Chapter 5 - Bank Reconciliation

 Next Chapter Bank Reconciliation, if a question on bank reconciliation were to appear in my O levels, I will be so happy and grinding teeth to teeth😁 That is provided I know how to do!

There are basically 4 steps in a bank reconciliation : -

Step 1. Compare the opening balance of the bank statement and the cash at bank account. Both opening balance  has to be correct in order to start your matching. 

    

The 2 items on the bank statement 1.chq no. 118 and 2.Trfr to supplier A amount has been taken in by the business in their Cash at bank account, whereas the opening balance of the Bank Statement - $5,550 Cr has yet to take in the effect of these 2 transactions. 

This could be due to customer for chq 118 telling the account clerk beforehand and the account clerk posting the trfr to Supplier A in the accounting system before actually processing the payment. 

Nevertheless, by adjusting these 2 entries in the bank statement, the opening balance of the bank statement is the same as the opening balance of the cash at bank account.

Step 2: 

Compare the transactions in the debit column of the cash at bank account against the Credit(Deposit) column of the bank statement &

Compare the transactions in the credit column of the cash at bank account against the Debit(Withdrawal) column of the bank statement. 

The cells highlighted in green were used to adjust the opening balance of the bank statement, henceforth they are considered to be non - reconciling/Ok.  For the cells which are not in green or crossed, we will have to adjust them in later steps.

Step 3: Draw up a revised bank account 

The purpose is to update the cash at bank account with items which appear in the bank statement which are not taken in yet by the business cash at bank account. The interest expense of $50 & Direct deduction - car instalment of $1000 appears in the bank statement but does not appear in the cash at bank account which is why we have to adjust in our cash at bank acc.

Step 4: Prepare a Bank Reconciliation Statement 

Having cleared the items in the bank statement, now the only outstanding are items in the cash at bank account which has not been reconciled or not slash at Step 2. 

Take note that the Credit balance as per bank statement means that your bank statement is positive and that you are taking up items which has been passed in the cash at bank account but not at the bank statement to tie to your revised bank account balance of $3,450.

Done, your bank reconciliation is finished :)

Remenber,  different format applies depending when your bank statement balance is Debit or Credit balance, it is the direct opposite of each other.

If Bank Statement balance is Credit balance, your bank recon statement will look like this: -

                          Bank Reconciliation Statement as at 31 Aug 20X1

                                                                                                                                 $

Credit Balance as per Bank Statement                                                                    X

Add: Cheques not yet credited (Receipts from customers/inflow to bank)             XX

Less: Cheques not yet presented (Payments to suppliers/outflow from bank)      (XX) 

Adjusted Balance as per cash at bank account                                                       XX

If Bank Statement balance is Debit balance, your bank recon statement will look like this: -

                          Bank Reconciliation Statement as at 31 Aug 20X1

                                                                                                                                 $

Debit Balance as per Bank Statement                                                                     X

Less: Cheques not yet credited (Receipts from customers/inflow to bank)          (XX)

Add: Cheques not yet presented (Payments to suppliers/outflow from bank)      XX 

Adjusted Balance as per cash at bank account                                                      XX

**A debit bank statement balance is also an bank overdraft. 

Tip: you just remember 1 format, e.g. debit balance in bank statement format flow for a bank recon statement, if exam comes out otherwise, just switch the sign!

A typical bank recon question will proceed to ask the impact the recon has on the Net profit of the business. For our example above, the interest expense of $50 & Direct deduction - car instalment of $1,000 were reflected in our bank statement but not in our bank account.  Therefore, we will proceed to:

for the 2 transactions below 

Dr Interest Expense   $50

Cr Cash at Bank                 $50

&

Dr Car Instalment Exp   $1,000

Cr Cash at Bank                      $1,000

Assuming profit was $10,000 before bank reconciliation, the revised profit will therefore be: 

$10,000 - $50 - $1,000 = $8,950 

Since both the adjustments were expenses which reduces net profit of the business. 

Examiners also likes to ask the reasons for Bank Reconciliation: -

1. A bank recon finds the reason for discrepancy between a business cash at bank account and bank account statement. 

2. Items such as Direct deduction/ receipts of cheques from customer/interest expenses can only be identified using a bank recon.

3. A Bank recon acts as a defence against fraud. Making sure the amount keyed to the accounting system are the same as which reflects in the bank statement.  

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