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In Grade 10 the bank reconciliation was introduced for the rst time. It involved basic journal entriesin the cash receipts and cash payments journal, a bank account in the general ledger and a bankreconciliation statement that had to be completed after you compared the bank statement with thebusinesses books.

The need for a bank reconciliation arises as different entries appear on the bank statement when

compared to the businesses books.In Grade 11 we dealt with the bank reconciliation in more detail. We looked at various reasonsbehind the different entries in different books and we completed the bank reconciliation statement.

In the business world, control of cash is facilitated by depositing cash sales and other receipts intactinto the current bank account and ensuring that all payments are made by cheque. This makes iteasy to verify the balance on the bank statement (an external document) with the bank account(internal record).

In Grade 12 we deal with the interpretation of the bank reconciliation in a more theoretical manner.

LESSON 1: Pre-nolege segent

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REwiNd:

Ban Reconclaton

NOTES:

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In this lesson, we will cover bank reconciliation statements. By the end of this lesson, you will be able to do the

following:

Prepare a bank reconciliation statement. Remember, this has already been covered in Grade 11.

Analyse and interpret the bank reconciliation statement. This is of utmost importance for Grade 12.

Explain the code of ethics as it applies mutually in an accountable and transparent way to all parties in the

nancial environment.

Demonstrate knowledge of internal control processes.

Proceure for preparng ban reconclaton stateents

The primary purpose of doing bank reconciliation is to determine exactly how much money we have in the

bank. However, bank reconciliation also serves as a means of external control to ensure that our records of

receipts and payments correspond to those of an external institution such as the bank.

When preparing a bank reconciliation statement, you would have in front of you the following:

The bank statement that you have received from the bank

Your cash payments journal

Your cash receipts journal

The previous months bank reconciliation statement

Secton 1: introuctonProceure for Preparng Ban

Reconclaton Stateents

ACCOUNTiNG

LESSON 1

ThEmE: BANk RECONCiLiATiON STATEmENTS

Secton 1: Proceure for Preparng BanReconclaton Stateents

Secton 2: Ban Reconclaton Entry Types

Secton 3: Ban Reconclaton Entry Types (cont.)

Secton 4: Ban Reconclaton Entry Types (cont.)

multple-coce Questons

Atonal Actvtes: Atonal Actvtes

Ansers

Ban Stateent

Cas Payent

Journal

Prevous Ban

Reconclaton

Stateent

Cas Recepts

Journal

dR CR

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Secton 2: Ban Reconclaton Entry Types

REmEmBER

Once you have this information in front of you, you will work according to the following procedure:

Compare the bank column of the CRJ to the credit column of the Bank Statement

Compare the bank column of the CPJ to the debit column of the Bank Statement

Compare previous bank reconciliation statement to the current bank reconciliation statement. This is veryimportant because there may be items that did not go through last month that go through this month

Tick items that are common as these agree

Unticked items on the B/S must be entered in the journals. Thereafter, total the journals

Post to the bank account in the general ledger and balance

Unticked items in the CPJ and CRJ, which have been processed in your records, but not in the records of

the bank, and unticked items in the previous bank reconciliation statement, are entered in the current bank

reconciliation statement

Remember, the bank reconciliation statement is nothing more than an extension

of your bank statement: it shows items that would have been entered had they

been processed. One more thing to remember: Why is there a discrepancy between your bank

account as it appears in your ledger and the bank statement? Because of timing differences, and as a result

of bank account adjustments entries that the bank has made that we are unaware of.

That was a quick recap of what you have done in Grade 11. What we are now going to do, is take each

transaction, and see how it is handled when doing the bank reconciliation statement.

In this section, we will look at the entries in the bank reconciliation, and refer throughout to the following table,

which indicates where transactions are to be entered:

Transacton CRJ CPJ Ban Recon No entry

dR CR

Direct deposit into the bank account as reectedon the bank statement

Stop / debit orders / electronic paymentsappearing on the bank statement

Bank charges and interest on overdraft

Cancellation of cheques (stale, stop payment,stolen or altered cheques)

Interest on favourable bank balance Cheques issued, but not appearing on the bankstatement

The rst transaction is a rect epost. An example is that of a tenant who lives in a remote area, who instead

of sending money by post, which may not be secure, deposits the money directly into the bank account. As a

result, it appears in the bank statement, but it is not in the CRJ where it must be entered.

The second transaction is a stop orebt orer, orelectronc payent (EFT Electronic Funds Transfer). This

appears in the bank statement, but not in the CPJ. It must therefore be entered it into the CPJ. This procedure

ensures that the business records like the bank account are in agreement with the bank statement.

The next step is to look at ban carges and the nterest on overraft. Notice that these have been separated,

and this is for a very important reason. Interest on overdraft is not a bank charge. Any other charges levied

by the bank would be accumulated under one umbrella account, namely the bank charges account. These

would include service fees, cash deposit fees, duty on debit entries and credit card levies. However, both these

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charges, and interest on overdraft appear in the bank statement, but not in the CPJ. This is where they will have

to be reected.

In the case of a cancelle, stolen oraltere ceque, the cheque in question must be cancelled.

When a check is written, it is reected in the cash payments journal. In order to cancel the cheque it must bereected in the records in the CRJ.

Just as the business must pay the bank interest on an overdrawn account, thebank will pay if the businesses bank balance is positive. This payment is reected

in the CRJ.

Cheques which have been issued but do not appear on the bank statement means that the business wrote out

these cheques and sent them to whomever they were due to. They therefore appear in the CPJ, but do not

appear in the bank statement. As a result they will appear as outstanding cheques. These must be entered in

the debit column of the bank reconciliation statement.

Secton 3: Ban Reconclaton Entry Types (contnue)

Transacton CRJ CPJ Ban Recon No entry

dR CR

Cheques outstanding on the previous bankrecon, but appearing in the current bankstatement

Cheques outstanding on the previous bankrecon, but still not appearing in the current bankstatement

Outstanding deposits

Deposit outstanding previously, but appearing inthe current bank statement

Dishonoured cheques

Cheques which were outstanding on the previous bank reconciliation, but which now appear on the current

bank reconciliation indicate that they appeared last month on the last bank reconciliation statement as

outstanding, but are now reected on this months bank statement. This means that the cheques were not

presented for payment last month, and have only been presented for payment this month.

Note: Very often learners get confused at this point, and put it back into the bank reconciliation for the current

month. This is incorrect! There is, in fact, no entry ts ont. This is because it was outstanding last month, has

now been presented for payment, and so it works itself out of the system.

Now let us look at ceques outstanng on the previous bank reconciliation, but still not appearing in the

current bank statement. This means that the cheque might have been given to someone who didnt need the

money immediately, and has not yet presented the cheque for payment. Since the cheque is still outstanding,

it is put it back in the bank reconciliation statement as an outstanding cheque.

Next, we look at outstanng eposts. These occur when the CRJ indicates that the money has been

deposited into the bank, but the bank statement shows no entry. This deposit is therefore not appearing. This

is a classic example of a timing difference. For instance, the deposit was made on the 27 th of the month.

The bank issued the bank statement on the 23 rd of the month. There is obviously no way that this deposit will

appear on the bank statement. While the business has a record of the deposit, the bank does not yet have a

record of this deposit. The business therefore has to make this bank reconciliation entry in the credit column.

Our nal focus is on sonoure ceques. Any cheque that is dishonoured, for whatever the reason

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(insufcient funds, a missing signature on the cheque, the words and gures disagree, etc.), must be entered

into the cash payments journal.

Secton 4: Ban Reconclaton Entry Types (contnue)

Transacton CRJ CPJ Ban Recon No entry

dR CR

Post-dated cheques issued

Post-dated cheques received

Error in the CPJ

Amount in the CPJ is higher than the originalcheque

Amount in the CPJ is lower than the original

cheque

Error on the B/S

Amount incorrectly debited

Amount incorrectly credited

Post-dated cheques that you have issued are entered into the debit column of the Bank Reconciliation.

In terms of internal control procedures, post-dated cheques received are entered into a post-dated

cheque register. They are kept until the date that appears on that cheque, at which stage that cheque

becomes negotiable.

Remember, until that stage nothing can be done with that cheque. In termsof accounting entries, absolutely nothing can be done with it and no entry

is made.

Next, we look at errors n te cas payents journal. There are two possible errors that can be made in this

journal. Either the amount is overstate, or else it is unerstate. If the amount entered into the CPJ is higher

than the cheque, a correction has to be made, and that is made in the CRJ. If the amount entered into the

CPJ is lower than the amount of the original cheque, then to take account of that discrepancy we need to

enter it into our CPJ.

It is also possible that the bank has made errors on the bank statement. Again, an amount can either be

incorrectly debited or credited to your account. In each case, the entry must be reversed. If an amounthas been incorrectly debited, it is entered it into the credit column of the bank reconciliation statement. If

the bank has incorrectly credited the business the business has to enter it into the debit column of the bank

reconciliation statement.

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Lets use the following example to illustrate the purpose of a bank reconciliation.

Art brief: Picture of a teen with an older man (uncle) going through banks statement of business books.

Your uncles business receives a bank statement at the end of the month from the bank. Your uncle shows youhow he then compares the transactions on the statement with the entries in the businesses books. For example,the stop and debit orders are automatically deducted from the bank account on the bank statement butnowhere are there records of these stop or debit orders for insurance premiums. It is therefore your unclesresponsibility to record these transactions in his set of business books. Your uncle needs to makes sure that all

entries are reected in both places (i.e. bank statement and his books).

Now that you have an understanding of how a bank reconciliation works in your uncles business you can nowuse it yourself. You get your banks statement and on it is reected the payment of bank charges four your ATMwithdrawls. You have kept a budget listing of all of your withdrawals and you have deducted them from yourmonthly income your are paid for working in your uncle on Saturdays. Our bank account has been debitedbut the charges only appear on the banks statement and not in your budget. So you need record this in yourbudget as an expense.

You should now clearly see that it is very important to reconcile our records (or the books of the business) againstthe bank statement. You can also see that although bank reconciliation is an aspect of accounting it is a basicskill taught that you as an individual can use to double check your budget with that of the bank. Individualsor businesses cant not reconcile their nancial records with that of the bank: one checks the other so thatdifferences can be investigated.

The word reconciliation means to make two sets of amounts correspond with each other (i.e. tomake them equal to each other).

Real-lfe applcaton segent

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Get Real!

FOR EXAmPLE