How To Prepare Bank Reconciliation Statement

INTRODUCTION

An organization will record money paid into the bank and the sums drawn from the bank with cheques in the cash book. Then again, the bank will record all the transactions in its own book. The book prepared by the bank showing the transactions between it and the customer is called "Bank Statement".


As a matter of necessity the balances of the bank statement and the cash book must be equal.

But at a given date, the balance of the cash book is not likely to agree with the balance on the bank statement due to certain reasons which will be explained later. 

When there is a difference between the two balances, then there is a need for reconciliation.

Bank reconciliation statement can be defined as a statement  that is prepared to make the balance of the cash book agree with that of the bank statement. 

The reconciliation is necessary so as to test the accuracy of the postings in the cash book by reconciling the balance of the cash book with that of the bank statement.

REASONS FOR DISCREPANCIES/DISAGREEMENT BETWEEN THE CASH BOOK AND THE BANK STATEMENT
The timing and information differences which can cause disagreement between them are:

1. Uncredited cheque
2. Unpresented cheque
3. Dishonoured cheque
4. Bank charges
5. Dividend
6. Standing order
7. Credit transfer
8. Direct debit
9. Errors by the bank

(1) Uncredited Cheques:
These are cheques received from customers has been debited from the cash book but have not been recorded in the bank statement due to lateness or the bank statement had been prepared before the cheques were paid in.

(2) Unpresented cheques:
These are cheques drawn or issued out to the customers or any business partners and have been credited to the cash book but have not been presented to the bank or drawn from the bank as at the time of the preparation pf the bank statement. The cheques can be delayed for months if the recipients fail to pay them in. 




The company has had credited the cash book with the cheques issued out, thereby reducing the balance of the cash book but it had not been debited to the bank statement. 

Therefore, the balance of the bank remains the same.

(3) Dishonoured Cheques: 
These are cheques received from customers and paid in by the firm, but were rejected by the bank as a result of some reasons. Reasons for dishonouring a cheque include:

• If the amount in words and in figure are not the same.
• Irregular or wrong signature.
• If there is insufficient fund or money in the bank account.
• If it is a stale cheque.
• If the account holder instructs the bank to dishonour any cheque in relation to his account.
• If there is alteration in the cheque and it is not properly signed.

(4) Bank charges: 
This is the amount deducted by the bank for services rendered. The bank will deduct the charges without informing the company until they receive the bank statement. It is a form of C.O.T.

(5) Dividend:
This is part of the profits for shares held by customers paid directly into his bank account.

(6) Standing order:
This is an instruction or order made by the customer to the bank to make regular payment to somebody. e.g hire purchase installments. It can be weekly, quarterly or yearly.

(7) Credit transfer:
These are payments made by customers of the firm, directly into their account in the bank without the awareness of the firm.

(8) Direct debit:
It is an arrangement whereby a person`s account is debited with a sum of money at the instance of a supplier with the account owner`s prior permission.

(9) Errors by the bank:
No one is above mistakes. Banks can also make mistakes. An amount paid in by a customer may be credited to another customer`s account.

Causes of differences	Effects on Cash book	Effect on bank statement Cashbook balance	Correction starting With balances	Correction starting With bank statement
Uncredited cheques	Greater balance	Lower balance	Deduct	Add
Unpresented cheques	Lower balance	Greater balance	Add	Deduct
Bank charges	Greater balance	Lower balance	Deduct	Add
Standing order	Greater balance	Lower balance	Deduct	Add
Credit transfer	Lower balance	Greater balance	Add	Deduct
Dividend	Lower balance	Greater balance	Add	Deduct
Dishonoured cheques	Greater balance	Lower balance	Deduct	Add
Direct debit suppliers	Greater balance	Lower balance	Deduct	Add
Undercasting Of Debit side Of cashbook	Lower balance	Greater balance	Add	Deduct
Overcasting of Debit side of Cash book	Greater balance	Lower balance	Deduct	Add

PREPARATION OF THE BANK RECONCILIATION STATEMENT
 Bank reconciliation statement can be dealt with from two perspectives, namely:
 (1) Preparation of only the bank reconciliation statement.
 (2) (i) Adjustment of the cash book.
      (ii) Preparation of the bank reconciliation statement using the balance of the adjusted cash book.

Read Also: How To Prepare Income Statement Using Principles of Marginal and Absorption costing

METHOD 1:

 PREPARATION OF ONLY BANK RECONCILIATION STATEMENT

Using this method, only bank reconciliation statement will be prepared. We can start with either the cash book balance or bank statement balance. There will be no adjustment of the cash book. 

If the cash book balance is to be used, then unpresented cheques, credit transfers,dividends will be added while bank charges, standing order, bank commission etc will be deducted to give us the balance as per bank statement. 

The proforma bank reconciliation statement will be shown below:

Proforma or Format of the bank reconciliation statement when starting with the balance of cash book:

Bank Reconciliation statement as at 31st December 20--

	$	$
Balance as per cash book Add:      Unpresented cheque               Credit transfers               Dividend Undercasting of receipt side of cash book Less:      Uncredited cheque                Bank charges                Bank commission                Standing order                Dishonoured cheque Overcasting of receipt side of cash book Balance as per bank statement	xx xx xx xx xx xx xx xx xx xx	xx xx xx (xx)  xx

Note: The balance arrived at must be equal to the balance of the bank statement.
Conversely, if we want to start with the balance as per bank statement, then items like uncredited cheques, bank charges, dishonoured cheques will be added while unpresented cheques, credit transfers, dividend are deducted. When the bank statement balance is used, the proforma bank reconciliation will look like this.
Format of the bank reconciliation when the bank statement balance is used:

Bank reconciliation statement as at 31st December 20--

	$	$
Balance as per bank statement Add:      Uncredited cheque               Bank charges               Bank commission               Standing order               Dishonoured cheques               Direct debit Overcasting of receipt side of cash book Less:      Unpresented cheque                Credit transfers                Dividends Undercasting of receipt side of cash book Balance as per cash book	xx xx xx xx xx xx xx xx xx xx xx	xx xx xx (xx)  xx

Overdraft: It is a situation whereby the cash book balance might have been overdrawn. The cash book will show a credit balance. The adjustment needed to reconcile the disagreement is a complete opposite of when the cash book showed a debit balance.

Bank reconciliation statement as at -------

	$	$
Overdraft as per cash book Add:      Uncredited cheque               Bank charges               Bank commission               Standing order               Dishonoured cheques               Direct debit Less:      Unpresented cheque                Credit transfers                Dividends Balance as per bank statement	xx xx xx xx xx xx xx xx xx	xx xx xx (xx)  xx

 
 If the overdraft as per bank statement is used, then the reverse will be the case. Two things can be noted:

1. When we start with overdraft as per cash book, it will look exactly like when starting with balance as per bank statement.
2. When we start with overdraft as per bank statement, it will look exactly like when starting with balance as per cash book.

Bank reconciliation statement as at -------

	$	$
Overdraft as per bank statement Add:      Unpresented cheque               Credit transfers               Dividend Less:      Uncredited cheque                Bank charges                Bank commission                Standing order                Dishonoured cheque Balance as per cash book	xx xx xx xx xx xx xx	xx  xx xx  (xx)  xx

METHOD 2:
Using this method, an adjusted cash book will be prepared and the adjusted balance will be used to prepare the bank reconciliation statement. 

Any item that appears in the adjusted cash book will not be recorded in the bank reconciliation statement. The format will look like this:





PROFORMA OR FORMAT

Dr.                      Adjusted cash book                                        Cr.

	$		$
Jan     Balance b/f Jan     Credit transfers Jan     Dividends Jan     Receipt undercast Jan     Payment overcast	xx xx xx xx xx ­__ xx	Jan    Bank commission Jan    Bank charges Jan    Standing orders Jan    Dishonoured cheques Jan    Payment undercast Jan    Receipt overcast           Balance c/d	xx xx xx xx xx xx xx xx

Note: If the payment side is greater than the receipt side, then the balance is overdraft which will be treated as explained above.

 Bank reconciliation statement as at -------

	$
Balance as per adjusted cash book Add unpresented cheques Less uncredited cheques Balance as per bank statement	xx  xx  xx (xx) ­ xx  xx

Treatment required when the cash book and the bank statement are given:

1. The credit side of the cash book must be compared with the entries on the debit side of the bank statement.
2. Items present on the credit side of the cash book but not posted to the debit of bank statement are unpresented cheques.
3. The debit side of the cash book must be compared with the entries on the credit side of the bank statement.
4. Uncredited cheques will not be credited to the bank statement.
5. Entries on the credit side of the bank statement not on the debit side of the cash book may be; dividend, credit transfers, etc.
6. Entries on the debit side on the bank statement not on the credit side of the cash book may be regarded as bank charges,standing order, commission etc.