BANK RECONCILIATION STATEMENT.
A bank reconciliation statement is a statement which explains the differences between balance as per the bank statement and balance as per the cash book of the enterprise. Cash book balance as per the business should always be equal to the balance as per the bank statement issued by the bank.
In most cases this is always not the case and the reconciliation has always to be carried out.
FUNCTIONS/PURPOSE OF BANK RECONCILIATION.
1. To update the cash book of the transactions that have gone through the bank such as bank charges.
2. To check and correct any error made in the cash book.
3. To detect and prevent any fraud that relate to the cash book and bank transactions.
ITEMS CAUSING DIFFERENCES BETWEEN CASHBOOK BALANCE AND THE BANK STATEMENT BALANCE.
a. Unpresented cheques.
These are cheques that have been sent by the business to the creditors thereby crediting the cashbook but the creditors have not presented the cheques to the bank hence the transaction is not been debited by the bank. This will make the bank statement to be overstated as compared to the cashbook balance.
b. Uncredited Cheques
These are cheques that have been received by the business from debtors, thereby debiting the cashbook with the amount but the business has not taken the cheque to the bank hence the amount has not been credited into the bank account making the cash book balance to be overstated and the bank statement balance to be understated. This can also arise when the bank has not cleared a cheque that has been presented by the business mainly because of the clearing process.
c. Dishonoured cheques
These are cancelled cheques. When the cheques have been dishounered by the bank, the bank will debit our account with the amount necessary notifying us, making the cashbook balance to be more than the bank statement balance by the amount of dishonored cheques.
d. Bank charges commissions and direct debits.
These are charges made by the bank on services rendered to the business. The bank will automatically debit our account with the amount without our notification there for the cashbook balance will be understated as compared to the bank statement balance .
e. Bank interest and other direct Credits.
These are income received by us from our customers and the bank has directly credited our accounts with the amount without our notification. In this case, the cashbook balance will be understated as compared to the bank statement balance.
f. Standing orders.
These are instructions given to the bank by our business to make regular payments of specified amount at specified dates and therefore the bank will usually make payments directly without our notification.
PROCEDURE OF CARRYING OUT BANK RECONCILIATION.
1. Compare the bank statement and the cashbook. Tick common items appearing in the cashbook and in the bank statement by comparing debits in the cashbook and credits in the bank statement.
2. The unticked items in the cashbook are used for the preparation of bank reconciliation statement. Unticked transactions appearing on the debit side of the cashbook represents uncredited cheques wheres unticked items appearing on the credit side of the cashbook are unpresented cheques .
3. Unticked items appearing in the bank statement are used as follows
Reconcilliation of opening balances.
Updating the cash book (preparation of adjusted cashbooks)