Content Standard 12.2

Bank Reconciliation Statement

Penyata Penyesuaian Bank

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Explanation

A Bank Statement is a periodic copy of the business's current account issued by the bank to the account holder (usually monthly). Its main function is to record every transaction that has passed through the business's bank account, namely all deposits (money in), cheque payments, direct payments, bank charges, interest and the closing balance according to the bank's records. The Bank Statement allows the trader to verify the accuracy of banking transactions, detect any unauthorised payment or fraud, and serves as the source for updating the bank column of the Cash Book. An important point: from the bank's viewpoint the trader's deposit is a liability of the bank, so deposits are recorded on the Credit side and withdrawals on the Debit side of the Bank Statement. Therefore a credit balance in the Bank Statement equals a debit (favourable) balance in the trader's Cash Book.

The Bank Reconciliation Statement is a statement prepared to reconcile the Cash Book balance with the Bank Statement balance on a particular date. Its purpose is to prove that the difference between the two balances arises from reasonable causes and not from errors or fraud. It also acts as a form of internal control over money at bank because it detects unpresented cheques, recording errors, and payments or receipts not yet recorded in the Cash Book. Once the reconciliation is complete, the trader can be sure that the bank balance reported in the Statement of Financial Position is accurate.

The difference between the Cash Book balance and the Bank Statement balance arises from three groups of causes. First, items already recorded in the Cash Book but not yet through the bank (timing differences): unpresented cheques (cheques written and credited in the Cash Book but not yet cashed by the payee) and uncredited cheques or deposits in transit (cheques/cash paid in and debited in the Cash Book but not yet credited by the bank). Second, items already in the Bank Statement but not yet in the Cash Book, such as bank charges and commission, interest on overdraft, bank interest received, standing orders, direct debits, direct credits (like dividends or rent paid straight into the bank), and dishonoured customer cheques. Third, errors made either by the trader in the Cash Book or by the bank.

The first step in the reconciliation process is to update the Cash Book. All items appearing in the Bank Statement but not yet recorded in the Cash Book must be entered first. Receipts that increase the balance (e.g. bank interest received, direct credits, dividends) are debited in the Cash Book, while payments that reduce the balance (e.g. bank charges, standing orders, direct debits, dishonoured cheques) are credited in the Cash Book. After all these items are recorded, a new balance is computed; this updated Cash Book balance becomes the starting point of the Bank Reconciliation Statement.

The second step is to prepare the Bank Reconciliation Statement, beginning with the updated Cash Book balance. To this balance, unpresented cheques are added (because they reduced the Cash Book but have not yet reduced the bank balance), and uncredited cheques/deposits in transit are subtracted (because they increased the Cash Book but have not yet increased the bank balance). The final figure must equal the balance per the Bank Statement. If the Cash Book balance is an overdraft (credit balance), the add/subtract arrangement is reversed. When the two figures agree, the reconciliation is considered complete and accurate.

Worked examples

Updating the Cash Book (Sinar Maju Grocery Store)

On 31 May, the debit balance of Sinar Maju's Cash Book (bank column) was RM4,300. After receiving the Bank Statement, the following items were found not yet recorded in the Cash Book: bank charges RM50, bank interest received RM220, standing order (insurance premium) RM300, direct credit dividend RM500, and a dishonoured customer cheque from Mr Halim RM270.

Cash Book updating entries: Debit Cash Book (bank interest) RM220; Debit Cash Book (dividend direct credit) RM500. Credit Cash Book (bank charges) RM50; Credit Cash Book (standing order insurance) RM300; Credit Cash Book (dishonoured cheque Mr Halim) RM270.

Updated Cash Book balance = RM4,300 + RM220 + RM500 − RM50 − RM300 − RM270 = RM4,400 (debit balance).

Preparing the Bank Reconciliation Statement on 31 May

After the Cash Book is updated, two timing differences remain: unpresented cheques RM950 (cheques paid to suppliers but not yet cashed) and uncredited cheques RM1,300 (deposits in transit not yet credited by the bank).

Bank Reconciliation Statement as at 31 May: Balance as per Cash Book (updated) RM4,400; Add: Unpresented cheques RM950 (subtotal RM5,350); Less: Uncredited cheques RM1,300; Balance as per Bank Statement RM4,050.

Because the final figure RM4,050 equals the balance in the Bank Statement, the reconciliation is accurate.

Overdraft balance case

Suppose the updated Cash Book shows a credit balance (overdraft) of RM1,200. Unpresented cheques total RM600 and uncredited cheques RM900.

For an overdraft, the arrangement reverses: Overdraft balance per Cash Book (RM1,200); Less: Unpresented cheques RM600 (balance becomes RM600); Add: Uncredited cheques RM900; Overdraft balance per Bank Statement = RM1,200 − RM600 + RM900 = RM1,500 (overdraft).

This shows that the direction of add/subtract depends on the type of balance (debit or overdraft).

Practice

State three reasons why the Cash Book balance differs from the Bank Statement balance, and classify each as a timing difference or an item not yet recorded in the Cash Book.

Answer: (1) Unpresented cheques: timing difference; the cheque has been credited in the Cash Book but not yet cashed by the payee. (2) Uncredited cheques / deposits in transit: timing difference; the deposit has been debited in the Cash Book but not yet credited by the bank. (3) Bank charges / bank interest / standing order / dishonoured cheque: items not yet recorded in the Cash Book because the trader only learns of them on receiving the Bank Statement; these must be updated in the Cash Book first.

Delima Enterprise's Cash Book shows a debit balance of RM3,600 on 30 June. The following items are not yet recorded: bank charges RM80, direct credit rent received RM700, standing order RM250, and bank interest RM150. Compute the updated Cash Book balance and state the debit/credit entries.

Answer: Debit Cash Book: rent direct credit RM700 and bank interest RM150. Credit Cash Book: bank charges RM80 and standing order RM250. Updated Cash Book balance = RM3,600 + RM700 + RM150 − RM80 − RM250 = RM4,120 (debit balance).

Using the updated balance of RM4,120 from the question above, prepare the Bank Reconciliation Statement if unpresented cheques are RM1,050 and uncredited cheques are RM480.

Answer: Bank Reconciliation Statement as at 30 June: Balance as per Cash Book (updated) RM4,120; Add: Unpresented cheques RM1,050 (subtotal RM5,170); Less: Uncredited cheques RM480; Balance as per Bank Statement RM4,690.

Mutiara Enterprise's updated Cash Book shows a credit balance (overdraft) of RM900. Unpresented cheques total RM400 and uncredited cheques RM1,100. Prepare the Bank Reconciliation Statement.

Answer: For an overdraft the arrangement reverses: Overdraft balance per Cash Book RM900; Less: Unpresented cheques RM400 (balance becomes RM500); Add: Uncredited cheques RM1,100; Overdraft balance per Bank Statement = RM900 − RM400 + RM1,100 = RM1,600 (overdraft).

Exam tips

Key terms

Bank Statement: A periodic copy of the current account issued by the bank, recording all transactions and the balance per the bank's records.
Unpresented cheque: A cheque credited in the Cash Book but not yet cashed by the payee, temporarily making the bank balance higher.
Uncredited cheque: A deposit/cheque debited in the Cash Book but not yet credited by the bank (deposit in transit).
Standing order: A fixed instruction to the bank to make recurring payments automatically, e.g. an insurance premium.

Source: DSKP KSSM Prinsip Perakaunan Tingkatan 5

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