UNIT9: CASHBOOK AND BANK RECONCILIATION
Key unit competence: To be able to reconcile cash book and bank
statement balances
Introductory activity
Suppose that you are hired as an account clerk at your school. At the end
of the month you find that there is disagreement between the cash book
balance and the balance on the bank statement.
a) What are the reasons do you think are basis of those discrepancies?
b) What do you suggest as an answer for those discrepancies toensure the balance to be reported in financial statement?
9.1: Cash Book and Bank Statement
Activity 9.1
Carry out the research on the difference between cash book and bank
statement
9.1.1 Nature and purpose of a cash book
A book in which cash receipts and payments are recorded is known as a cash
book. A cash book is a part of ledger as well as a book of original entry. All
receipts and payments are recorded in the cash book directly. Any entry made
in the cash book is part of double entry. It means if a debit entry is made in the
cash book then only corresponding credit entry is to be made in the respective
ledger account. Similarly, if a credit entry in the cash book then only debit entry
is to be made in the respective ledger account
We can maintain cash account and bank account in a cash book. A cash account
records the receipt and payment on cash, and the bank account records receipts
and payments of money by cheque.
Note: Recording transaction in the cash book and types of cash books had
been discussed on in the Unit 3.9
9.1.2 Bank statement
Bank statement is sent by a bank to its short- term receivables and payables
(customers with bank overdrafts and customers with money in their accounts)
itemizing the balance on the account at the beginning of the period, receipts
into the account and payments from the account during the period, and the
balance at the end of the period. These statements may be produced monthly,
weekly or even daily depending on the volume of transactions going through the
account.
You should be clear on one point. If a customer has money in their account, the
bank owes them that money, and the customer is therefore an account
payable of the bank. This means that if a business has FRW 5,000,000 cash
in the bank, it will have a debit balance in its own cash book, but the bank
statement, if it reconciles exactly with the cash book, will state that there is a
credit balance of FRW 5,000,000 in the bank’s payables account. (The banks
records are a mirror image of the customers’ own records, with debits andcredits reversed.)
What does a bank statement look like?
The following points refer to the circled letters on the bank statement.
Application activity 9.1
1. What is a cash book?
2. State the components of bank statements
9.2 Bank reconciliation
Activity 9.2
Discuss the purpose of preparing bank reconciliation statement
9.2.1 The meaning of bank reconciliation statement
Bank reconciliation statement may be defined as a detailed statement reconciling
at a given date the cash balance reported by the bank with that shown in the
records of a business.
These days almost all businessmen operate bank account. All the transactions
in a bank account are recorded in the cash book in the bank column. The bank
accounts opened by businessmen are normally current accounts. In this account,
the customers of the bank can deposit or withdraw money whenever they like.
The relationship between a bank and its customers is one the debtor and the
creditor. If a trader has deposited FRW 20,000,000 into his bank account then
the bank is the debtor of the trader and from the bank’s points of view, the trader
is a creditor.
9.2.2 Importance of Bank Reconciliation
• Bank reconciliation strengthens an organization’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 easier to trace in the bank
statement than if they were cash.
• 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.
9.2.3. Reasons for discrepancy between cashbook and bank
statement balances
i. Un-credited Cheques and Deposit in Transit
These are cheques that are deposited or ledger into the bank account at the
bank, but take time before being posted to the trader’s account by the bank.
The cash book will thus show a record of these cheques, which may not appear
on the bank statement. Also banks accept cheques for collection whereby
customers accounts are credited only when money is actually received from the
banks against which cheque were drawn
ii. Un-presented Cheques
These are cheques issued to creditors and immediately credited to the bank
account in the cash book but take time before they are actually presented to the
bank for payment. The trader’s cash book thus reflects the payment, which is
not shown by the bank statement.
iii. Standing Orders
These are instructions issued by a trader to the bank to make certain payments
on his/her behalf, such as insurance premiums, rent to landlord etc. The bank
continually pays according to trader’s last instructions without contacting him/
her as often.
Such payments appear in the bank statement as debit entries but do not appear in the cash book as the trader has no proof that they have been made,
until when in receipt of the statement.
iv. Direct credit/ Direct Remittances
This refers to deposits directly lodged into the customer’s bank current
account without his/her knowledge. It could comprise dividends received from
investments, interest received on fixed bank deposits, or a debtor’s payment by
credit transfer etc. Such information is shown in the bank statement and not in
the trader’s book.
v. Dishonoured Cheques
A cheque deposited in the trader’s bank account is returned by the bank as
unpaid or dishonoured for reasons such as:
• When the funds on the drawers account are not sufficient the cheque
will be labelled (IF) insufficient Fund or R/D Refer to the drawer
• Amount in words differing from the amount in figures
• Drawer’s signature being different from the specimen signature
available at the bank.
• Cheque is presented earlier than that face date (post dated).
• Cheque presented beyond two months of the date of issue (stale
cheque)
The bank statement thus shows amounts of dishonoured cheques on the debit
side. The cash book does not show the credit entry of dishonoured cheques,
as this information will not yet have been communicated to the trader. He only
gets informed of the information thereof when he receives the bank statement.
vi. Bank charges
The bank charges its customers for banking services. These are debited straight
away to the customer’s bank account without having to contact the customer.
The customer is ignorant of the bank charges, until when in receipt of the bank
statement.
vii. Errors or mistakes
Errors or mistakes made either in posting the cash book or bank statement
as shown in the bank statement, may also cause disagreement between the
two accounts. For instance, the cash book is debited with a cheque issued to
a creditor, or the bank erroneously debits the trader’s account with dividendsreceived by the bank on his/her behalf.
Application activity 9.2
1. Explain the following terms
a) Bank reconciliation statement
b) Un credited cheques
c) Un presented cheques
d) Direct remittances
2. What are causes for discrepancy between cash book and bank
statement balances3. Discuss the importance of bank reconciliation
9.3 Preparation of bank reconciliation statement
Activity 9.3
KARANGWA is a sole trader in MUHANGA CITY; he keeps the books
of accounts regularly. At the end of January 2022 just after receiving the
bank statement, he realized discrepancy between the cash book and bank
statement balances. He is asked to carry out the bank reconciliation, but
he doesn’t have enough skills in preparing that statement. Suppose you
are hired as an Accountant, what are procedures will you follow to performthat assignment?
9.3.1 Bank reconciliation procedures
Bank reconciliation statement is prepared at any particular date to reconcile the
cash book, and bank balance usually at the end of every month. This is because
the cash book is balanced at the end of the month likewise bank statement is
issued at the end of the month. When preparing a reconciliation statement we
can start with a balance either on the cash book or bank statement
The following are procedures when preparing bank reconciliation:
Step 1- Compare the ending balance on the cash book and bank statement and
see if there are equal or not.
Step 2 – Tick off the items in both cash book and bank statement.
Step 3 – Up date the cash book from the bank statement
Step 4 – Balance the cash book bank columns to produce an updated balance
Step 5 – Identify the remaining un- ticked items from the cash book
Step 6 – Preparation of the bank reconciliation statement
9.3.2 Method of bank reconciliation
There are three principal methods of preparing a bank reconciliation
statement
1. Beginning with the cash book balance, adjusting, updating or correcting
the cash book 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.
Example1.
The following cash book and the bank statement for KBG Ltd for the month ofJanuary 2022
Adjusted (corrected cash book)
Example 2
Mupenzi’s cash book showed a debit balance of FRW 3,000,000 on 31 March
2022. His bank statement showed a credit balance of FRW 2,212,480 on the
same date. A careful examination of the two records revealed that the difference
was due to the following:
a) A cheque for FRW 82,410 issued by Murenzi, another customer at the
bank, was wrongly debited by the bank in the Mupenzi’s bank account
b) The bank had paid FRW 53,390 to Mupenzi’s insurance company as per
standing order
c) John who was Mupenzi’s tenant had paid rent FRW 145,000 direct into
Mupenzi’s bank account
d) Cheques for FRW 432,750 deposited by Mupenzi on 29 March were
returned unpaid but no entry had been made in the cash book to record
the return.
e) Cheques totaling FRW 1,344,020 issued by Mupenzi to his creditors did
not appear on the bank statement. One of these cheques for FRW 100,000
is dated 10 June 2017.
f) The cashier, in totaling the cash book pages, overstated the debit balance
of the cash book by FRW 200,000.
g) Bank charges amounting to FRW 52,910
h) Cheques totaling FRW 1,455,080 deposited by Mupenzi on 29 March
were credited by the bank on 2 April.
Required: (i) Adjustment of the cashbook balance (ii) A bank reconciliationstatement as at 31 March 2009
Answer
Method 2: Beginning with the bank statement balance and working towards
proving the balance as per cash book
Application activity 9.3
You are required to:
a) Update the cash book to take into account all necessary items
into account
b) Draw up a bank reconciliation statement as on 31 December2021
End of unit assessment
The following is the cash book (bank column) of Mr MUGABE for November
2021
Prepare:
• The amended cash book• Bank reconciliation statement