ATP 106 LEGAL PRACTICE MANAGEMENT (ACCOUNTING)

BANK RECONCILIATION STATEMENT

The cashbook for cash at bank records all the transactions taking place at the bank i.e. the movements
of the account held with the bank. The bank will send information relating to this account using a bank
statement for the firm to compare.

Ideally, the records as per the bank and the cashbook should be the same and therefore the balance
carried down in the cashbook should be the same as the balance carried down by the bank in the
bank statement.
In practice however, this is not the case and the two (balance as per the bank and firm) are different.
A bank reconciliation statement explains the difference between the balance at the bank as per the
cashbook and balance at bank as per the bank statement.

Items Appearing In the Cashbook and Not Reflected In the Bank Statement

1) Unpresented Cheques: Cheques issued by the firm for payment to the creditors or to other
supplies but have not been presented to the firm's bank for payment.
2) Uncredited deposits/cheques: These are cheques received from customers and other sources for
which the firm has banked but the bank has not yet availed the funds by crediting the firm's account.

3) Errors made in the cashbook.

These include:
 Payments over/understated
 Deposits over/understated
 Deposits and payments misposted
 Overcasting and under casting the Balance c/d in the cashbook.

BANK RECONCILIATION

Banks usually send customers a monthly statement that shows the account's beginning balance (the
previous statement's ending balance), all transactions that affect the account's balance during the
month, and the account's ending balance.
The ending balance on a bank statement almost never agrees with the balance in a company's
corresponding general' ledger account. After receiving the bank statement, therefore, the company
prepares a. bank reconciliation statement, which identifies each difference between the company's
records and the bank's records. The normal differences identified in bank reconciliation will be
discussed separately. These differences are referred- to as reconciling items. Bank reconciliation
begins by showing the bank statement's ending balance and the company's balance (book balance) in
the cash account on the same date:
Deposits in transit

Most companies make frequent cash deposits. Therefore, company records may show one or more
deposits, usually made on the last day included on the bank statement, which do not appear on the bank
statement. These deposits are called deposits in transit and cause the bank statement balance to understate
the company's actual cash balance. Since deposits in transit have already been recorded in
the company's books as cash receipts, they must be added to the bank statement balance.

Outstanding cheques

A check that a company mails to a creditor may take several days to pass through the mail, be
processed and deposited by the creditor, .and then clear the banking system. Therefore, company
records may include a number of cheques that do not appear on the bank-statement. These cheques
are called outstanding cheques and cause the bank statement balance to overstate the company's actual
cash balance. Since outstanding cheques have already been recorded in the company's books as cash
disbursements, they must be subtracted from the bank statement balance.

Automatic withdrawals and deposits

Companies may authorize a bank to automatically transfer funds into or out of their account.

Automatic withdrawals from the account are used to pay for loans (notes or mortgages payable),
monthly utility bills, or other liabilities. Automatic deposits occur when the company's checking
account receives automatic fund transfers from customers or other sources or when the bank collects
notes receivable payments on behalf of the company,

Banks use debit memoranda to notify companies about automatic withdrawals, and they use credit
memoranda to notify companies about automatic deposits. The names applied to these memoranda
may seem confusing at first glance because the company credits (decreases) its cash account upon
receiving debit memoranda from the bank, and the company debits (increases) its cash account upon
receiving credit memoranda from the bank. To the bank, however, a company's checking account
balance is a liability rather than an asset. Therefore, from the bank's perspective, the terms debit and
- credit are correctly applied to the memoranda.

Unlike deposits in transit or outstanding cheques, which are already recorded in the company's books,
automatic withdrawals and deposits are often brought to the company's attention for the first time
when the bank statement is received. On the bank reconciliation, add unrecorded automatic deposits
to the company's book balance, and subtract unrecorded automatic withdrawals.

Interest earned
Banks often pay interest on checking account balances. Interest income reported on the bank
statement has usually not been accrued, by the company and, therefore, must be added to the
company's book balance on the bank reconciliation,

Bank service charges

Banks often require customers to pay monthly, account fees, check printing fees, safe-deposit box
rental fees, and other fees. Unrecorded service charges Must be subtracted from the company's book
balance on the bank reconciliation.
NSF (not sufficient funds) cheques
A check previously recorded as part of a deposit may bounce because there are not sufficient funds
in the issuer's checking account. When this happens, the bank returns the check to the depositor and
deducts the check amount from the depositor's account.

Therefore; NSF cheques must be subtracted from the company's book balance on the bank
reconciliation.

Errors
Companies and banks sometimes make errors. Therefore, each transaction on the bank statement
should be double-checked. If the bank incorrectly recorded a transaction, the bank must be
contacted, and the bank-balance must be adjusted on the bank reconciliation. If the company
incorrectly recorded a transaction, the book balance must be adjusted on the bank reconciliation and
a correcting entry must be journalized and posted to the general ledger.

When all differences between the ending bank statement balance and book balance have been
identified and entered on the bank reconciliation, the adjusted bank balance and adjusted book
balance are identical,

CAUSES FOR DIFFERENCE BETWEEN THE BALANCE AS PER CASH BOOK AND
THE BALANCE AS PER BANK STATEMENT

The balance shown by the bank statement should agree with the bank balance shown by the Cash
Book. However, often there is a difference even if there is no mistake. The difference is due to the
Following reasons:-

1. Cheques received are entered in the Cash Book as soon as they are received.

2. There may be a delay of a day or two in sending the cheque to the bank. Moreover, the bank
usually, does not credit the customer until the cheque is realized; if they are on other banks, it
means delay.

3. In the meantime, therefore, the Cash Book will show more balance than what the bank shows
in its Own books.

4. As soon as cheques are issued, they are entered in the Cash Book, but the bank, again, makes
no entry until the cheques are actually presented for payment and are paid.

5. This means that the bank shows a higher balance in favor of the client than what the Cash
Book of the client shows.

6. The bank often makes charges for services it renders; these are known as bank charges.

7. If there is an overdraft, the bank will also- charge interest. These bank charges and interest are
entered in the bank books and the entry is generally made in the Cash Book only when, the bank
statement is received. The bank is often entrusted with the task of collecting interest on securities or
dividends on shares or even the collection of amounts due on bills of exchange or promissory notes.

9. The bank will credit the customer as soon as the amounts are received but the entry by the
customer in the Cash Book must await receipt of information by the customer.
10. The bank may also make payments. According to the standing instructions of the client or in
respect of 'any special instruction such as on presentation of documents for supply of goods for
which a letter of credit has been opened previously.

Entries in the Cash Book in such cases are made on receipt of advice from the bank.

FORMAT 1
Bank Reconciliation Statement as at 31/12

Balance at bank as per cashbook (updated) xx

Add: un presented cheques xx
Errors on bank Statement (see note 1) xx

Less: Uncredited deposits xx

Errors on Bank Statement (see note 2) xx
Balance at bank as per Balance Sheet xx

Note 1: These types of errors will have an effect of increasing the balance at bank e.g. an overstated
deposit or an understated payment by the bank.

Note 2: These types of errors will have an effect of decreasing the balance at bank e.g. an
understated deposit ui an overstated payment by the bank, or making an unknown payment.

FORMAT 2
Bank Reconciliation Statement as at 31/12

Balance at bank as per bank statement

Add: Uncredited deposits
Errors on bank statement (note 2)

Less: Unpresented cheques

Errors on bank statement (note I )
Balance at bank as per cashbook (updated)
Illustration
On 10 January 2006, Joseph Kahiga, a sole trader, received his monthly bank statement for
December 2005.

The statement showed the following:

Date Particulars Debit Credit Balance

2005 Sh. Sh. Sh.
Dec 1 Balance 186,200
5 Cheque No.417864 (Electricity) 24,300 161,900
5 Dividend 2,600 164,500
5 Local cheque deposit (Solomon Otieno) 21,200 185,700
8 Cheque No.417866 (Jemima Nyarnbura) 17,400 16&,300
10 Cheque No.4 17867 (Young Traders) 1.700 166,600
13 Miscellaneous credit (Kevin Kagai) 18,500 185,100
14 Standing order 3,200 181,900
20 Cheque No.417865 (Janet Aoko) 30,700 151,200
20 Local cheque deposit (Donald Korir) 11,800 163,000
21 Cheque No.417868 (David Okoth) 9,500 153,500
21 Cheque No.417870 (Rent) 16,100 137,400
24 Bank charges 1,800 135,600
27 Local cheque deposit (Joy Nduta) 4,700 140,300
28 Direct debit 8,800 131,500
29 Cheque No.417873 (Daniel Wambua) 1,200 130,300
29 Local cheque deposit (Joseph Ondieki) 27,900 158,200
3 Cheque No.417871 (Moses Siringi) 2,500 155,700

Joseph Kahiga's cashbook for the month of December 2005 was as follows:

CASH BOOK
2005 Sh. 2005 Cheque No. Sh.
Dec 1 Balance b/d 186,200 Dec 1 Electricity 417864 24,300
4 Solomon Otieno 21,200 2 Janet Aoko 417865 30,700
9 Kevin kagai 18,500 5 Jemimah Nyambura 417866 17,400
19 Donald Korir 11,800 6 Young Traders 417867 1,700
24 Joy Nduta 4,700 10 David Okoth 417868 9,500
27 Joseph Ondieki 27,900 14 Victor Karanja 417869 7,100
29 Owen Ndumbi 9,800 16 Rent 417870 16,100
30 Walter Oyugi 13,400 20 Moses Siringi 417871 2,500
21 Steve Maithya 417872 3,700
22 Daniel Wambua 417873 1,200
______ 31 Balance c/d 179,300
293,500 293,500

Required:
1) Joseph Kahiga 's updated cash book. as at 31 December 2005.
2) Joseph Kahiga's bank reconciliation statement as at 31 December 2005.
 John Kahiga
Updated Cash Book as at 31 December 2005
Sh '000' Sh '000'
Balance b/d 179,300 Standing order 3,200
Dividend 2,600 Bank charges 1.800
______ Direct debit 8,800
181,900 Bal. c/d 168,100
181,900

Balance reconciliation statement as at 31 December 2005

Sh. Sh.
Balance as per cashbook (updated) 168,100
Add: un presented cheques:
Victor Karanja No.417869
7,100
Steve Maithya No.417872
3,700 10,800
178,900
Less: Uncredited cheques:
Owen Ndubi 9,800
Walter Oyugi 13,400 23,200
Balance at bank as per bank statement 155,700

Illustration

Mwambi, a sole trader received his bank statement for the month of June 2001. At that, date the
bank balance was. Sh.706,500 whereas his cash book balance was Sh.2,366,500. His
Accountant investigated the matter and discovered the following discrepancies:

1) Bank charges of Sh.3, 000 had not been entered in the cashbook.
2) Cheques drawn by Mwambi totaling Sh.22,500 had not yet been presented to the bank
3) He had not entered receipts of Sh.26,500 in his cashbook.
4) The bank had not credited Mr. Mwambi with receipts of Sh.98, 500 paid into the bank on 30
June 2001.
5) Standing order payments amounting to Sh.62,000 had not been entered into the cashbook,
6) In the cash book Mwambi had entered a payment' of Sh.74,900 as Sh.79,400.
7) A cheque for Sh. 15,000 from a debtor had been returned by the bank marked "refer to
drawer" but had not been written back into the cashbook.
8) Mwambi had brought forward the opening cash balance of Sh.329,250 as a debit balance
instead of a credit balance.
9) An old cheque payment amounting to Sh. 44, 000 had been written back in the cashbook but
the bank had already honoured it.
10) Some of Mwambi's customers had agreed to settle their debts by paying directly into his bank
account. Unfortunately, the bank had credited some deposits amounting to Sh.832, 500 to
another customer's account. However, acting on information from his customers, Mwambi had
actually entered the expected receipts from the debtors in his cashbook.
Required:
1) A statement showing Mwambi's adjusted cash book balance as at 30 June 2001.
2) A bank reconciliation statement as at 30 June 2001.

Solution
i.
Adjusted Cash book
Sh '000' Sh '000'
Balance as per Cash book 2,366,500 Bank charges 3,000
Receipts 26,500 Standing order 62,000
Overcast in payment 4,500 Overcast in opening bal. 658,500
Dishonoured cheque 15,000
Cheque paid by bank 44,000
________ Balance c/d (adjusted CB) 1 615 000
2,397,500 2,397,500
ii) Bank reconciliation statement

Bank reconciliation statement as at 30 June 2001

Sh.
Balance as per cashbook (adjusted) 1,615,000
Add:
Unpresented cheques 22.500
1,637,500
Less: Uncredited cheques (98,500)
Error (832,500)
Balance as per bank statement 706.500

Illustration

Lotus Ltd. operated two bank accounts with its banker, account number 1 and account number 2. As
at March 2004, the balances as per the bank statement and the cash book were as follows:

Account Balance as per bank Balance as per cash book

statement
Sh. Sh.
Number 1 323,600 (Cr) 34,000 (Dr)
Number 2 156,400 (Dr) 277,600 (Dr)

Investigations revealed the following:

1. Cheques banked but not yet credited:

Sh
Account No. 1 80,000
Account No. 2 56,000

2. Cheque No. 30 I for .8,000 deposited into account No.2 was dishonored but it is has not been
reflected in the cash book.

3. A cheque No. 420 for Sh.8,800 paid direct into bank account No.1 has not been recorded in
the cash book

4. A cheque No. 341 for Sh. 6,400 was deposited into account No.2 but, this was wrongly
recorded in the cash book as Sh.8,000.

5. A cheque No. 210 for Sh.29,200 paid out from account No.1 and recorded as such in the cash
book, was erroneously paid out of account NO.2 by the bank.

6. A cheque No. 308 for Sh.12,800 paid out from account No.2 was erroneously entered in
account No.1 in the cash book.
 7. A transfer of Sh.400,000 from account No.1 to account No.2 had been entered in the cash
book but the bank had not been instructed to effect the transfer.

8. A standing order payment of Sh.4.000 from account No.2 has not been recorded in the cash
book.

9. A cheque No. 48 for Sh.8,400 paid from account No.2 was incorrectly entered in the cash
book as Sh4,800.

10. Bank charges not yet entered in the cash book are Sh.1,200 for account No.1 and Sh. 1,600 for
account No.2

11. A cheque No. 720 for Sh.80,000 received in respect of account No.2 and subsequently
credited to account No. 2 by the bank, was incorrectly entered in account No. 1 in the cash
book.

12. A cheque No.78 for Sh.7,200 received in respect of account No.2 was incorrectly recorded in
the cash book as Sh.6,800.

13. There was an unpresented cheque of Sh2,400 in respect of account No.2.

Required:

1) Adjusted cash book for each of the two accounts

2) Bank reconciliation statement for each of the IWO accounts, for the month of March 2004.
Solution

Updated Cash Book No. 1

Sh ‘000’ Sh ‘000’
Balance b/d 34,000 Bank 1,200
Direct credit 8,800 Cheque-error 80,000
Cheque No. 308 paid 12,800
Bal c/d (adjusted) 25.600 ______
81,200 81,200

Updated Cash Book No. 2

Sh ‘000’ Sh ‘000’
Balance b/d 277,600 Dishonoured cheque No. 301 8,000
Direct cheque No. 720 80,000 Cheque No. 341 overstated 1,600
Cheque No. 785 understated 400 Cheque No. 308 paid 12,800
Standing order 4,000
Cheque No. 48 understand 3,600
Bank charges 1,600
______ Balance c/d (adjusted) 326,400
358.000 358,000
 Bank Reconciliation statement No. 1
Sh. Sh.
Balance as per adjusted cashbook (25,600)
Add: Cheque No. 210 (error) 29,200
Transfer 400,000 429,200
403,600
Less: Uncredited cheques (80,000)
Balance as per bank statement 323,600

Bank Reconciliation statement No. 2

Sh. Sh.
Balance as per adjusted cashbook 326,400
Add: Unpresented cheque 2,400
328,800
Less: Cheque No. A210(error) 29,200
Transfer 400,000
Uncredited cheques 56,000 (485,200)
Balance as per bank statement 156,400