Understanding Bank Reconciliation Statements

Bank Reconciliation Statement

• A bank reconciliation statement reconciles the business's cash records with the bank's records.
• Businesses keep records of all cash transactions, and banks also keep records of customer cash transactions.
• The bank sends monthly statements to customers showing all transactions.
• The bank statement allows the business to check its cash journal entries against the bank's records.
• Differences are expected between the business's records and the bank statement.
• The lesson provides a thorough example to help in understanding bank reconciliation statements.

Banks and Business Relationship

• Banks consider businesses as creditors because they hold the business's money.
• Businesses view banks as debtors because the bank holds their money.
• Businesses debit their bank accounts when they receive and deposit cash, increasing their asset.
• Banks credit the same deposits, viewing the business as a creditor.
• Bank debits are unfavorable in the bank statement, indicating money going out.
• Bank credits are favorable in the bank statement, indicating money coming in.
• The business books mark debits as favorable and credits as unfavorable

Reasons for Discrepancies

• Cash deposited by a business, especially at month-end, may not appear on the bank statement.
• Errors may be made by either the bank or the business.
• Checks deposited by the business may be dishonored by the bank due to insufficient funds.
• Bank charges are levied by the bank and only appear on the bank statement.
• Interest may be charged on an overdrawn balance or earned on a favorable balance.
• Stop order or direct debit payments may be made by the bank.
• Deposits may be made directly into the bank account without the business's immediate knowledge.

Reconciliation Procedures

• The business's cash journals must be updated after receiving the bank statement.
• Transactions that the bank needs to attend to are recorded in the bank reconciliation statement.
• Items still outstanding from the previous month's bank reconciliation statement must be recorded again.
• Exceptions include outstanding checks from last month that are stale or have been canceled.
• Deposits made by the business but not yet credited on the bank statement must be entered in the bank reconciliation statement.
• Checks issued by the business but not appearing on the bank statement should be recorded in the bank reconciliation statement.
• Checks that must be canceled, including stale checks, require a cancellation entry in the cash receipts journal.
• The entry should be identical to the original entry in the cash payments journal.
• Direct deposits made into the business's account must be recorded in the cash receipts journal.
• Interest on overdraft appears on the bank statement and must be recorded in the cash payment journal separately from bank charges.
• Bank charges levied by the bank should be added up and recorded as one entry in the cash payments journal.
• Stop orders and direct debits must be recorded in the cash payments journal.
• Dishonored checks must be recorded in the cash payment journal.
• Errors made by the business in the cash journals must be corrected in the cash journals.

Error Correction Logic

• If the amount recorded in the cash payments journal is more than it should be, a corrective entry for the difference is made in the cash receipts journal.
• If the amount recorded in the cash payments journal is less than it should be, a corrective entry for the difference is made in the cash payments journal.
• Errors made by the bank are recorded in the bank reconciliation statement.

Example - Ritesh Furnishers Reconciliation

• Reconcile and complete the cash receipts journal
• Reconcile and complete the cash payments journal
• Reconcile and post to the bank account ledger and balance it
• Reconcile and prepare the bank reconciliation statement as at October 1st, 2019
• The bank column of each of the journals showed the following totals before the October 2019 bank statement was received: Cash receipts total 87,600 and cash payments total 87,890
• The comparison of the cash journals for with the bank statement revealed the following differences.
• Balances must first be brought forward from the cash journal into their associated categories
• Entries on the bank statement but not in the cash journals must be updated for
• Entries posted in the cash journals but not in the bank statements must be reconciled

Reconciliation Example Breakdown

• Take a check from Lessee, then record it into the check was initially recorded in cash receipts and the cash payment
• When a debit is made from Telecom, the telephone expenses go into the cash payments journal
• Charges levied by Equity Bank (service fees, cash deposit fees, credit card commission, and interest on overdraft) goes into the cash payments.
• Remember to seperate the overdraft interest.
• Deposit made by Equity Bank to the interest of fixed deposit account goes into the cash receipts journal
• The bank statement showed a debit balance of 9290 on October 31, 2019
• Deposits by Equity Bank into into the account of Ritesh Furnishes goes into the cash receipts journal
• Entries in the cash journals but not appearing in the bank statement example
• Entries that appeared in the bank reconciliation statement for September 2019 are accounted for in the October statement
• A check that was previously issued to the West Port Chess Club but did not clear the bank so must be recorded in the cash receipts journal
• The Bank account in the general ledger of Reflects a debit balance, so show show up in the closing totals

Bank Reconciliation T-Account

• Includes a total for recipts, and a total for payments
• Can be totalled only once the cash payment journal and cash reciepts journal have been calculated
• When the debit and credit side are compared, you carry down the balance on the higher side
• When the accounts are correctly calculated the debits will equal the credits

Explore bank reconciliation statements, which reconcile a business's cash records with the bank's records. Examine the relationship between banks and businesses, understanding how each views the other in terms of creditor and debtor roles. Learn to reconcile differences between records.