Bank Reconciliation Statement

The balance as per bank statement and the bank balance in the ledger accounts differ in most cases. That is why; there is a need to reconcile the difference between two sets of balances. There are plenty of reasons for the differences and accountant need to identify these items for reconciliation.

Reasons of Differences

Outstanding checks – By outstanding check, we mean the checks issued by the entity to third parties but these checks did not appear in the bank. As a result, bank statement shows more balance than the entity’s own ledger.

In transit – These are the checks which the company has deposited into the bank but due to the length of the check clearing process, the amount has not yet credited into the entity’s bank balance. As a result, bank balance shows lower balance as compared to the balance as per ledger.

Bank Charges – Often bank charges various kinds of fees to provide services, this fact does not come to the knowledge of the entity until the bank statement is taken from the bank.

Interest income – Entity earns interest income over its balance maintained with the bank. At the end of the month, bank credits the entity’s bank account with the interest income. This comes to the knowledge of the company when the bank statement is taken out from the bank.

Example

At 31st Dec, 2015, the balance as per bank statement shows $4,506 while the cash book shows a balance of $2802. On examining the bank statement with the cash book records, it was found that a check issued to a creditor amounting to $1,936 on 31st Dec, 2015 was not presented into the bank. Apart from this, a check of $232 deposited into the bank has not received till 31st Dec 2015. 

Required

Prepare bank reconciliation statement.

Solution

Balance as per bank statement$4,506
Check issued not presented into the bank ($1,936)
Check in transit $232
  
Balance as per cash book/ pass book  $2,802

Example 2

Faiz chemical is engaged in producing various types of chemicals used in the detergent industry. It is regarded as one of the main producer of chemicals in the region. Following details are available from its financial records as at 31st March, 2013:

1. Bank balance as per cash book (Debit balance7,000
2. Balance as per bank statement (Credit balance5,155
3. Check issued to the supplier but presented after 31st March1,000
4. Three check amounting to $ 500, $1,000 & $ 1,500 were issued but the check amounting to $ 1,000 was presented on 6rd April.750
5. Check issued but not recorded in the cash book.250
6. Check deposited into the bank account but credited by the bank in Faiz account after 31st March.1,000
7. Total three checks deposited into bank account amounting to $ 1,000, $ 1,200 & $ 1,600 but the check amounting to $1,600 was credited by bank on 4th April.500
8. Faiz company’s accountant deposited checks into bank but not recorded in cash book.800
9. The accountant made a mistake and as a result, debit side of the cash book was overcastted by1,000
10. Again due to accountant’s mistake, credit side of the cash book was understated by500
11. Bank credited Faiz account by $ 150 for interest over saving account, while debited $ 50 on account of bank charges.
12. Dividend credited by bank in account of Faiz company
13. A customer deposited the bill in Faiz bank account not recorded in cash book.
14. $ 1,000 belongs to the dishonored check appeared in pass book. But this has not been recorded in cash book.
15. On 4th April, Bank fulfilled the bill payable of the Faiz company for $ 1,500 issued on 30th Match.
16. Accountant by mistake, entered the bank charges $ 5 over issuance of new check book twice.
17. Check of $ 50 drawn by Raiz Chemical had been wrongly charged to Faiz Chemical’s account in March 2013.
Required: Find out the adjusted balance and prepare the bank reconciliation statement in order to arrive balance as per bank statement.

Solution

Faiz Chemical

Statement of Adjusted Balance

As on 21st March 2013

DetailsCash BookBank Statement
Balance as per
Less: check not presented
Less: check not presented
Less: check issued but could not be recorded in cash book
Add: check not cleared till 31st March
Add: check not cleared till 31st March
Add: check deposited into bank but not recorded in cash bookLess: debit side of overstated
Less: credit side understatedAdd: interest income
Less: Bank chargesAdd: dividend income earned
Add: Customer direct deposit into company account
Less: dishonored checks
Less: Bill payable
Add: Bank charges recorded two times in the cash book
Add: Bank error
Adjusted balance








7,000
(750)
1,000
(500)(800)
150
(50)
1,000
500
(1,000)(1,500)
5
5,055



5,155
(1,000)
(1,000)
250
1,600          
5,055













Faiz Chemical

Bank Reconciliation Statement

As on 21st March 2013

Adjusted balance calculated as above 
Add: check not presented till 31st March
Add: check not presented till 31st March
Less: check not cleared till 31st March
Less: check not cleared till 31st March
Less: Bank mistake 
Balance as per bank statement / pass book 
5,055 
1,000 
1,000 
(250) 
(1,600) 
(50) 
5,155

Example

Neon Plc bank balance as per ledger is not complying with the balance as per bank statement. Upon scrutiny, following reasons of differences were identified:

  1. Cash book balance 63,600.
  2. Balance as per pass book 18,800.
  3. Cheque of $ 19,000 was deposited into the bank was erroneously recorded in the bank statement as $ 11,800.
  4. $ 16,000 cheque was issued to pay off a creditor’s liability. Due to clerical mistake, it was recorded as $ 6,000 in the cash book.
  5. Neon Plc did a mistake is recording a payment to a supplier as entered it as $ 27,000. However, cheque was of $ 30,600.
  6. Cheque deposited of $ 24,000 on the last date of the year not shown on bank statement till 31 December.

Required

Prepare bank reconciliation statement of Neon Plc.

Solution

Neon Plc

Bank Reconciliation Statement

As on December 31, 201X

 ParticularsCash BookPass Book
Balance as per63,60018,800
   
Add: amount recorded short 7,200
   
  26,000
   
Less: amount recorded short due to error in cash book10,000 
   
 53,600 
   
Less: Creditors3,600 
   
 50,000 
   
Add: cheque deposited but appeared in pass book 24,000
   
Adjusted balance50,00050,000

Example

Jasmine & Co. is a well known perfume manufacturer in the Middle East. Following information is available from its accounting records on April 10, 2016:

Cash book credit balance $ 16,840.

Balance as per bank statement debit balance $ 96,000.

Cheque issued to suppliers amounting to $ 70,000. Out of these, only cheques amounting to $ 56,000 were presented.

Cheque received from customers amounting to $ 150,000. Out of these, only $ 80,000 was realized.

Cheque issued to a creditor amounting to $ 9,000 was not recorded in the books.

Bank charges on overdraft facility $ 500 not recorded in the cash book.

Jasmine & Co. received dividend in the bank amounting to $ 3,000 not recorded in the cash book.

Cheque of $ 17,500 was erroneously recorded in the cash book as $ 11,740.

A customer cheque was dishonored amounting to $ 10,200. On dishonor, bank penalizes $ 200 as bank charges.

Required

Prepare bank reconciliation statement.

Record journal entries to correct the accounting record.

Answer

Jasmine & Co.

Bank Reconciliation Statement

For the period ended …..

ParticularsCash BookPass Book
Balance as per(16,840)(96,000)
Less: cheques not presented (14,000)
  (110,000)
Add: cheque presented but not cleared 70,000
  (40,000)
Less:  
Creditors9,000  
Interest expense1,000  
Creditors (correction of error)5,760  
Dishonored cheque10,200  
Bank charges200(26,160) 
 (43,000) 
Add: dividend collected3,000 
Adjusted overdraft balance(40,000)(40,000)

Adjusting Entry

No.ParticularsDebitCredit
1Creditors
Interest expense
Creditors
Debtors
Bank charges
Bank overdraft
9,000
1,000
5,760
10,200
200
     




261,160
2Bank overdraft
Dividend income
3,000 3,000

Bank Reconciliation Statement Problem Exercise

Kevin is a lawyer firm and has so many big clients in their portfolio. It is progressing quite beautifully in the recent years. The success largely depends upon the aggressive and innovative strategies of the top management. The firm has just ended and for the year end audit, you are required to prepare a bank reconciliation statement because balance as per ledger and as per pass book are not in conformity.

The cash book of the Kevin showed a debit balance of $ 38,000 while the pass book balance showed a balance of $ 86,000 on December 31, 2014. On security, following reasons for differences were identified to reconcile the two sets of documents. The reasons are as follows:

  1. Dividend collected by the banker on behalf of Kevin $ 60,000.
  2. Dishonored cheque of a customer $ 12,000.
  3. The bank paid against the note issued by the Kevin $ 22,400 (including interest charges of $ 1,200.
  4. Cheque $ 26,800/- received from a customer wrongly entered into the accounting records as $ 30,400.
  5. Cheque amounting to $ 28,000 deposited into the bank did not appeared in the bank statement.
  6. Cheque amounting to $ 36,000 paid to a supplier of office stationary did not appear in the bank statement.
  7. Office rent was paid by a cheque amounting to $ 28,800 appeared erroneously as 10,800 in the bank statement.

Required:

You are required to:

Prepare a bank reconciliation statement

Record journal entries as indicated by the reconciliation.

Solution

Kevin

Bank Reconciliation Statement

For the month Ended December 31, 2014.

ParticularsDebitCredit
Balance as per38,00086,000
Add: collection of dividend60,000 
 98,000 
Less: dishonored cheque12,000 
 86,000 
Less: note paid with interest payment22,400 
 63,600 
Less: overstatement in recording deposits3,600 
 60,000 
Add: uncollected cheque 28,000
  114,000
Less: unpresented cheque 36,000
  78,000
Less: understatement in amount 18,000
Adjusted balance60,00060,000

Kevin

Adjusting Entries

No.ParticularsDebitCredit
1Bank
Dividend income
60,000
 
60,000
2Debtors
Bank
12,000
 
12,000
3Notes payable
Interest expense
Bank
20,000
2,400
 

 22,400
4Debtors
Bank
3,600 3,600

Checkout our Bank Reconciliation Exercise & Answer & MCQS Page.