Chapter 30 Bank reconciliation statements
Learning objectives After you have studied this chapter, you should be able to: Explain why bank reconciliations are prepared Reconcile cash book balances with bank statement balances Reconcile ledger accounts to suppliers’ statements Make the necessary entries in the accounts for dishonoured cheques
Bank reconciliations All funds paid into and out of the business bank account are recorded in the cash book. The bank also record the flow of funds. If the items entered in the cash book and by the bank were the same, the balances would match. However, there may be items in the cash book that the bank don’t know about and vice versa, so a reconciliation is necessary.
Comparing the cash book and statement
The updated cash book
Where closing balances differ
Where closing balances differ (Continued) The unmatched items are: The cheque paid to M. Peck on January 30 that is in the cash book but not the bank statement. The cheque for £470 received from J. Soames that is in the cash book but not the bank statement.
Where closing balances differ (Continued)
Dealing with a bank overdraft A cash book showing an overdrawn balance will have a balance brought down on the credit side. A bank statement showing an overdrawn balance will show O/D against the balance. Reconciling a bank statement that is overdrawn is done in the same way, remembering that money coming in will make the balance smaller.
Dealing with a bank overdraft (Continued)
Dealing with a bank overdraft (Continued)
Dishonoured cheques When a cheque is received from a customer and paid into the bank, it is recorded on the debit side of the cash book. Later, if the customer’s bank will not honour the cheque, it is recorded on the credit side of the cash book to cancel out the receipt. The bank will show the cheque on the statement as a ‘dishonoured cheque’.
Learning outcomes You should have now learnt: Why it is important to perform a bank reconciliation when a bank statement is received That a bank reconciliation statement should show whether or not errors have been made either in the bank columns of the cash book or on the bank statement
Learning outcomes (Continued) That a bank reconciliation statement can be prepared either before or after updating the cash book with items omitted from it that are shown on the bank statement That a bank reconciliation statement prepared after updating the cash book with items omitted from it that are shown on the bank statement shows that you know why the bank statement balance is different from that shown in the cash book and statement of financial position
Learning outcomes (Continued) That a bank reconciliation statement prepared before updating the cash book with items omitted from it that are shown on the bank statement is reconciled from cash book to statement of financial position amount and then to the bank statement. It shows the amounts to be entered in the statement of financial position and also shows that you know why the bank statement balance is different from the balances shown in the cash book and in the statement of financial position
Learning outcomes (Continued) That in the case of bank overdrafts, the reconciliation statement adjustments are the same as those shown when there is a positive bank balance, but the opening and closing balances are negative How to prepare a bank reconciliation statement after updating the cash book with items omitted from it that are shown on the bank statement
Learning outcomes (Continued) How to prepare a bank reconciliation statement before updating the cash book with items omitted from it that are shown on the bank statement Why cheques may be dishonoured and what the effect is upon the bank balance How to make the appropriate entries to the accounts when a cheque is dishonoured