Bank Reconciliation Statement: Cash Book, Bank Statement

CONTENTS

1. Definition of terms:
2. Cash Book
3. Bank Statement
4. Bank Reconciliation Statement
5. Uses of a Bank Statement
6. Items causing discrepancy(disagreement) between the Cash Book balance and the Bank Statement balance

CASH BOOK

A Cash Book is a subsidiary book of account that is used to record the receipt and payment of cash and cheques by a business organization. The Cash Book functions both as a subsidiary book and a ledger. The Cash Book is part of the double entry system.

BANK STATEMENT

A Bank Statement is a statement prepared by a bank and sent to the customer at periodic intervals showing the transactions that has taken place between the bank and its customer for a particular period of time.

USES OF A BANK STATEMENT

1. To check the transactions that has taken place within that period
2. It is used as a source document
3. It is used for bank reconciliation
4. It is used for auditing purposes
5. It is used to determine the opening balance and the closing balance of a bank account

BANK RECONCILIATION STATEMENT

A  bank reconciliation statement is a statement prepared by an account holder (i.e. the trader or the business) for the purpose of identifying the causes of disagreement (or discrepancy) between the Cash Book balance and the Bank Statement balance and to reconcile (or harmonize) the two balances.

ITEMS CAUSING DISCREPANCY (DISAGREEMENT) BETWEEN THE CASH BOOK BALANCE AND THE BANK STATEMENT BALANCE

A       Items in the Cash Book but not in the Bank Statement

1. Unpresented cheques
2. Uncredited cheques
3. Errors in the Cash Book

B        Items in the Bank Statement but not in the Cash Book

• Bank charges
• Dividends
• Standing Orders
• Credit Transfers (or Direct Credits)
• Direct Debits
• Dishonoured Cheques
• Interest received from the bank e.g. on fixed deposit
• Interest charged on overdrafts/loans
• Errors in the Bank Statement

EVALUATION QUESTIONS

1. What is a Bank Reconciliation Statement
2. What is the purpose of a Bank Statement to a businessman

UNPRESENTED CHEQUES

These are cheques issued by the business but are yet to be presented for payment at the bank by the payee.

 Unpresented cheques will be found on the credit side of the Cash Book but not on the debit side of the Bank Statement

The effect of unpresented cheques is to make the Bank Statement balance to be higher than the Cash Book balance.

UNCREDITED CHEQUES

These are cheques received by the business and lodged (or deposited) in the bank but have not been credited in the Bank Statement

Uncredited cheques will be found on the debit side of the Cash Book but not on the credit side of the Bank Statement

The effect of uncredited cheques is to make the Cash Book balance to be higher than the Bank Statement balance.

ERRORS IN THE CASH BOOK

These are mistakes of omissions, duplications, wrong figures etc. made in the recordings/entries posted into the Cash Book

BANK CHARGES

These are amounts deducted by the bank from the customers account in respect of services rendered by the bank to the customer for that period. Bank charges will include Commission on Turnover (COT), cost of cheque books issued to customers etc.

Bank charges will be found on the debit side of the Bank Statement but not on the credit side of the Cash Book

The effect of bank charges is to make the Cash Book balance to be higher than the Bank Statement balance.

DIVIDENDS

Dividends represent the part of the profits of a limited liability company that is given to shareholders as a reward for their investments in the company

Dividends will be found on the credit side of the Bank Statement but not on the debit side of the  Cash  Book

The effect of dividends is that the Bank Statement balance will be higher than the Cash Book balance

STANDING ORDERS

Standing orders represent instructions given by an account holder to the bank to pay on his behalf, on a regular basis, a fixed amount of money to a named beneficiary.

Standing orders will be found on the debit side of the Bank Statement but not on the credit side of the Cash Book

The effect of standing order is to make the Cash Book balance to be higher than the Bank Statement balance

CREDIT TRANSFERS (or DIRECT CREDITS)

Some customers or debtors of the business may settle their outstanding accounts by paying directly into the business account with the bank.

Credit transfers will be found on the credit side of the Bank Statement but not on the  debit side of the Cash Book

The effect of credit transfer is to make the Bank Statement balance to be higher than the Cash Book balance.

DIRECT DEBITS

This is an arrangement whereby a bank will pay on behalf of the account holder, bills that are presented by third parties.

Direct debits will be found on the debit side of the Bank Statement but not on the credit side of the Cash Book

The effect of direct debits is to make Cash Book balance to be higher than the Bank Statement balance.

DISHONOURED CHEQUES

These are cheques received by the business and lodged into the bank but have been returned unpaid by the drawer’s bank.

Dishonoured cheques will be found on the debit side of the Bank Statement but not on the credit side of the Cash Book

The effect of dishonoured cheque is to make the Cash Book balance to be higherthan the Bank Statement balance.

INTEREST RECEIVED FROM THE BANK e.g. on Fixed Deposits

Where a customer maintains both current account and fixed deposit account, the bank may pay interest on such fixed deposit into the customer’s current account.

Interest on fixed deposits will be found on the credit side of the Bank Statement but not on the debit side of the Cash Book

The effect of interest on fixed deposits is to make the Bank Statement balance to be higher than the Cash Book balance.

INTEREST CHARGED ON OVERDRAFTS

When a current account holder is allowed to overdraw his account, the bank will charge interest on the balance overdrawn on a monthly basis

Interest on overdraft will be found on the debit side of the Bank Statement but not on the credit side of the Cash Book

The effect of interest on overdraft is to make the Bank Statement balance to be  smaller than the Cash Book balance.

ERRORS IN THE BANK  STATEMENT

These are mistakes of omissions,duplications, wrong figures etc. made by the bank in the recordings made in the Bank Statement

EVALUATION QUESTIONS

1. List eight items that will cause the Cash Book balance not to agree with the Bank Statement balance
2. Explain how the items listed above may cause a difference between the Cash Book balance and Bank Statement balance.

READING ASSIGNMENT

1. Simplified and Amplified Financial Accounting Page 95 – 114
2. Business Accounting 1 Page 209 – 225

GENERAL EVALUATION QUESTIONS

1. Define the following: (a) Bank Statement (b) Bank Reconciliation Statement
2. What is the purpose of a Bank Statement to a businessman
3. Identify and briefly explain any five reasons why the Cash Book and Bank Statement may disagree
4. List four features of each of the following (a) Current Account (b) Savings Account
5. State five services rendered by commercial banks to their customers

                                                    WEEKEND ASSIGNMENT

1. The bank column in the Cash Book shows a credit balance of N18,000. This means (a) a total payment of N18,000 (b) a left-over of N18,000 in the bank (c) an overdraft of N18,000 (d) a gross receipt of N18,000
2. Which of the following may have been recorded in the Cash Book and fail to appear in the Bank Statement (a) bank charges and commission (b) cheques issued, presented and cashed (c) bank lodgements (d) payments made by the bank on a standing order
3. Which of the following is not a cause of discrepancy between Cash Book and Bank Statement balance (a) uncredited cheques (b) paid cheques (c) standing orders (d) dishonoured cheques
4. Items in the Bank Statement of a business but not in the Cash Book before preparation of bank reconciliation statement do not include(a) bank charges (b)standing order (c) presented cheques (d) interest on overdraft
5. A document sent by a bank to its current account customers detailing their transactions over a given period is (a) bank reconciliation statement (b) bank statement (c) credit transfer (d) banker’s advice

                                                                THEORY

1. What is a (a) bank statement (b) bank reconciliation statement
2. List five source documents used in preparing the Cash Book