The bank columns of the cashbook records money paid out and received by the business bank account. Both the bank and business concerned should have identical records of these transactions since both records refer to the same transactions. The bank will regularly send to the business concerned a copy of its related transactions. This is called a bank statement.
The business will check its cash book bank entries against the entries in the bank statement. The differences found many times are due to:
–Genuine recording errors
–The difference in time when the entries to the cashbook of the business and the bank’s records are made; most of the time it is due to this third factor.
Items which may cause a time difference in making entries to the cash book and the bank’s records
These are cheques paid out and recorded by the business but have not been received by the bank for payment. Unpresented cheques will therefore be found on the payment side of the cashbook but not on the bank statement.
These are cheques received and recorded in the cashbook by the business which have not been lodged, or were lodged late, so were not entered on the bank statement. Late Lodgements will be found on the receipts side of the cashbook but not on the bank statement.
A business may instruct its bank to make regular payments to stated entities on its behalf. These would have been entered on the bank’s records first and would therefore be found on the payment side of the bank statement but not in the cash book of the business.
These represent payments where the creditor is given permission to withdraw the payments directly from business bank account. These would first be recorded by the bank. Direct Debits are found on the payment side of the bank statement but not in the cash book.
These represent payments of the business for some services provided by the bank. These payments would automatically be withdrawn from the business account by the bank so would first be on the bank’s records. Bank Charges would be found on the payment side of the bank statement but not in the cash book.
These represent funds transferred to the business bank account from another account through the banking system. This would first be entered on the bank’s records. Credit Transfers are found on the receipts side of the bank statement but not in the cash book.
If a cheque is received by the business and lodged to the bank but later discovered by the bank to have some irregularity, the bank will not accept the cheque. This dishonoured cheque would first be recorded by the bank. Dishonoured cheques will be found on the payment side of the bank statement but not in cashbook of the business.
Below is an example:
The bank columns in the cash book for May 2011 and the bank statement for the same month for C. White are shown below.
You are required to:
(a) Update the cashbook with the correct balance as on May 31, 2011
(b) Draw up a bank reconciliation statement, reconciling the corrected cash book balance with the bank statement balance.