Bank Reconciliation

Bank Reconciliation

Bank reconciliation is where you check that your bank statement (the banks version of your bank account) matches your own cash book (your version of the bank account).  Its good practice to do so because: -

·         We can correct errors we make in our cash book

·         We can notify the bank of errors they may have made

·         We can update the cash book with items we have missed

·         We can identify out of date cheques and cancel them in the cash book

·         We can identify dishonoured cheques and update the cash book accordingly

·         We can use it as a deterrent to fraud by comparing our version  to the banks independent version

Technique

If the exam question says it’s not been put in the cash book – put it in!

If it’s been put in the cashbook incorrectly – fix it!

Or

If the question gives you a bank statement and cash book you will need play snap by pairing items up (tick both items though!) and then writing things which are not ticked on the bank statement into the cash book.  Remember that if it’s a debit on the bank statement it should be credited in your cash book as you write things from your own perspective.

Balance off the cash book –you are now ready to do the bank reconciliation statement.  There should be some things which have ALREADY been put in the cash book but are not on the bank statement.  These are spotted as they were not ticked by you.  Usually these are timing differences possibly caused by putting money in at the end of the month so it’s does not show on this month’s bank statement (i.e. an uncleared lodgement).    A supplier of ours might have put a cheque in their safe and forgot to take it to the bank (i.e. present it) for payment (an unpresented cheque)

The next part to do is one that many students forget – it’s the layout! 

‘The balance on the bank statement added to uncleared lodgements (debits) minus unpresented cheques (credits) should equal the updated cash book figure. ‘    This sentence can be completely reversed if you prefer to set this out the opposite way round.

I try to get my students to remember things by using a rhyme.   I’m sure you can think of a better one !!

Boasters Say

Any Utter Lies

Let’s Unfollow Cause

Can’t Be bothered

Your layout then should look something like the ones below.  It doesn’t usually matter which way round the middle lines are as long as it’s the correct direction (i.e. you add when you are supposed to add etc.!).  If you are not given the bank statement figure then you will need to work it out by working backwards.

Nial Satis

Bank Reconciliation Statement at 1^st January 2013

Balance as per Bank Statement                                                                 xxxx

Add Uncleared Lodgements                                                                      xxxx

Less Unpresented Cheques                                                                       xxxx

Balance as per updated Cash Book                                                           xxxx

Or

Balance as per updated Cash Book                                                           xxxx

Add Unpresented Cheques                                                                       xxxx

Less Uncleared Lodgements                                                                      xxxx

Balance as per Bank Statement                                                                 xxxx

Control Accounts

A trial balance tests the arithmetical accuracy of the accounts.  If the trial balance does not agree, it may require a great deal of effort to locate the error/s.  To reduce the amount of time spent searching for errors, a type of trial balance, known as a CONTROL ACCOUNT, is prepared for each of the Sales and Purchases Ledgers.

Thus only the ledgers whose control accounts do not balance need detailed checking to find errors.  This could mean 2 books instead of 4 to be checked which reduces the effort needed!  The balance of the control account should be equal to all the individual debtors/creditors added together.  This is how it verifies the accounts accuracy.

A sales ledger control account is shown below

                                +                                                                                           -

                                -                                                                                       +

A simple solution is to remember to put a plus and minus on top of each account as has been done above

Notes to remember

There may be contra entries in the control accounts where the same business (person) is both a supplier and a customer, and inter-indebtedness has been netted (“set-off”).

This reduces the amount and goes on the minus side of each control account!

Cancelled and Dishonoured cheques increase the amount owing – so you put them on the plus side

Benefits of using control accounts

• Fraud detection.
• The provision of timely relevant information on Debtors (Trade Receivables) and Creditors (Trade Payables) which can be used on Balance Sheets as either Current Assets or Current Liabilities.

Limitations of control accounts

It does not tell you which account has the error (i.e. locate it)
Some errors still apply  

• C             Commission
• O             Omission
• C             Compensating
• O.           Original Entry

Control accounts are therefore useful at verifying the accuracy of the accounts but not foolproof!

Users of Accounting information (Stakeholders)

Why do Accounting

Accounting is done for various reasons , including letting people and organisations know:

·         If they are making a profit or a loss

·         What their business is worth

·         How much cash they have

·         How wealthy they are

·         How much they are owed

·         How much they owe someone else

·         Keeping a financial check on the things they do

·         Legal obligation to check tax liabilities

·         Helping control expenses

·         Obtaining loans

Possible users of accounting information include internal and external users.  Internal are those inside the business whilst external are outside: -

Internal

·         Managers – to assess performance, plan for the future, make decision and claim bonuses

·         Owner(s) of the business - to assess profitability and liquidity,

·         Employees – to assess job security or pay rises

External

·         A prospective buyer  - is business worth the price being asked

·         The bank – assess risk of any loan and interest rate

·         HMRC – to charge the correct amount of tax

·         Credit Supplier – to assess whether the firm has good enough liquidity to repay its debt to them

·         Customers – to check their orders placed will be received in due course

Balancing off accounts

Closing off accounts

Quick reminder of the usual entries.

Assets/Expenses             To increase         Debit

                                      To decrease        Credit

Liabilities / Capital            To increase         Credit

                                        To decrease        Debit

To balance off an account

1. Add the debits up and write it (in rough) in the corner
2. Add the credits up and write it (in rough) in the corner
3. Leaving two lines blank under the side with the most entries draw two totals lines parallel underneath the total
4. Write the biggest total in your total lines
5. The side which was slightly smaller has a balance to carry down.  Above the total write the last date of that period and then Balance c/d (carried down)
6. On the opposite side beneath the total you need to start the next period.  Write the starting date of the next period and write balance b/d (brought down) with the same balancing figure.

Below in an example

The account is now ready for February's entries to be made.  You will need to do this for all accounts.  The balance to be carried / brought down could be on either side.  For accounts where there is no balance to bring down you simply put the total down.