments journal. In order to cancel the cheque it must be reflected in the records in the CRJ. Just as the business must pay the bank interest on an overdrawn account, the bank will pay if the businesses bank balance is positive. This payment is reflected in the CRJ. Cheques which have been issued but do not appear on the bank statement means that the business wrote out these cheques and sent them to whomever they were due to. They therefore appear in the CPJ, but do not appear in the bank statement. As a result they will appear as outstanding cheques. These must be entered in the debit column of the bank reconciliation statement.

REmEmBER

Section 3: Bank Reconciliation Entry Types (continued)

Transaction
Cheques outstanding on the previous bank recon, but appearing in the current bank statement Cheques outstanding on the previous bank recon, but still not appearing in the current bank statement Outstanding deposits Deposit outstanding previously, but appearing in the current bank statement Dishonoured cheques

CRJ

CPJ

Bank dR

Recon CR

No entry

Cheques which were outstanding on the previous bank reconciliation, but which now appear on the current bank reconciliation indicate that they appeared last month on the last bank reconciliation statement as outstanding, but are now reflected on this months bank statement. This means that the cheques were not presented for payment last month, and have only been presented for payment this month. Note: Very often learners get confused at this point, and put it back into the bank reconciliation for the current month. This is incorrect! There is, in fact, no entry this month. This is because it was outstanding last month, has now been presented for payment, and so it works itself out of the system. Now let us look at cheques outstanding on the previous bank reconciliation, but still not appearing in the current bank statement. This means that the cheque might have been given to someone who didnt need the money immediately, and has not yet presented the cheque for payment. Since the cheque is still outstanding, it is put it back in the bank reconciliation statement as an outstanding cheque. Next, we look at outstanding deposits. These occur when the CRJ indicates that the money has been deposited into the bank, but the bank statement shows no entry. This deposit is therefore not appearing. This is a classic example of a timing difference. For instance, the deposit was made on the 27th of the month. The bank issued the bank statement on the 23rd of the month. There is obviously no way that this deposit will appear on the bank statement. While the business has a record of the deposit, the bank does not yet have a record of this deposit. The business therefore has to make this bank reconciliation entry in the credit column. Our final focus is on dishonoured cheques. Any cheque that is dishonoured, for whatever the reason

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(insufficient funds, a missing signature on the cheque, the words and figures disagree, etc.), must be entered into the cash payments journal.

Section 4: Bank Reconciliation Entry Types (continued)

Transaction
Post-dated cheques issued Post-dated cheques received Error in the CPJ Amount in the CPJ is higher than the original cheque Amount in the CPJ is lower than the original cheque Error on the B/S Amount incorrectly debited Amount incorrectly credited

CRJ

CPJ

Bank dR

Recon CR

No entry

Post-dated cheques that you have issued are entered into the debit column of the Bank Reconciliation. In terms of internal control procedures, post-dated cheques received are entered into a post-dated cheque register. They are kept until the date that appears on that cheque, at which stage that cheque becomes negotiable.
REmEmBER

Remember, until that stage nothing can be done with that cheque. In terms of accounting entries, absolutely nothing can be done with it and no entry

is made. Next, we look at errors in the cash payments journal. There are two possible errors that can be made in this journal. Either the amount is overstated, or else it is understated. If the amount entered into the CPJ is higher than the cheque, a correction has to be made, and that is made in the CRJ. If the amount entered into the CPJ is lower than the amount of the original cheque, then to take account of that discrepancy we need to enter it into our CPJ. It is also possible that the bank has made errors on the bank statement. Again, an amount can either be incorrectly debited or credited to your account. In each case, the entry must be reversed. If an amount has been incorrectly debited, it is entered it into the credit column of the bank reconciliation statement. If the bank has incorrectly credited the business the business has to enter it into the debit column of the bank reconciliation statement. NOTES:

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Get Real!
Real-life application segment
Lets use the following example to illustrate the purpose of a bank reconciliation.

Art brief: Picture of a teen with an older man (uncle) going through banks statement of business books. Your uncles business receives a bank statement at the end of the month from the bank. Your uncle shows you how he then compares the transactions on the statement with the entries in the businesses books. For example, the stop and debit orders are automatically deducted from the bank account on the bank statement but nowhere are there records of these stop or debit orders for insurance premiums. It is therefore your uncles responsibility to record these transactions in his set of business books. Your uncle needs to makes sure that all entries are reflected in both places (i.e. bank statement and his books). Now that you have an understanding of how a bank reconciliation works in your uncles business you can now use it yourself. You get your banks statement and on it is reflected the payment of bank charges four your ATM withdrawls. You have kept a budget listing of all of your withdrawals and you have deducted them from your monthly income your are paid for working in your uncle on Saturdays. Our bank account has been debited but the charges only appear on the banks statement and not in your budget. So you need record this in your budget as an expense. You should now clearly see that it is very important to reconcile our records (or the books of the business) against the bank statement. You can also see that although bank reconciliation is an aspect of accounting it is a basic skill taught that you as an individual can use to double check your budget with that of the bank. Individuals or businesses cant not reconcile their financial records with that of the bank: one checks the other so that differences can be investigated.
FOR EXAmPLE The word reconciliation means to make two sets of amounts correspond with each other (i.e. to

make them equal to each other).

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