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Chapter 4 Bank Reconciliation Statements

Notestoteachers

1 Start with Chapter 4 of Frank Wood’s Introduction to Accounting and briefly explain to students the basic principles of recording in the cash book.

2 It is necessary to show a (real or simulated) bank statement to students as most of them would probably have no idea of what one looks like.

3 Most students have difficulty understanding why a debit bank balance appearing in the cash book represents a positive balance while a debit bank balance appearing in the bank statement represents a negative (overdraft) balance. Teachers must clarify a bank deposit from the perspectives of the business and the bank (whether it is treated as an asset or a liability).

4 Most students have the misconception that a bank reconciliation statement is used to make corrections in the cash book and/or the bank statement. Teachers must clarify that the bank reconciliation statement is simply used to show the difference between the bank balances of the cash book and the bank statement. By so doing, a bank reconciliation statement can help spot errors in the cash book or the bank statement.

5 Most students have difficulty understanding why unpresented cheques and uncredited cheques are added to and deducted from the cash book balance, respectively, in arriving at the bank statement balance. Teachers should tell them the purpose is to reconcile both balances. The calculation would be reversed if it starts with the bank statement balance and ends with the cash book balance.

6 The treatment of bank errors is the most difficult task. Teachers should spend more time demonstrating how they should be shown on the bank reconciliation statement and explaining the general principle behind this.

7 In public examinations, this topic is usually combined with other topics in a long question, most probably the correction of errors, which will be taught in Chapter 6.

Q1 A bank overdraft occurs when a firm withdraws more money than it has in its bank account. As a result, the balance at the bank will become negative.

Q2 A standing order is an instruction given by a bank customer to his bank to pay a fixed sum of money from his account to a named beneficiary (payee) at regular intervals.

Example: A fixed amount of money is automatically transferred out of one’s bank account to pay property management fees on a fixed date each month.

A direct debit is an authority given by the customer to a named payee to claim payments from the customer’s bank account and an instruction to his bank to allow the payments to go through. It does not specify the payment amount or the payment date.

Chapter 4

Notestoteachers

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Example: Money is automatically transferred out of one’s bank account to pay electricity charges, but the amount and the date of each transfer is not fixed.

Generally, a standing order is used when the bank customer needs to pay a fixed amount at regular intervals. When payments are made at irregular intervals or are of variable amounts, a direct debit would be used instead.

Q3 The reason may be one of the following:

• The drawer does not have enough money in the current account for the payment.

• There is no signature on the cheque, or the signature does not match the record at the bank.

• The amount in words differs from the amount in figures.

• The cheque is not dated.

• The cheque is a stale cheque (i.e., exceeding six months after the date of issue).

• The cheque is a post-dated cheque. This means that the date on the cheque has not yet been reached.

• The drawer’s account has been closed.

• Alterations to the cheque have not been countersigned by the drawer.

(Any two of the above)

Q4 A bank reconciliation statement is prepared at the end of a period in order to show the reasons for the difference between the bank balances of the cash book and the bank statement.

Q5 Yes.

A bank reconciliation statement shows the reasons for the difference between the bank balances of the cash book and the bank statement. The reasons may be errors and omissions made in the cash book or the bank statement. So the preparation of a bank reconciliation statement can help to detect and correct errors.

Q6 DYuen BankReconciliationStatementasat30November2009

$ $Overdraftbalanceaspercashbook (3,780)Add Unpresentedcheque 630 Credittransfer 1,240 1,870 (1,910)Less Uncreditedcheque 1,060 Standingorder 770 Bankcharges 490 (2,320)Overdraftbalanceasperbankstatement (4,230)

Q7 (a) MCheng BankReconciliationStatementasat31March2010

$ $Balanceasperbankstatement 161,800Add Banklodgementnotyetenteredonbankstatement 11,500 Bankerror—Servicefeeovercharged 1,800 13,300 175,100Less Unpresentedcheque (16,400)Adjustedbalanceaspercashbook 158,700

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(b) MCheng BankReconciliationStatementasat31March2010

$ $Balanceaspercashbook 156,500Add Unpresentedcheque 16,400 Creditor—Stalecheque 12,000 Openingbalanceunderstated 10,000 Directcredit 18,600 57,000 213,500Less Banklodgementnotyetenteredonbankstatement 11,500 Bankerror—Servicefeeovercharged 1,800 Debtor—Dishonouredcheque 19,000 Paymentunderstated 13,000 Loaninterest 5,000 Electricity—Directdebit 1,400 (51,700)Balanceasperbankstatement 161,800

A2 When a firm keeps money in the bank, it is the same as the firm lending money to the bank. Therefore, the firm’s positive bank balance is treated as a liability by the bank and not an asset.

A4 Adjusting entries in the drawer’s cash book:

Dr Cash book (bank column) Cr Creditor’s account

ASSESSMENT

Short QuestionsShort Questions

1 (a) CashBook

2009 $ 2009 $Jun 30 Balanceb/d 2,833 Jun 30 UnionCredit—Standingorder 44" 30 RSLtd—Credittransfer 90 " 30 Bankcharges 70 " 30 Balancec/d 2,809 2,923 2,923

(b) CChan BankReconciliationStatementasat30June2009

$Correctedbalanceaspercashbook 2,809Add Unpresentedcheque 57 2,866Less Uncreditedcheque (624)Balanceasperbankstatement 2,242

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2 (a) CashBook

2008 $ 2008 $Dec 31 KSung—Directcredit 180 Dec 31 Balanceb/d 3,922" 31 Balancec/d 4,007 " 31 MercantileLtd—Standingorder 200 " 31 Bankcharges 65 4,187 4,187

(b) CHung BankReconciliationStatementasat31December2008

$Correctedoverdraftbalanceaspercashbook (4,007)Add Unpresentedcheque 84 (3,923)Less Uncreditedcheque (211)Overdraftbalanceasperbankstatement (4,134)

3X (a) CashBook

2009 $ 2009 $Mar 31 KTong—Directcredit 57 Mar 31 Balanceb/d 5,280" 31 Balancec/d 5,300 " 31 BKSLtd—Directdebit 49 " 31 Bankcharges 28 5,357 5,357

(b) KWoo BankReconciliationStatementasat31March2009

$Overdraftaspercorrectedcashbook (5,300)Add Unpresentedcheque 490 (4,810)Less Uncreditedcheque (160)Overdraftasperbankstatement (4,970)

4X (a) CashBook

2009 $ 2009 $May 31 Balanceb/d 141,030 May 31 CYeung—Returnedcheque 4,800" 31 Dividendrevenue 16,280 " 31 Bankcharges 820 " 31 Balancec/d 151,690

157,310 157,310

(b) DDLtd BankReconciliationStatementasat31May2009

$Adjustedbalanceaspercashbook 151,690Add Unpresentedcheques($2,790+$16,270) 19,060 170,750Less Uncrediteddeposit (29,140)Balanceasperbankstatement 141,610

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5 (a) CashBook

2009 $ 2009 $Dec 31 Balanceb/d 4,500 Dec 31 Insurance—Standingorder(i) 600" 31 Dividendrevenue(ii) 720 " 31 Bankcharges(iii) 90" 31 HKFinanceLtd—Refund(iv) 780 " 31 CHo—Dishonouredcheque(vi) 210" 31 Transferfromsavingsa/c(v) 4,200 " 31 Balancec/d 9,300 10,200 10,200

(b) KTang BankReconciliationStatementasat31December2009

$Correctedbalanceaspercashbook 9,300Add Unpresentedcheques($750+$870) 1,620 10,920Less Uncreditedcheque (2,070)Balanceasperbankstatement 8,850

Application Problems

6 (a) CashBook

2010 $ 2010 $Apr 30 Balanceb/d 53,000 Apr 30 Bankcharges(i) 150" 30 Chequewronglyrecordedon " 30 Rent—Standingorder(ii) 20,000 creditside($6,200×2)(iv) 12,400 " 30 Debtor—Dishonouredcheque(iii) 3,560" 30 Credittransfer(v) 5,800 " 30 Balancec/d 48,680" 30 Dividendrevenue(vii) 1,190 72,390 72,390

(b) PandaClub BankReconciliationStatementasat30April2010

$Correctedbalanceaspercashbook 48,680Add Loaninterestundercharged (vi) 2,400 Unpresentedcheque (viii) 700Balanceasperbankstatement 51,780

or PandaClub BankReconciliationStatementasat30April2010

$Balanceasperbankstatement 51,780Less Loaninterestundercharged (vi) (2,400) Unpresentedcheque (viii) (700)Correctedbalanceaspercashbook 48,680

(c) See text, Section 4.5 of Frank Wood’s Introduction to Accounting.

7X (a) CashBook

2009 $ 2009 $Oct 31 Balanceb/d 76,230 Oct 31 Debtor—Dishonouredcheque(vi) 2,720" 31 Dividendsreceived(iv) 930 " 31 Insurance(vii) 8,250" 31 Ratesrefund($5,500×2)(v) 11,000 " 31 Discountsallowed(viii) 30 " 31 Balancec/d 77,160 88,160 88,160

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(b) GloryLtd BankReconciliationStatementasat31October2009

$ $Adjustedbalanceaspercashbook 77,160Add Unpresentedcheque (ii) 1,840 79,000Less Uncrediteddeposits (i) 5,650 Bankerror($10,000×2) (iii) 20,000 (25,650)Balanceasperbankstatement 53,350

(c) The reason could be:

(i) The creditor had not deposited the cheque into his bank account.

(ii) The cheque had been deposited but had not yet been processed by the bank by the end of the period.

8 (a) CashBook

2010 $ 2010 $Mar 31 Balanceb/d 93,596 Mar 31 Bankinterestcharges(iii) 184" 31 PaulLee—Incorrectamount " 31 Rates—Autopay(iv) 2,688 entered(ii) 1,080 " 31 DavidHo—Dishonouredcheque(vi) 2,080" 31 PeterPang—Credittransfer(v) 3,256 " 31 Balancec/d 95,484" 31 Salesreceiptsomitted(viii) 2,504 100,436 100,436

(b) AnneLo BankReconciliationStatementasat31March2010

$Balanceasperbankstatement 91,600Add Uncreditedcheque (vii) 8,744 100,344Less Unpresentedcheques (i) (4,860)Correctedbalanceaspercashbook 95,484

(c) In Hong Kong, when a cheque is deposited into the bank, it takes at least one full working day for the cheque to clear. As the cheque was deposited on 31 March 2010, it would only be cashed in early April 2010. Thus, it did not appear on the bank statement for the month ended 31 March 2010.

9X (a) CashBook

2010 $ 2010 $Dec 31 Balanceb/d 137,900 Dec 31 Tradesubscription(iii) 11,060" 31 Dividendrevenue(ii) 1,365 " 31 Interestexpenses(iv) 210" 31 MrSin(v) 3,210 " 31 MrWo—Dishonouredcheque(vi) 1,246" 31 ThomasWong(v) 2,530 " 31 Balancec/d 139,209" 31 ChequereceivedfromMrMa previouslyrecordedonthe creditside($3,360×2)(viii) 6,720 151,725 151,725

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(b) BankReconciliationStatementasat31December2010

$ $Correctedbalanceaspercashbook 139,209Add Unpresented cheques: (i) MrMa 860 MrMan 190 1,050 140,259Less Overdraftinterestwronglycharged (vii) (840)Balanceasperbankstatement 139,419 or

BankReconciliationStatementasat31December2010

$Balanceasperbankstatement 139,419Add Overdraftinterestwronglycharged (vii) 840 140,259Less Unpresentedcheques (i) (1,050)Correctedbalanceaspercashbook 139,209

10 (a) CashBook

2010 $ 2010 $May 7 Sales 1,630 May 1 Balanceb/d 3,340" 10 Capital 10,000 " 4 Van 5,000" 29 ABLtd 555 " 18 DMingLtd 237" 31 Dividendrevenue(ii) 280 " 30 Wages 470 " 31 Bankcharges(i) 110 " 31 Insurance—Standingorder(iv) 920 " 31 Sales—Dishonouredcheque(v) 75 " 31 Balancec/d 2,313 12,465 12,465

(b) BMok BankReconciliationStatementasat31May2010

$Adjustedbalanceaspercashbook 2,313Add Unpresentedcheque (vi) 237 2,550Less Uncreditedcheque (iii) (555)Balanceasperbankstatement 1,995

(c) See text, Section 4.4.

11X (a) No. A bank reconciliation statement is prepared to explain the difference between the bank balances of the cash book and the bank statement.

(b) (i) CashBook

2009 $ 2009 $Mar 31 Balancec/d 24,275 Mar 31 Balanceb/f(balancingfigure) 5,894 (foundinthebankreconciliation " 31 Creditor($5,280+$5,016)(iii) 10,296 statement) " 31 ChungHwaLtd— Dishonouredcheque(v) 2,484 " 31 Overdraftinterest(vi) 862 " 31 Electricity(vii) 4,739 24,275 24,275

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(ii) BankReconciliationStatementasat31March2009

$ $Adjustedbankbalanceaspercashbook(balancingfigure) (24,275)Add Personalchequewronglydepositedintobank (i) 1,320 Unpresentedcheques (ii) 11,763 13,083 (11,192)Less Lodgementnotyetenteredonbankstatement (iv) (3,180)Overdraftbalanceasperbankstatement (14,372)

(iii) The bank balance to be shown in the balance sheet as at 31 March 2009 would be $24,275 (overdraft).

12 (a) CashBook

2009 $ 2009 $Feb 28 Balanceb/d 2,716 Feb 28 Bankcharges 562" 28 JasperLtd—Credittransfer 1,375 " 28 Governmentrates—Directdebit 231 " 28 JacobCo—Dishonouredcheque 350 " 28 Tradesubscriptions—Standingorder 375 " 28 Balancec/d 2,573 4,091 4,091

(b) AmyKo BankReconciliationStatementasat28February2009

$ $Balanceasperbankstatement 1,429Add Uncrediteditem 2,000 3,429Less Unpresented cheques: Telephone(No.4149) 106 Wages(No.4152) 750 (856)Correctedbalanceaspercashbook 2,573

(c) Accounts Receivable Ledger

JacobCo

2009 $ 2009 $Feb 1 Balanceb/d 719 Feb 24 Bank 350" 28 Bank—Dishonouredcheque 350 " 28 Balancec/d 719 1,069 1,069

13X (i) Bank receipts and payments should be recorded in the cash book on the dates that they are made. This is the time when the corresponding liability is settled. For example, a cheque payment should be recorded when the cheque is drawn and not when it is presented to the bank. Making entries on the basis of the bank statement could miss some cheques that have been drawn but have not been presented during the period.

(ii) These items are usually debited or credited automatically to the bank account without prior notification. The account holder can only ascertain these items upon receiving the bank statement.

(iii) Actually, these cheques or deposits were recorded in the cash book when they were drawn or made. Adjustments for such items are just for the purpose of explaining the difference between the bank balances of the cash book and the bank statement.

(iv) As explained in part (i), bank receipts and payments should be recorded in the cash book when they are made. So the bank balance shown in the balance sheet should be the adjusted balance of the cash book.

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Past Exam QuestionsPast Exam Questions

14 (a) CashBook

2006 $ 2006 $Mar 31 Balanceb/f 225,000 Mar 31 Dishonouredcheque(iii) 6,800" 31 Tradecreditors(i) 800 " 31 Paymenttosupplier($2,750×2)(iv) 5,500" 31 Credittransfer(vii) 6,600 " 31 Standingorder—Rent(viii) 34,000 " 31 Balancec/f 186,100 232,400 232,400

(b) BankReconciliationStatementasat31March2006

$ $Balanceaspercorrectedcashbook 186,100Add Unpresentedcheque (v) 1,400 187,500Less Overdraftinterestwronglydebited (ii) 1,000 Uncreditedcheque (vi) 20,150 (21,150)Balanceasperbankstatement 166,350

(c) (i) To discover any errors or irregularities, and

(ii) To detect any missing transactions in the cash book.

15X (a) CashBook

2006 $ 2006 $Dec 31 Balanceb/d 186,400 Dec 31 Tradedebtors(i) 7,800" 31 Tradedebtors(vii) 3,900 " 31 Overdraftinterest(ii) 2,660 " 31 Tradedebtors(iv) 19,000 " 31 Insurance(vi) 6,000 " 31 Balancec/d 154,840 190,300 190,300

(b) BankReconciliationStatementasat31December2006

$ $Balanceaspercorrectedcashbook 154,840Add Unpresentedcheques (iii) 8,800 Bankerrors (viii) 20,000 28,800Less Uncrediteddeposit (v) (36,680)

Balanceasperbankstatement 146,960

(c) A bank reconciliation statement provides:

(i) verification of firm’s records with aspects ‘not yet known’ by the bank such as uncredited deposits and unpresented cheques.

(ii) verification of the amounts recorded as received and paid.

(iii) a check on the time differences between when a deposit is recorded as received (or paid) and when it is banked (or withdrawn from bank).

(iv) an update of the firm’s records with aspects ‘not yet known’ by the firm, that is, direct deposits such as interest received, direct withdrawals such as bank fees and dishonoured cheques.

(v) a check for errors in either the firm’s records or the bank’s records (as reported in the bank statement).

(Any one point)

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16 (a) CashBook

2007 $ 2007 $Mar 31 Balanceb/d 235,930 Mar 31 Salary(iii) 33,870" 31 Dishonouredcheque(vi) 5,100 " 31 Machinery($17,000–$10,700)(iv) 6,300" 31 Creditsideoverstated(viii) 15,600 " 31 Bankcharge(vi) 100 " 31 Balancec/d 216,360 256,630 256,630

(b) BankReconciliationStatementasat31March2007

$ $Balanceaspercorrectedcashbook 216,360Add Unpresented cheques: ChequedrawnbyMrChan (i) 5,650 ChequepaidtoMrLuk (v) 6,320 11,970

Less Uncrediteddeposit (ii) 2,000 Overdraftinterestwrongcharged (vii) 1,400 (3,400)Balanceasperbankstatement 224,930

(c) A bank reconciliation statement provides:

(i) verification of firm’s records with aspects ‘not yet known’ by the bank such as uncredited deposits and unpresented cheques.

(ii) verification of the amounts recorded as received and paid.

(iii) a check on the time differences between when a deposit is recorded as received (or paid) and when it is banked (or withdrawn from bank).

(iv) an update of the firm’s records with aspects ‘not yet known’ by the firm, that is, direct deposits such as interest received, direct withdrawals such as bank fees and dishonoured cheques.

(v) a check for errors in either the firm’s records or the bank’s records (as reported in the bank statement).

(Any two points)

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