3. Bank Reconciliation
A bank reconciliation is the process of matching
the balances in the business records to the bank
records.
The goal is to find the differences between the
two (business records vs bank records) and
making changes to the business records as
appropriate.
Q: Why do business do bank reconciliation?
4. Why do bank reconciliation?
• Identify any errors committed by the business or
the bank (rare).
• Helps the business identify the actual amount of
cash available to spend.
• Without bank reconciliation you expose your
business to risk. Risk of people stealing from your
account.
5. Why do bank reconciliation?
• The bank reconciliation may also show any undue
delay in the clearance of cheques.
• A balanced bank reconciliation provides
confidence in the accuracy of the business
records.
6. Bank Records: Business Records:
Bank Statement Compare • Cash receipts
journal
• Cash payment
journal
Find the differences • Cash at bank
account
Tick each entry that appears in both sets of records
And circle the entries do not appear in both set of records
Entries found in the bank records but missing in the business
records should be added to the business records
Prepare a cash balance summary
Prepare a bank reconciliation statement.
7. What is a bank statement?
A bank statement is a document that is issued by a
bank once a month to its customers.
8. What information does the bank statement
provide?
• The beginning cash balance in the account
• + The deposited cheques and cash
• - Cash withdrawn from the account
• - Cheques paid out
• + Interest earned on the account
• - Bank charges against the account
• = Ending cash balance in the account
9. 1) The business owner (Mr. A) makes a cash sale of
$200 and deposit the cash into the bank (NAB).
• What is the double entry for the business?
DR Cash $200, CR Sales $200
• What is the double entry for the bank?
DR Cash $200, CR Bank statement (deposit) $200
The $200 the bank received is not from sales, but an
obligation/liability to return the $200 to the business owner
on demand.
10. Bank Interest earned
Bank automatically add interest to the account.
When you open an account at a bank, the bank
will pay you to keep your money at their bank.
11. Bank charges
Bank automatically deducts charges from the
account.
Examples
• Monthly bank service charge - cost of
maintaining an account.
• Bank charges a fee when a cheque is returned
for insufficient funds.
• Bank charges a fee on an overdraft account.
12. 2) Mr. A’s bank (NAB) deducts a bank charge of $6.
• What is the double entry for the business?
DR Bank charges $6, CR Cash $6
• What is the double entry for the bank?
DR Bank statement $6, CR Bank service charge revenue $6
When bank charges Mr. A $6, the bank earns $6.
13. Bank Statement
Date Description DR CR Balance
XXX Balance b/f 0
XXX Cash Sales 200.00 √ 200.00 CR
XXX Bank interest earned 5.00 205.00 CR
XXX Monthly bank service charge 6.00 √ 199.00 CR
Missing in cash receipts journal
Cash receipts journal (DR)
Date Particulars Rec no. Debtors Cash sales Sundries Bank
xxx Cash sales xx 200.00 200.00 √
200.00
Cash payments journal (CR)
Date Particulars Chq no. Creditors Cash Purchase Sundries Bank
xxx Monthly bank service charge 5.00 5.00
5.00
Mr. A made an error
15. Reconciling Items
• Unrecorded deposits
• Unpresented cheques
• Business errors and Bank errors (rare)
• Bank Transfer /EFT
• Bank Interest earned
• Bank charges
16. Case Study
Bella needs to buy a
beautiful prom dress for
the prom night.
Mr John Brown is a
fantastic tailor and he
owns a neighbourhood
dress shop.
Bella decides to purchase
a custom made dress
which cost her $700.
17. Unrecorded deposits
Bella gave John a cheque of $700.
John entered this transaction into his cash
receipts journal.
At the end of the day, he deposited the
cheque into his bank account.
John’s bank did not have a chance to process the
cheque; and the bank statement has already been
prepared.
18. Unrecorded deposits
Receipts that have been recorded in the cash
receipts journal and taken to the bank at the
end of the day; but at that time the bank
statement has been prepared; and the bank
have not processed those receipts.
19. Unpresented cheques
John ordered some silk cloth from Jay
Enterprise to make Bella’s prom dress.
He wrote a cheque of $200 to Jay
Enterprise and sent it by mail.
He entered this transaction into his cash payments
journal.
John’s bank statement has already been prepared,
but the cheque has not been presented for payment
at the bank.
20. Unpresented cheques
Cheques that have been written, sent and
recorded in the cash payments journal; but at
that time the bank statement has been
prepared; and the cheques have not been
presented for payment at the bank.
26. Cash balance summary as at 30 April 2012
$ Opening balance from bank
Opening balance 2,565.00 statement
Add cash receipts 6,106.00 Total from cash receipts
journal
Less cash payments 7,765.00 Total from cash payments
journal
Closing balance 906.00
Bank reconciliation statement as at 30 April 2012 MATCH
$ Closing balance from bank
Balance as per bank statement 406.00 CR statement
Item circle/ highlight from
Add Unrecorded deposit 700.00
cash receipts journal
Less Unpresented cheques 200.00 Item circle/ highlight from
cash payments journal
Balance as per business cash records 906.00 CR
Notas del editor
Bank reconciliation is similar to “Spotting the Differences” activity we did earlier. One is using pictures and the other is using numbers.
Undue = excessive
The bank statement also shows the cumulative balance of cash in the account (it appears on the right side of the bank statement).Show the class an example of a bank statement.
The bank statement also shows the cumulative balance of cash in the account (it appears on the right side of the bank statement).Show the class an example of a bank statement.
This is because it reflects the bank's obligation/liability to return the $200 to the business owner on demand.
Simple interest: simple interest is interest paid on the original principal only.For example,4000 dollars is deposited into a bank account and the annual interest rate is 8%. How much is the interest after 2 years?4000× 8% × 4= $640Compound interest: is the interest earned not only on the original principal, but also on all interests earned previously.In other words, at the end of each year, the interest earned is added to the original amount and the money is reinvested = 4000 x 8% x1= $320; 4000+320 =4320; 4320 x 8% x1=$345.6 Total interest = 320 +345.6 =$665.6
Q: How does a business owner know whether if his bank deduct any bank charges or add any bank interest?
I am assuming John is such a fantastic tailor because he is a vampire; this means he doesn’t need to sleep hence have many extra hours to sew a brand new dress.
Items recorded in the cash book but not in the bank statement, due to timing difference.
As you add a transaction, put a tick beside it in the bank statement, cash receipts journal and cash payments journal. It indicates that the those missing entries have been recorded.
