Understanding Bookkeeping

Debit Side Of The Bank Statement:

•  Bank charges and commission;

•  Bank overdraft interest;

• Cheques from customers that have been dishonoured;

• Telegraphic transfers made by the company;

• Standing order instruction

Credit Side Of The Bank Statement:

• Interest and dividends received by bank on behalf of the company;

• Re-presented cheques which are cheques earlier dishonoured now represented for payment;

• Credit transfers/amount paid direct by debtors to the company’s bank account.

Main Reasons For Timing Difference

Items on the credit side of the Cash Book not in the Bank Statement.

Cheques drawn in favour of creditors and credited in the Cash book may not yet been presented by the creditors for payment;

Lodgements Not Credited:

     Items on the debit side of the Cash Book not in the Bank Statement.

      Mainly cheques received and banked but not recorded by the bank because these cheques have not been cleared by the clearing system;

Payments on Bank Statements not in the Cash Book

      Example like credit transfers and standing order, bank interest, bank overdraft interest and charges;

Cheques dishonoured entered in the Bank Statement not in the Cash Book;

Dividends received, bills receivables, etc collected by the Bank and recorded in the Bank Statement but not in the Cash Book

Bills payables paid by the bank and recorded in the Bank Statement but not in the Cash Book

Reason For A Bank Reconciliation Statement

Due to the timing of the recording of the receipts and payments in the Cash Book from the recording by the bank, very frequently, a Bank Statement balance may not agree with the balance in the Cash Book.

Hence, a bank reconciliation statement needs to be drawn up to reconcile the difference in the balance between the Bank Statement and the Cash Book.

The importance or the objective(s) of having bank reconciliation statements are as follows:-

• To ensure no omission of transactions into the company’s Cash book, one should consistently reconcile the bank statement with the company’s cash book

• That bank reconciliation is between A PERIOD OF TIME, say we have finished reconciled for the month of January, then we proceed to reconcile for the forthcoming month of February and so on.

• Without a proper bank reconciiation statements, we might not a correct position of our bank account(s). Examples like dishonored cheque, bank charges/overdraft interest  from banks or wire transfer /direct credit of lodgement by customers are not recorded in the company’s cash book

Answer to Accounting Test Question No 4:

Company A

Bank Reconciliation as at 31 st July 2006 $

Balance as per bank statement at 31 st July 2006 55,262

Add: Deposits in transit / Uncredited deposits 1,300

56,562

Deduct:

Unpresented cheques

Check No

6661 dated July 20th $380

6662 dated July 27th 1,050

Adjusted Bank balance at 31 st July 2006 55,512

Balance as per Bank account at 31 st July 2006 55,597

Add: Check no 6666 (Overstated amount) 180

55,777

Deduct:

Bank service charge $55

Dishonored check $210

265

Adjusted Cash balance at 31 st July 2006 55,512

Answer to Accounting Test Question No 5:

Part 1 : Preparation of Bank Reconciliation Statement:

Company XYZ

Bank Statement As At 31 st August 2006 $

Step 1: Bank Balance to Corrected Balance

Balance per Bank Statement $74,674

Add: Deposits Outstanding 8,200

Deduct: Checks Outstanding (8,420)

$74,454

Step 2: Book Balance to Corrected Balance

Balance per Book $78,304

Service charges (50)

Automatic monthly transfer (2,000)

Error in recording cash disbursement ($2,000-200) (1,800)

Corrected Cash Balance $74,454

Part B: To record credits to cash revealed by the bank reconciliation.

Miscellaneous charges ( bank service charges) $50

Cash-savings account $2,000

Accounts payable $1,800

Cash $3,850

[PS: Each adjustment affecting the book balance required journal entries

None of the adjustments to the bank balance require entries. ]

Accounting Test Question No 4:

In early August 06, Company A received a bank statement which showed a balance of $55,262 as at 31 th July’06. However, its own record showed a balance of $55,597 on the same date.

The following differences are identified:

(i) Deposits amounted to $1,300 was not in the bank statement;

(ii) Two checks were sent to suppliers, but yet to be accounted for by the bank. The checks details were as follows:

· Check no:6661 dated July 20 $380

· Check no:6662 dated July 27 $670

(iii) The bank imposed a service charge of $55

(iv) A check no 6666 issued on July 24 for water bill amounting to $3,350 was wrongly entered in the cash payment journal as $3,530. The amount was correctly shown as $3,350 in the bank statement.

(v) A check amounting to $210 was received from customer ABC on July 15 and deposited a day after. However, due to insufficient fund in Mr.ABC’s account, the bank informed the Company A that the dishonored check had been debited to Company A.

Show the Bank Reconciliation Statement for Company A.

Accounting Test Question No 5:

Company XYZ received a bank statement for the month of August 2006. The bank statement showed the following information:

Balance, August 1, 2006 $68,326

Deposits 45,300

Checks processed (36,222)

Service charges (50)

Monthly deposit into saving account directly

Deducted by bank from account (680)

Balance, August 31 st , 2006 $76,674

Company XYZ’s general ledger account had a balance of $78,304 at the end of August 2006.

(i) Deposits outstanding amounting to $8,200;

(ii) all checks written by the company were processed by the bank except for those totaling $8,420;

(iii) A $2,000 check to a supplier correctly recorded by the bank but was incorrectly recorded by the company as $200 credit to cash.

Required:

1. Prepare a bank reconciliation statement for the month of August’06

2. Prepare the necessary journal entries at the end of August to adjust the general ledger cash account.

[ Refer Answers ]