May 28, 2022

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How to Prepare a Bank Reconciliation Statement with ease for your Business

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How to Prepare a Bank Reconciliation Statement with ease for your Business

Earlier, we have gone through how to understand a bank statement. You were also told that most times bank statement may not have the same balance in the bank column of the cash book.

Today, you will be trill on how to solve this problem.

This challenges is solved using an updated or adjusted cash book and bank reconciliation statement. What, then, is an updated cash book and bank rrconciliation statement?

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 An updated cash book is used to solve the items that are in the bank statement and are not in the cash book.

A bank reconciliation statement as defined in most financial accounting textbook, is a statement that reconcile the differences between a bank statement and the bank column of the cash book. This statement records items that are in the bank column of the cash book but are not in the bank statement.

Read here: how to understand bank statement.

Items in the cash book that will not be found in the bank statement

(1) Unpresented cheques

 These are the cheques drawn on the bank and given to the payees but they have not been presented for payment to the bank at the time of receiving the bank statement. The bank column of the cash book of the business has been credited (that is, it has been treated as payment through the bank by the business) this transaction would appear on the credit side of the bank column of the cash book but missing from the debit side of the bank statement.

(2) Uncredited cheques

These are cheques deposited in the business bank account and have not been recorded in the bank statement until three or four days thereafter, whereas it would have been recorded on the debit side of the cash book.

(3) Cash book error

These are errors in the bank column of the cash book such as incorrect amount, etc that are in the cash book.

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You will noticed that the items (1) and (2) are figures that are not in the bank statements and items (3) are not in the bank statement but errors in the bank column of the cash book.
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Items in the bank statement but are not in the cash book

(1) Bank charges

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 These are charges made by the bank to cover the expenses in handling bank account. The major charges are based on the volume (i.e. turnover) of the transactions on the account. It is sometimes called commission on turnover (COT). Other charges are charges for cheque book, interest charges on bank overdraft facilities from the bank, administration expenses etc. These charges would have been recorded in the bank statement but will be missing on the credit side of the bank column of the cash book.

(2) Direct Debits

These are direct payments of expenses on behalf of the business. These have the same effect as the bank charges.

(3) Direct Credits:

These are amounts received on behalf of the business directly by the bank. The bank statement would have been credited but the entry will be missing from the debit side of the cash book.

(4) Error in the bank statement

These are errors made by the bank and are in the bank statement.

Steps Involved In the Recognising the differences

(a) Tick items on the debit side of the bank column of the cash book against items on the credit side of the bank statement. Outstanding items on the debit side of the cash book but missing on the credit side of the bank statement are uncredited cheques. List them.

(b) Tick items on the credit side of the bank column of the cash book against items on the debit side of the bank statement. Items outstanding on the credit side of the cash book but missing on the debit side of the bank statement are unpresented cheques. List them.

(c) The remaining items on the debit side of the bank statement are bank charges and standing order. List them.

(d) The remaining items on the credit side of the bank statement are amounts paid into the bank directly for the benefit of the business entity by its customers (i.e. direct credits).

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(e) After all these have been adjusted, it should be possible to reconcile the cash book balance with the balance on the bank statement. If it is not, then there are some errors which further investigation would reveal and be traced to their
sources.

Preparation of Updated Cash Book

The items listed in the debit side of bank statement such as standing order and bank charges are credited to the updated cash book and items in the credit side of the bank statement such as direct credits are debited in the updated cash book.

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Furthermore, errors in the cash book are debited or credited in the updated cash book. If the errors are to be corrected in the debit side of the bank column of the cash book such errors are recorded in the debit side of the updated cash book.

Then, determined the balance of the updated cash book.

Preparation of the Bank Reconciliation Statement

Here, you will have to start with the balance of the adjusted cash book.

Next, add the unpresented cheques determined in (b) above.

Substract uncredited cheques determined in the (a) above.

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If there is errors in the bank statement, record them in the bank reconciliation statement. If the errors falls on the debit side of the bank statement add, if it falls on the credit side substract.

Below is the format of the updated cash book and bank reconciliation statement

          Format of Updated Cash Book

                                                                 
                                                   Updated/Adjusted Cash Book
                                                             N                                                           N
Balance b/d                                        x        Standing order                        x

Direct debit                                       x          Dishonoured cheques           x

Direct Credit                                     x          Bank charges                          x

Understatement error                    x        Overstatement error               x                                

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                                                                Adjusted cash balance              x
                                                         xx                                                           xx

Read here: how to understand a bank statement.

     Format of Reconciliation Bank statement
N
Balance as per adjusted cash book            xx
Add: Unpresented cheques                                                       xx
Error of overstatement by bank                                        xx
Subtotal                                                                                      xx
Less: Uncredited cheques                                                         xx
Error of understatement                                                           xx
Balance as per bank statement                                               xx

The balance as per bank statement must be equal with the balance of the original bank statement

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