BANK RECONCILIATION

Bank reconciliation is the process of bringing into agreement the balance as per
cashbook (bank column) and the balance as per bank statement.

A statement sent by the bank to the account holder showing a summary of

transactions between him/her and the bank i.e. deposits (bankings) and withdrawals
or payments and the running balance after each transaction is called a bank
statement, A bank statement shows how the account was operated. A bank prepares a
bank statement for each account holder especially holders of current accounts at the
end of each month but can be prepared at any time on request by the account holder.

When a cheque is banked or cash Js deposited (lodged in), the customer's account will
be credited in the bank. The person who made a deposit or banking will debit his or
her cashbook. Conversely when a customer makes a withdrawal or makes payments
out of his bank account, his/her account will be debited in the bank and he/she will
credit his/her cashbook (bank column).

If all credits in the bank were also debited to the cash book and all debits in bank
were credited to the cashbook and vice-versa, the two balances would obviously
agree and there would be no need for bank reconciliation. Unfortunately this is not
always the case. The balance as per bank statement seldom agrees with the balance
as per cashbook and this warrants the preparation of a bank reconciliation statement.

Objectives of bank reconciliation

 To track if there are any differences by comparing the company’s cash book
with the bank’s passbook.
 To adjust the bank balance in your firm’s cash book if there is any difference
found in the balances as per the cash book and the passbook.
 To keep a track of the cheques bounced, cheques altered, stolen, or cashed
without your knowledge.
  To detect fraudulent transactions if any.
 To help auditors with the annual audits.
 To maintain a track of the company’s accounts payable and receivable.

The need for Bank Reconciliation

1. Bank reconciliation strengthens an organisation's internal control system
through detection and prevention of fraud. An accountant or cashier who
embezzles his/her employer’s funds and manipulates the cash book will be
discovered if bank transactions (cheques) were involved. It is therefore
advisable to receive and make payments by cheque because such transactions
are more easier to trace in the bank statement than if they were cash.

2. Bank reconciliation leads to accuracy in records. This is because the cash book
and bank statement are synchronized. A mistake in either the cash book or
bank statement will be detected and corrected during bank reconciliation.

Causes for discrepancy between cash book and bank statement balances
The following are the reasons or items which cause a difference between the cash
book balance and the bank statement balance thus necessitating preparation of a
bank reconciliation statement.
1. Direct Debits (Debits in bank statement not credited to the cash book)
These are payments that are effected by the bank without requiring a cheque to be
issued by the account holder. Since cheques are not issued for such payments, they
are not recorded in the cash book yet debited in the bank statement. Direct debits
mostly include bank charges and standing orders.

Bank charges are levied by the bank for services offered to the account holder. These
charges include, ledger fees, commissions etc. These charges are directly debited to
the bank statement.

Standing orders are arrangements where the account holder instructs the bank to
make certain routine and fixed type of payments directly to the payees on behalf of
the account holder. Cheques are not issued by account holder for these types of
payments. Standing order arrangements are often for transactions such as paying
insurance premiums, paying utility organisations for say water rates, electricity bills
etc and for paying interest and amortising fixed installment loans. For standing order
arrangements to be effective, payments must be routine and fixed.
2. Direct Credits (Credits in Bank statement not in debited to the cash book)
These are receipts that are directly credited to the bank statement without having
been debited to the cashbook. For instance some debtors might prefer to settle their
indebtedness by paying directly to the payee’s bank account. An organisation like UEB
has a lot of direct credits. Other direct credits include interest received, dividends
etc.

When a person's bank account is directly credited, the bank is supposed to send a
credit advice note or credit memo to that person and a debit advice note for direct
debits. However, in many cases, these advice notes are sent together with the bank
statement and therefore too late to be included in the cashbook.
3. Unpresented Cheques
These are Cheques that are drawn and credited in the cashbook but not presented to
the bank for encashment or payment. These Cheques are not debited to the bank
statement.
4. Uncredited Cheques (Deposits-in-transit)
These are Cheques or cash deposited to the bank and debited to the cashbook but not
credited by the bank.
5. Clerical errors
Errors made in recording amounts or wrong postings in the cash book or bank
statement will also cause the cash book and bank statement balances to disagree

6. Dishonoured Cheques
A dishonoured cheque is one that the bank has refused to pay or recognise as an
instrument for transferring money from one person to another. Dishonoured Cheques
are recorded in the cash book but are either not recorded in the bank statement or
recorded in such a way that there is no effect on the bank statement balance.
There are many reasons for a bank to dishonour a cheque. Some of these reasons
are:
No sufficient funds on the drawer's account- This is a criminal offence in the
laws of Uganda.
Amount in words differing with amount in figures.
If the drawers' signatures on the cheque differ from specimen signatures held
by the bank.
When a cheque becomes stale or expires. A cheque gets stale or expires six
months from the date on the cheque.
Alterations in figures or words which are not counter signed by drawers.
If there is no account title on the cheque.
Cheques which are not confirmed and yet in the contract between the account holder
and the bank, drawers confirmation is required.
If the payee's identity is doubted
For certain Cheques e.g. Bank of Uganda Cheques, if a payment voucher is not
attached.

Methods of bank reconciliation

There are three principal methods of preparing a bank reconciliation statement.
1. Beginning with the cashbook balance, adjusting, up-dating or correcting the
cashbook and then preparing a bank reconciliation statement. The ultimate
aim of this method is to arrive at or prove the bank statement balance.
2. Beginning with the bank statement balance and working towards proving the
cash book balance.
3. Adjusting the cash book balance and also adjusting the bank statement
balance. The aim is to show whether the two adjusted balances agree.

Either methods of bank reconciliation can be used. The majority of Ugandan

organisations use methods 1 and 2 above.
SOLVED EXAMPLES
1. The following cash book and bank statement for BBK Ltd for the month of
September 2015.
Cash book (Bank column)
(Shs. 000) (Shs.OOO)
1/9/15 Bal b/f 80,000 7/9/15 Mukasa 32,000
2/9/15 John 60,000 8/9/15 Peter 40,000
10/9/15 XY Ltd. 24,000 11/9/15 Okurut 30,000
14/9/15 Twesigye 10,000 17/9/15 Bob 14,000
16/9/15 Tibaire 4,000 28/9/15 Jimmy 6,000
28/9/15 Stella 34,000 28/9/15 Harriet 4,000
30/9/15 Matte 13,000 30/9/15 Martin 2,000
30/9/15 Joel 2,000 30/9/15 Manda 1,000
Simon 4,000
Bal. c/f 94.000
227.000 227.000

Bank Statement
. Dr. Cr. Balance

Date Particulars (Shs. 000) (Shs. 000) (Shs. 000)

1/9/15 Bal. b/f 80,000

5/9/15 John 60,000 140,000
8/9/15 Mukasa 32,000 108,000
10/9/15 Peter 40,000 68,000
13/9/15 Okurut 30,000 38,000
14/9/15 XYLtd 24,000 62,000
16/9/15 Twesigye 10,000 72,000
18/9/15 Bob 14,000 58,000
20/9/15 C. M. Leon 18,000 76,000
25/9/15 S.O. (UP &TC) 2,000 74,000
26/9/15 C,M. (George) 16,000 90,000
30/9/15 Bank Charge 200 89,800
C.M. = Credit memo
S. O. = Standing order
A cheque written to Jimmy on 28/9/15 and one received from Tibaire and banked on
16/9/15 were dishonoured by the bank.
Required:
Prepare BBK Ltd. bank reconciliation statement for the month ended 30/9/15.

SOLUTION
Method 1: (Beginning by adjusting or correcting the cash book and working
towards proving balance as per bank statement).

Adjusted (corrected) cash book

(Shs.000) (Shs.000)
Bal. b/f 94,000 Tibaire 4,000
(Dishonoured
cheque)
C.M-Leon 18,000 UP & TC (S.O) 2,000
C.M-George 16,000 Bank charge 200
Jimmy 6000 Bal. c/f 127,800
(Dishonoured
cheque)
134,000 134,000

BBK Ltd
Bank reconciliation statement for the month ended 30/9/15
(Shs.000) (Shs.000)
Balance as per adjusted cash book 127,800
Add: Unpresented cheque
Harriet 4,000
Martin 2,000
Manda 1,000
Simon 4,000 11,000
Less: Uncredited cheques 138,800
Stella 34,000
Matte 13,000
Joel 2,000 49,000
Balance as per bank statement 89,800

Example of a format for a Bank Reconciliation

ABC International is closing its books for the month ended April 30. ABC's
controller must prepare a bank reconciliation based on the following issues:

1. The bank statement contains an ending bank balance of $320,000.

2. The bank statement contains a $200 check printing charge for new checks that
the company ordered.
3. The bank statement contains a $150 service charge for operating the bank
account.

4. The bank statement rejects a deposit of $500 due to not sufficient funds, and
charges the company a $10 fee associated with the rejection.

5. The bank statement contains interest income of $30.

6. ABC issued $80,000 of checks that have not yet cleared the bank.

7. ABC deposited $25,000 of checks at month-end that were not deposited in time
to appear on the bank statement.

The controller creates the following reconciliation:

Item Adjustment to Books

#

Bank balance $320,000 1  

- Check printing charge -200 2 Debit expense, credit cash

- Service charge -150 3 Debit expense, credit cash

- NSF fee -10 4 Debit expense, credit cash

- NSF deposit rejected - 500 4 Debit receivable, credit cash

+ Interest income + 30 5 Debit cash, credit interest income

- Uncleared checks - 80,000 6 None

+ Deposits in transit + 25,000 7 None

Book balance   $264,170  

Bank Reconciliation Statement

When the bank reconciliation process is complete, you should be able to print a
report through your accounting software that shows the bank and book balances,
the identified differences between the two (mostly uncleared checks), and any
remaining unreconciled difference. Retain a copy of this report for each month.
The auditors will want to see it as part of their year-end audit. The format of the
report will vary by software package; a simplistic layout is:

Bank Reconciliation Statement  

For Month Ended March 31, 20X3 Notes 

Bank balance $850,000  

Less: Checks outstanding -225,000 See detail

Add: Deposits in transit +100,000 See detail

+/- Other adjustments 0  

Book balance $725,000  

Unreconciled difference $0