Bank Reconciliation Statements PPT and Exercise

Bank Reconciliation Statements

1. Bank Reconciliation Statements A Level R Gour

2. Learning Objectives What are the Bank Reconciliation Statements? Time Difference Updating the Cash Book Bank Reconciliation Statement example Preparing a Bank Reconciliation Statements Alternative Layout of Bank Reconciliation Statements Dealing with Unusual items on Bank Statements Importance of Bank Reconciliation Statements

3. What are the Bank Reconciliation Statements? A Bank Reconciliation Statement (BRS) is a financial document used in accounting to compare and reconcile the balance shown in a company's cash book (internal records) with the balance shown on its bank statement (external records provided by the bank). Purpose of a Bank Reconciliation Statement: To identify and explain differences between the bank balance in the books and the balance on the bank statement. To ensure the company's accounting records are accurate and up to date . To detect errors , omissions , or fraud .

4. What are the Bank Reconciliation Statements? Bank Reconciliation Statement; Bank Reconciliation Statement (BRS) is a document that helps you compare and reconcile the difference between the bank balance shown in the company’s cash book (or ledger) and the balance shown in the bank statement. Why is it needed? Because the bank statement and the company’s cash book often don’t match due to timing differences, errors, or transactions recorded in one place but not the other

5. What are the Bank Reconciliation Statements? There are reasons why cash book and bank statements may differ; Time differences caused by unpresented cheques,(Time delay between writing the cheque and recording it in the cash book). Cheque being banked by the payee and then recorded on the bank statement. Amounts not yet credited (Amounts paid in the bank but not yet recorded on the bank statement). Cash book has not been updated with items that appear on the bank statement and which should also appear in the cash book such as Bank Charges.

6. Amounts not yet credited One common reason for differences between the cash book and bank statement is "Amount not yet credited" by the bank. What does it mean? It refers to the deposits (like cheques or cash) the company has made and recorded in its cash book but have not yet appeared or been recorded by the bank in the bank statement. For example, if you deposited a cheque on the last day of the month, the bank might not have processed it until the next month, so it won’t show up on the current bank statement.

7. Amounts not yet credited How is this treated in the Bank Reconciliation Statement? The amount not yet credited is added back to the bank statement balance because the bank statement is understated (does not include these deposits yet).The company's cash book balance already includes these amounts, so the difference arises.

8. Example Cash book balance (per company) = £10,000 Bank statement balance = £8,000 Amount not yet credited (deposits made but not reflected in bank statement) = £2,500 Bank Reconciliation Statement: Particulars Amount (£)Bank statement balance £8,000 Add: Amount not yet credited £2,500 Adjusted bank statement balance £10,500. If the cash book balance is £10,000 and the adjusted bank statement balance is £10,500, then the difference (£500) might be due to other reasons like unpresented cheques or bank charges that should be investigated.

9. Common Reasons for Differences Outstanding (Unpresented) Cheques : Cheques issued by the business but not yet cleared by the bank. Deposits in Transit (Uncredited Deposits) : Amounts received and recorded in the cash book but not yet credited by the bank. Bank Charges : Fees deducted by the bank but not yet recorded in the cash book. Direct Debits or Standing Orders : Payments made by the bank on behalf of the business but not recorded in the business books. Bank Interest or Direct Credits : Money added by the bank (e.g., interest or customer deposits) not yet recorded in the cash book. Errors : Mistakes in either the company’s books or the bank’s records.

10. Updating the Cash Book There are other differences such as the Bank columns of the cash book and the bank statement. These do need to be entered on the cash book to bring it up to date. For example Automatic Standing order should be entered in the cash book. When preparing a Bank Reconciliation Statement (BRS) , certain items appear in the bank statement but are missing from the cash book . These must be entered (updated) in the cash book first.

11. Examples Items that Appear in the Bank Statement but Not Yet in the Cash Book Bank Charges / Commission Deducted by the bank (e.g., service charges, ATM fees). Must be recorded as an expense in the cash book. Interest on Overdraft Bank may charge interest automatically. Needs to be entered in the cash book. Interest Credited by Bank Interest income on savings/current account. Must be added in the cash book. Direct Deposits by Customers Customers may pay directly into the company’s bank account. Cash book must record this receipt.

12. Examples Standing Orders (automatic fixed payments) Regular payments such as rent, insurance, subscriptions. Deducted by the bank automatically. Direct Debits (variable automatic payments) Payments like utility bills deducted by bank. Need to be recorded as an expense. Dishonoured Cheques (Bounced Cheques) If a cheque deposited is not cleared, the bank reverses the credit. Must be reduced in the cash book. Bank Fees for Returned Cheques Extra charge by the bank when cheques bounce.

13. How to reconcile Cash Book & Bank Statement Step 1: Compare Cash Book and Bank Statement The Cash Book is maintained by the business. The Bank Statement is maintained by the bank. 👉 When you receive the bank statement, compare both to see differences.

14. How to reconcile Cash Book & Bank Statement Step 2: Update the Cash Book Before preparing the Bank Reconciliation Statement (BRS), first update the cash book for items found in the bank statement but missing in the cash book: Bank charges / commission Interest charged/credited Direct deposits by customers Standing orders and direct debits (rent, insurance, utility bills) Dishonoured cheques Now, the updated cash book balance is ready.

15. How to reconcile Cash Book & Bank Statement Step 3: Identify Timing Differences Even after updating the cash book, the balance may still differ from the bank statement because of timing issues: Unpresented cheques – cheques issued but not yet cleared by the bank. Uncredited cheques (deposits in transit) – cheques deposited but not yet credited by the bank. Bank errors – rare but possible (e.g., wrong posting).

16. How to reconcile Cash Book & Bank Statement Step 4: Prepare the Bank Reconciliation Statement (BRS) Start with either the Updated Cash Book Balance or the Bank Statement Balance . Add or subtract timing differences to reconcile the two.

17. Example Cash Book balance (after updating): £10,000 Bank Statement balance: £12,000 Differences: Cheques issued but not presented: £3,000 Cheques deposited but not yet cleared: £1,000 Bank Reconciliation Statement (BRS): Balance as per Cash Book £10,000 Add: Cheques deposited not yet cleared £1,000 Less: Cheques issued not yet presented (£3,000)--------------------------------------------------Balance as per Bank Statement £12,000 Now both balances agree. 👉 In summary: Update the cash book for items in the bank statement not yet recorded. Identify timing differences (unpresented/uncredited cheques).Prepare the BRS to reconcile the balances.

18. Alternative layout of Bank Reconciliation Statements Yes — apart from the standard layout, there are alternative formats for preparing a Bank Reconciliation Statement (BRS). The choice depends on whether you start with the Cash Book balance or the Bank Statement balance . Familiar layout starts with the cashbook balance and finishes with the Bank Statement balance. However there could also be alternative layout where reconciliation should commence with the Bank Statement and finish with the cash book balance. With the alternative layout it is essential to Deduct unrepresented cheques Add amounts not yet credited.

19. Layout 1: Starting with Balance as per Cash Book Layout 1: Starting with Balance as per Cash Book Balance as per Cash Book (Bank Column) XXX Add: - Cheques issued but not yet presented XXX - Amounts deposited but not yet credited XXX Less: - Bank charges not entered in Cash Book XXX - Standing orders / direct debits XXX - Dishonored cheques XXX ------------------------------------------------ Balance as per Bank Statement XXX

20. Balance as per Bank Statement XXX Add - Direct deposits not in Cash Book XXX - Interest credited by bank XXX Less - Cheques issued but not yet presented XXX - Uncredited cheques XXX - Bank charges / standing orders XXX ----------------------------------------------------------------- Balance as per Cash Book XXX Layout 2: Starting with Balance as per Bank Statement

21. Dealing with Unusual items on Bank Statements When preparing a Bank Reconciliation Statement (BRS) and updating the cash book, you sometimes come across unusual items on the bank statement. Here’s how each is dealt with: Out-of-date (Stale) Cheques A cheque is usually valid for 6 months from the date of issue. If not presented within that period, it becomes stale and is no longer valid. Treatment: Cancel the cheque in the cash book (add back the amount to bank balance).Issue a fresh cheque if payment is still required.

22. Dealing with Unusual items on Bank Statements Dishonoured Cheques (Bounced Cheques) A cheque deposited but not cleared by the bank (due to insufficient funds, signature mismatch, etc.). Treatment: Deduct the amount from the cash book (reduce bank balance). Charge any bank fee for dishonour if applicable. Inform the customer and request alternative payment.

23. Dealing with Unusual items on Bank Statements Bank Errors Sometimes banks make mistakes, such as posting another customer’s transaction to your account. Treatment: Do not adjust your cash book. Report the error to the bank for correction. Show it in the BRS as a reconciling item until corrected.

24. Dealing with Unusual items on Bank Statements Bank Charges Charges levied by the bank (e.g., ATM fees, service fees, cheque processing charges). Treatment: Record as an expense in the cash book (reduce balance). Debit: Bank Charges A/C, Credit: Bank (Cash Book).

25. Dealing with Unusual items on Bank Statements Interest (on Overdraft or Deposits) Interest charged by the bank (on overdraft) → reduce cash book balance. Interest credited by the bank (on savings/current account) → increase cash book balance. Treatment: Adjust the cash book accordingly: If interest income → add to bank side. If interest expense → deduct from bank side.

26. Dealing with Unusual items on Bank Statements Summary: Out-of-date cheque → cancel and add back. Dishonoured cheque → reduce bank balance, maybe add bank fee. Bank errors → don’t change cash book, wait for bank to fix. Bank charges → expense, reduce bank balance. Interest → record as income or expense depending on nature.

27. Importance of Bank Reconciliation Statements Importance of Bank Reconciliation Statements Ensures Accuracy of Records Confirms that the cash book and bank statement balances agree. Helps detect errors in either record. Detection of Errors and Omissions Identifies mistakes such as double posting, missed entries, or wrong amounts. Highlights transactions recorded by the bank but missing in the cash book. Detection of Fraud or Irregularities Helps uncover unauthorized withdrawals, altered cheques, or fraudulent activity.

28. Importance of Bank Reconciliation Statements Tracking Timing Differences Explains why balances differ (e.g., unpresented cheques, deposits in transit). Prevents confusion by clarifying temporary mismatches. Improves Cash Management Provides a true picture of available bank balance. Assists in better planning of payments and investments. Verification of Bank Charges and Interest Ensures bank fees, interest debits, and credits are correctly recorded. Builds Confidence in Financial Statements Regular reconciliation strengthens reliability of accounts. Important for auditors, investors, and management. In short: Bank Reconciliation Statements are vital for accuracy, fraud detection, transparency, and effective cash management.

29. Summary A Bank Reconciliation Statement is used to agree the balance shown by the bank columns of the cash book with that shown by the bank statement. Certain differences between the two are timing differences. These are; Unrepresented cheques & Amounts not yet credited. These differences will be corrected by time and most probably will be recorded on the next bank statement.

30. Summary Certain differences appearing on the bank statement need to be entered in the cash book to bring it up to date. These include; Receipts Credit transfer and bank transfer amounts received by the bank. Debit card receipts from customers Interest credited by the bank.

31. Summary Payments Standing orders and Direct Debits Debit card payments Bank charges and interest Dishonoured cheques debited by the bank. Bank reconciliation statement makes use of the time difference. Once prepared, Bank reconciliation statement is a proof that the bank statement and the cash book were agreed at a particular date.

32. Q&A