Welcome to Countouts. In this lesson, we're going to be looking at the bank reconciliation statement. What is the bank reconciliation statement? This is a statement where we reconcile what we have in our books with that in the bank statement. Whilst the business keeps a record of all its cash transactions, the bank also keeps a record of cash transactions with its customers.
The bank's record is sent out to customers monthly. showing all the customers transactions with the bank. The bank statement provides an ideal opportunity for the business to check the entries that it made in the cash journals.
So in essence, what we're doing in the bank reconciliation is after every transaction, we record them in our books. And then at the end of the month, we would receive the bank statement or during specific periods, we would receive the bank statement. That gives us an opportunity to compare what is in the bank statement with what is in our books. now obviously we would expect them to be the same but they will not be the same and why are they not the same we're going to look at those elements in this lesson so in this lesson we're going to go through some theory and also what you do with every item that you have that you need to take account of so we're going to go through a very thorough example which will help you understand the bank reconciliation statement and i'm confident that after this lesson you will be able to do any bank reconciliation statement yourself so if you gain value from this lesson if you want to learn something click on the subscribe button down below, like this video and share it to those you think it might help.
So let's get right into it. Here's something to remember. Since the bank keeps the cash of the business, it considers the business to be a creditor while the business considers the bank to be a debtor. Very important to bear that in mind. The bank keeps the money of the business, so it considers the business to be its own creditor because it owes the business that money it's keeping that money but it doesn't belong to the bank it belongs to the business while the business considers the bank to be a debtor because the business looks at the bank and says the bank has our money so it's like our data as such whenever the business receives and deposits cash the bank account is debited while the bank statement will show the same deposit as a credit entry so what we are seeing here is that in our books whenever we receive money in our bank account will record it on the debit side because bank is an asset and it increases on the debit side now if you do not know your debit and credit and how you do journals it's important for you to know that as you go ahead with the bank reconciliation statement so we have done a lesson specifically on those so you can click on the link on the top right of the screen or in the description below but what we are saying here is that when we receive money in our bank we debit bank because bank is an asset but according to the bank the bank views the business as a creditor like we said earlier so it will credit that amount so the bank account is debited while the bank statement will show the same deposit as a credit entry so when you look at the bank statement everything that comes into the bank will be on the credit side everything that goes out of the bank will be on the debit side but when you come to our books and look at our bank account in our books everything that comes in is on the debit side and everything that goes out is on the credit side the bank account of the business will be credited while the same payment will be shown as a debit on the bank statement you so here is how it is in the business books when we have a debit it's favorable when we have a credit it's unfavorable so we're talking about bank here and in the bank statement when you see an amount on the debit side that's unfavorable meaning that money is going out when you have an amount on the credit side that is favorable so you can see it's opposite of what we do in our books so that's something important that you need to remember going forward here are the some reasons why the bank statement would have would be different to our bank account The bank statement would be different to what we have in our books, hence the need for us to do the bank reconciliation statement.
So here are some reasons as to why that would be different. Cash deposited by the business, especially at the end of the month, may not appear in the bank statement. So remember, you would receive the bank statement at the end of the month and you would see that if you deposited the money on the 31st of the month, for instance, it would not appear on the bank statement because you deposited it just before the bank statement came out. So that is why. that would be different from what you have in your book so when you deposit it when you deposit that money you'd have recorded it in your books but they may not appear in the bank statement because you may have deposited it late so that's one of the reasons for the differences an error may have been made by the bank or the business so whenever an error is made obviously that is why you would have different amounts on both accounts checks deposited by the business may have been dishonored by the bank checks deposited by the business may have been dishonored by the bank so if a business receives a check maybe from a customer we would record that on the debit side in our books to say this um we've received this amount from a customer now later on when we go to the bank and try to deposit the check the bank may dishonor the check for whatever reason maybe insufficient funds or whatever the case may be so there is another reason for differences between the two accounts bank charges levied by the bank Remember, we'll only know what our bank charges are when we receive the bank statement.
So they would not appear in our books. So that is why the amounts will not be the same. Interest may have been charged on the overdrawn balance or interest may be earned on a favorable balance.
So again, the interest earned or charged will appear in the bank statement, but we'll need to receive the bank statement first for us to record it in our books. Stop order or debit order payments may have been made by the bank. so when a debit order goes off in our bank we will see it in our bank statement and only then will we record it in our books deposits may have been made directly into the bank account so a customer may have paid directly into the bank account so until we receive the bank statement we will not have seen it so we will only record it after the bank statement has been received there is another reason for the differences so now that we know the reasons for the differences here's how you account for this reasons and here is how you specifically going to do it when you are doing a bank reconciliation questions so here we are reconciling the bank balance in the ledger with the balance in the bank statement we do it in the bank reconciliation statement and how do we do it there are two main procedures involved in bank reconciliation they are the cash journals of the business must be updated after the bank statement is received so we look at the bank statement compared to our cash journals as well as previous month's bank reconciliation statement and we shall see when we go through this example so you compare that and update our cash journals after we receive the bank statement transactions that the bank needs to attend to are recorded in the bank reconciliation statement so whatever it needs to be recorded in the bank statement or whatever is missing in the bank statement or whatever error may have been made in the bank statement will be updated in the bank reconciliation statement but whatever didn't appear in our books but appear in the bank statement will need to be recorded in our books so items that are still outstanding from the previous month's bank reconciliation statement what do you do with this and i'm sure your question would have something like this where they tell you the following items appeared in last month's bank reconciliation statement but did not appear in this month's bank statement remember bank reconciliation statement whatever we record that we're expecting it to appear in the bank statement for the following month but if items are still outstanding from the previous month's bank reconciliation statement what will you do you have to record it again in this month's bank reconciliation statement so if you have that question where you're told the following items appear in last month's bank reconciliation statement but did not appear in this month's bank statement you take those same amounts and record it in this month's bank reconciliation statement so this entry like i said will appear again in the new bank reconciliation statement the exceptions will be for outstanding checks from last month that are stale or have to be cancelled for various reasons and you'll see this example when we go through our our our thorough example after this deposits that are made by the business not yet credited on the bank statement so if you made a deposit as a business and it's not on the bank statement what will you do well this this deposit must be entered in the bank reconciliation statement so if you made a deposit but you didn't see it on the bank statement it must be entered on the bank reconciliation statement. Checks issued by the business that did not appear in the bank statement.
So you issued checks to your suppliers or to whoever you are paying, but they didn't appear in the bank statement. What might that mean? That might mean that whoever you issued the check to has not gone to the bank to cash it as yet.
So that's why it will not appear in the bank statement. So what will you do? You record it in the bank reconciliation statement. These checks may not have been presented by the respective payees, like I said, to the bank for payment.
they will be recorded in the bank reconciliation statement checks issued that must be cancelled including stale checks now they may tell you in your question and you'll see now in our example later on that you issued a check but that check must be cancelled or it's stale or it's uh it's gone over its period maybe the check is only valid for three months or six months and it wasn't cashed in if it must be cancelled what do you do the cancellation entry for a check issued is made in the cash receipts journal the entry made you will be identical to the original entry in the cash payments journal so why do you do this if you issue a check to someone and they tell you now that check that you issued must be cancelled the day that you issued the check you recorded it in the cash payments journal but now that you are cancelling it you are recording it in the cash receipts journal to take it off your books to say now we are cancelling this check direct deposits made into the account of the business so someone might have deposited directly into your business so you may not have seen that you may not have recorded it in your books so what will you need to do this deposit must be recorded in the cash receipts journal Interest on overdraft. Now remember interest on overdraft will appear on your bank statement. So you'll need to see it on your bank statement then record it in your books. So the bank statement will reflect interest on overdraft if the overdraft facility has been used or utilized. On the debit side of the bank statement, that's where it will appear.
The interest must be recorded in the cash payments journal. It must not be included in the bank charges, with the bank charges as it is a finance cost. so they will tell you that the following charges were levied by the bank and they will show you all the charges maybe credit card fees or deposit fees together with interest on overdraft you'll add together all the fees except the interest on overdraft because there is a finance cost so you do it separately as a separate line item and we'll you'll see it in our example just now bank charges what do you do charges levied by the bank like i said previously shown on the debit side of the bank statement should be added up and recorded in the cash payments journal as one entry so you should add all of them up and add it in the cash payments journal as one entry and like i said don't add the interest interest just add it on a separate line item stop orders and debit orders well i've already already mentioned this these payments these are payments made regularly by a bank on behalf of a client and show on the debit side of the bank statement this stop orders and debit orders must be recorded in the cash payments journal Dishonored checks, well if a check is dishonored, checks previously deposited by the business may be dishonored by the bank and will be found on the debit side of the bank statement.
So whenever you want to cash in a check and the bank says this is dishonored, it will appear on the debit side of the bank statement. The entry for this must be made in the cash payments journal. So when a check is dishonored, you put it on the cash payments journal, a check that you try to deposit in the bank there is. then you'll put it on the cash payments journal errors that is made by the business remember when errors are made by the business it does not affect the bank statement so errors made by the business in the cash journals must be corrected in the cash journals the most common type of error is made when an incorrect amount is reflected in the cash payments journal for a check issued so whenever you've made whenever they say you've made these errors in your books you correct it in your books you don't touch the bank reconciliation statement because it does not affect the bank If the amount recorded in the cash payments journal is more than it should be, then a corrective entry for the difference between the two amounts is made in the cash receipts journal.
If the amount recorded in the cash payments journal is less than it should be, then a corrective entry for the differences between the two amounts is made in the cash payments journal. Errors made by the bank. Remember if errors are made by the bank, the error should be corrected in the bank reconciliation statement. So errors made by the bank will be corrected. by the bank in the next bank statement however errors made by the bank are recorded in the bank reconciliation statement just like i mentioned and these are the theories of how you complete the bank reconciliation statement so i've mentioned why we would need to complete the bank reconciliation statement what are some of the reasons for the differences and how you account for some of these uh some of this uh information that you may be given or you will be given when you have to complete a bank reconciliation statement so what you're going to do now is We're going to go through a thorough example in showing you exactly how you do the bank reconciliation statement.
So we'll first update our cash payments journal, our cash receipts journal. We'll also be required to do the bank account general ledger or the T account for the bank. That will help us get the balance that we need to put in the bank reconciliation statement. And you'll see just how we do this right now. So here we have the question for the bank reconciliation.
What it requires us to do is to. complete the cash receipts journal and cash payment journal of Roteach furnishers for October 2019 after taking the information provided into account. We're also asked to post to the bank account in the general ledger of Roteach furnishers and to balance the account and to prepare the bank reconciliation statement as of the 31st of October 2019. So we're given information down here.
So obviously you can see this is in Word document but my solution is going to be in Excel as you can see here. i've already drawn up the tables just to reduce the amount of time we'll take on this lesson and we are just going to rush through it so you can see my cash receipts cash payments the bank account the t account i've already drawn up and the bank reconciliation statement and how it looks as at so that date is supposed to be 31st of october 2019 because that's that's the date that you asked to do the bank reconciliation statement now let's begin with the bank reconciliation statement let's go through the information here we are told that the bank column of each of the cash journals showed the following totals before the october 2019 bank statement was received so this is what our books showed before we received the bank statement cash receipts journal 87 600 so what do we do with that and cash payments journal of 87 890 when they asked us to complete the cash payments and cash receipts journal so we start with that one the first thing that you do is that you go to your cash payments journal and cash receipts journal and plug in this amount so for cash receipts journal we have 87 600 so we go to our cash receipts journal and we put their total and obviously that's the amount which is brought forward so brought forward and obviously this column would be for folio and then we put in the amount how much was it it was eighty seven thousand six hundred so we put in the 87 600 and okay so here as you can see the total here is going to be the sum of all of them that i'll put down as you can see i've already uh put the formula there and then the cash payments journal we have 87 890 so we again write total this folio okay this is the broad forward we have 87 890 so we'll put 87 000 890 so this is the first thing that you do when you're asked to complete the cash payments journal and cash receipts journal you start taking the information and plugging them in like this so this was the balances before we received the bank the bank statement for the month and then we continue we are told that the comparison of the cash journals of rotich furnishers for october 2019 and the bank reconciliation statement for september 2019 with the bank statement from equity bank for october 2019 revealed the following differences very important to pay attention to the details now here especially this one's here in bold where they tell entries that appear on the bank statement but not in the cash journals so here you can see these amounts appear in the bank statement but did not appear in our books in our cash journals so what do you do well you don't touch the bank reconciliation statement because they already appear that in the bank statement so we only go to our books so wherever these amounts didn't appear we do the we go to that account and do it there so if it didn't appear in our books or in the cash journals we go to our cash journals and do it there later on if they tell us these amounts didn't appear in the bank statement then we go to the bank reconciliation statement and do it there so here they told us it didn't appear in the cash journal so we'll do it there what didn't appear in the cash journals when we are told here a check previously received from the lessee for rent was dishonored because of insufficient funds what does this mean someone someone who we rented out the premises to brought a check and gave it to us paying for his rent but when we went to the bank to try and cash it in we saw that the cash their check was dishonored because of insufficient funds now remember the date we received it we recorded it in our cash receipts journal and we put the amount 1570. now that we've learned that the cash that the check has been dishonored we have to remove it of our we have to remove it from our cash receipts journal how do we do how do we do that we put it in our cash payments journal so we go to our cash payments journal and put it there so we're going to put cash payments journal so here you can put uh anything you can put dishonored check or you can put a check from lessee so i'm just going to write there let's ask control because he now owes us money that check was dishonored and i'm going to write here check which was dishonored so i'll write check rd and then i put in the amount there 1500 and 70. so you can see here we had initially recorded it in our cash receipts journal when we received it but now that it's been dishonored we have to take it out of our cash receipts journal how do we do that we put it in our cash payments journal and then next one a debit order in favor of telecom for the personal telephone account of the proprietor so here we have incurred an expense here of telephone and a debit order just went straight from our bank account so if it went sorry from our bank so it went straight from our our bank and we have not recorded it in our books as we were told here it didn't appear in the cash journal so we have to go to our cash payments journal and record it over there so we're going to go to our cash payments journal and put in the telephone telephone i'm going to put the amount of 700 there the folio here you don't have to put anything you can leave it blank you'll still be marked correctly for the amounts that you put in the right place next one charges levied by equity bank now remember we mentioned this when we went through the theory that when you are told that charges are levied by equity bank we're talking about bank charges but we have service fees cash deposits fee credit card commission and interest on overdraft so what do you do you add all of them up together and name them bank charges except for interest on overdraft remember we say that interest on overdraft we record it separately because it's a finance cost so we add all the three together one thousand one hundred and one 110 40 and 370 so i'm going to write here bank charges and charges and then what am i going to do i'm going to add 110 plus 40 plus 370 so let me add it here 110 plus plus 40 plus 370 and it gives us 520 for bank charges and then the interest on overdraft we record it separately so we're going to record interest on overdraft down here interest on overdraft interest on overdraft and then we put in the amount there it's 120 rand remember these are all in the cash payments journal because they are bank charges if they say charges levied by the bank then you put it as bank charges and then the interest on overdraft so it's money leaving our business so it left our bank account and then we have to record it in the cash payments journal and then we move on to the next one we are told that a deposit by equity bank into the account of rotich furnishers very important to remember that we are rotich furnishers as we were told at the beginning on top of our day for interest on fixed deposit so what is interest on fixed deposit well a fixed deposit is us putting money in the bank investing it as a saving fixed deposit until a certain period when we'll receive it back so we are being paid interest on fixed deposit so it's a deposit by the bank into our account remember all these didn't appear in our books as we're told up here so we have to put it in our cash receipts journal for by for 500 rent so i'm going to go to my cash receipts journal and write interest on fixed deposit and then i put in the 500 rand and then the next one a deposit by a tenant tenant jason debt into the account of rotich furnitures for rent so we're going to call it rent income rent income and then how much was that there was 900 rand so i'm going to put 900 rand then move on to the next one now you can see there we have done everything that was not in our cash journals now here that's why i said it's very important to pay attention to the details because here now they're telling us in the cash journals meaning in our books that did not appear in the bank statement so if they did not appear in the bank statement where do we record it well if you guessed bank reconciliation statement you'd be correct so whatever didn't appear in the bank statement we do it in the bank reconciliation statement but now let's begin with our bank reconciliation statement what is the first line item we do in the bank reconciliation statement just like the cash receipts journal and cash payments journal we put the balance abroad forward as you can see these two amounts here so that's the same thing we do in the bank reconciliation statement so let me quickly go to the bank reconciliation statement i'm going to call call it here so let's look let's go to additional information you have to look for the amount which was in the bank statement so we are sold here that day bank statement showed a debit balance of 9290 on the 31st of october 2019 so if it's a debit balance it means we're on bank overdraft obviously because the bank records us in in the opposite way that we record ourselves so it's this one's a debit balance which means it's negative so the bank statement showed a debit balance of 9290. so you look for that one and you start with that one in the bank reconciliation statement since it's a debit balance we're going to write there debit balance as per as per bank statement now that we have that and it's on the debit side obviously because that's what we're told we write down 9,290 okay then let me highlight this one that so that i remember that i'm done with that one and then now we go to the journals that we are told this one didn't appear in the bank statement so we continue here entries in the cash journals that did not appear in the bank statement what didn't appear in the bank statement a deposit made on the 31st of october 2019 remember i mentioned this earlier on you know when we went through the theory to say that you may have made a deposit at the end of the month which didn't appear which will not appear in the bank statement so now what do we do we record it in the bank reconciliation statement so remember when we deposit money to the bank whether where would it appear in the bank bank statement should appear on the credit side so we write down here whatever side it appears for all the items you write start with that start with the with that word credit or debit so here it's a credit outstanding deposit because it didn't appear in our bank statement as we can see here entries in the cash journals that did not appear in the bank statement we have 25 600 so i'm going to write down 25 600 next the following check issued during october 2019 so these checks did not appear in the bank statement we are still there so we are told that these checks didn't appear in the bank statement so why wouldn't and what's the possible reason we mentioned it in our theory that maybe the people who paid with these checks didn't cash in the checks so why would the checks appear they would appear on the debit side because according to the bank statement it uh it's the opposite of our account so we put the negatives on the debit side so we're going to write here debit outstanding checks and then now that we've written that now let's write the numbers down number 750 750 so these are the check numbers by the way and then how much was it 3 170 on the debit side that's why i wrote debit outstanding checks uh in fact let me move that okay um let me move that to the right yes let me put it there so it's 3170 3170 and then write down check number 755 so check number 755 put in the amount there 1040 so one of four zero and then and then we're done with this one entries in the cash journals that did not appear in the bank statement now very important pay attention here these are we are told here additional information so in this additional information we don't know where they didn't appear we're not told they didn't appear in our books or we're not told it didn't appear in the bank statement so you have to pay very careful attention to how you account for this one you have to know where it's supposed to go so let's go through each one and see we're told check number 690 dated 23 september 2019 being last month because we are doing for october 2019 which appeared in the bank reconciliation statement for september 2019 did not appear in the bank statement for october 2019 now we i explained this one went through the theory earlier on that was very important for you to have understood the theory to say if it appeared in the bank reconciliation statement for last month which we are told here it's for september which is last month and did not appear in the bank statement for this month october what do we do we put it in the bank reconciliation statement for this month again so you are putting in the bank reconciliation statement again so we continue and write that check check number 690 So I'm going to put check number 690. Now, remember, it didn't appear. And it's a check that we paid out. So we write down the 3,000 for this one here.
So it's very important for you to note that if you told you that it appeared in last month's bank reconciliation statement, but not in this month's bank statement, put it in the bank statement again. Next, we're told check number 685 issued to Westpocot. chess chess club during august 2019 as a donation must be cancelled as the club no longer exists now think about it we're told that a check which was issued to westpac chess club as a donation must be cancelled as the club no longer exists why would you cancel a check well it means the check was not cashed in at all because if it was cashed in there was no point of cancelling it but since we are canceling it we know it was not cashed it in but remember when we gave it in as a donation where did we where did we record it when you issue a check to someone we issued it as a donation where would we have recorded it we recorded it in our books that we gave out a check for 1200 only when it was only if it was cashed in it would have appeared in the bank statement but since we are told it must be cancelled that means it didn't it was not cashed in so we don't have to touch the bank reconciliation statement what do we have to do we have to make the entry in our books so initially when you gave away the check we recorded it in our cash payments journal now to remove it because we are cancelling it we're putting it in our cash receipts journal 1200 so we go to our cash receipts journal and you put here donation so we're just putting the details of what what this amount is is for and then check cancelled and you put in the amount how much was it 200 so i'm going to put 1200 over there and we have the amount and then what we told the bank account in the ledger of rotich furnishers reflected a debit balance of 9 700 now the only thing that we are left to do here in our bank reconciliation statement as you can see we're done with all the information we're given the only thing that we need to do now is to put remember we start with our banks reconciliation statement we always start with debit balance as per bank statement and then the last thing that we do at the bottom here don't forget we put the balance as per bank account now when you put the balance as per bank account you put it in its correct side remember in our bank account or in our books we record bank on the debit side so here as well in the bank reconciliation statement it's the only item where you put it in its appropriate side by that we mean if it's a positive it's a debit side if it's a negative it's a credit side so let me show you how we do that we're told that the bank account in the ledger of rotish furnishers so that means in our book reflected a debit balance of 9 700 so now we have to do the t account for us to know how much our bank account should show after making those corrections so we also asked to do the t account so let's go ahead and do our t account so first of all we put our the total here so we are done with our cash receipts journal and cash payments journal so we take this total here cash receipts journal in our books it's a bank so we record it on the debit side and then we take the cash payments journal and record it on the credit side so let's begin with that let's put our date 31st october so i'm just gonna i'm just gonna put it that way and then what is our detail over there we're gonna call it balance brought down and then here what we were told first of all that the bank account in the ledger of rotish furnishers reflected a debit balance so according to our books we had a balance of 9700 an amount of 9700 so that's the first thing we do put that 9700 in the bank account ledger and then what's the next thing that we do we put total receipts now we're putting the one in the cash receipts journal so we write total receipts and you write the amount over there 90 90 200 90 200 and then what else do you do we put here the cash payments journal so we'll put the total payments and then i've got to put the date first so i put 31 october and then what do we put there ninety thousand eight hundred remember cash payments journal is money leaving our bank and we credit money when they when it leaves our bank okay now that we have all the three okay for the balance brought forward are supposed to put as at the first of the month because here we can see the balance account on the 1st of october 2019 so i was supposed to put 01 october so we have our debits and we have all our credits so this is what you do when you ask to do the bank account general ledger you put the balance brought forward as you are told in additional information here balance account as as on the first of october you put that amount and then total receipts you take it from the cash receipts journal which you'll have completed and then cash payments journal you put it on the credit side as 90 800 which you'll have completed as well now obviously if you know how to do the general ledger if you'd like to know lessons on that you'll find the links in the description below you total up both sides and you see which side is the bigger side and you put the amount for the bigger side on both sides so you can see obviously it will be here because we have ninety thousand plus nine thousand seven hundred so nine thousand seven hundred plus ninety thousand gives us ninety nine nine hundred and you take that same amount so nine nine nine hundred and put on the credit side as well and then what is missing on the credit side to make it balance with the debit we are missing so let me write here balance carry it down this is how we do our general ledger if you didn't know but you can check the link in the description below you'll find a lesson on how to complete that and how to close off a general ledger and then what do we do we take this total over here minus this one here to get the balance 9100 and then we come to the bottom here on the left hand side and write balance brought down now this will be the opening balance for the following month so put the the same amount which is here on balance carried down and there you have the balance brought down so we know that our bank account is supposed to reflect 9100 and remember what i said the last thing that you do in your bank reconciliation statement is to put in the debit or credit balance as per bank account well we know it's a debit balance because the debit side is the bigger side and you can see we have balance brought down on the debit side of 9100 so you go here and you write debit balance as per bank account and then you put in the amount here from the ledger that you have just completed so you put in 9100 now that you have done that your bank reconciliation statement should balance your debit should equal your credits so let me add all of them together 25 600 and we have 25 600 on the credit side you can see our bank you reconciliation statement balances that means we did everything correctly so remember the steps that you take when you're doing bank reconciliation statement pay careful attention to the details that you are given and you should be able to complete your bank reconciliation statement correctly remember you have to complete your cash receipts journal and cash payments journal as well as the bank account in the general ledger for you to get the balance at the end of the period for our bank account which we'll put here in the debit balance as per bank account at the end and remember with the bank reconciliation statement obviously you always start with the balance as per the bank statement if it's debit you write debit balances by bank statement with credit you do that and then you end with the balance as per bank account bank account what do you mean you mean as according to our books so you calculate it and then you put the amount there i hope this has made sense and it was explained thoroughly if you have any questions or any queries please leave them in the comment section below otherwise once again if you have gained value from this lesson please subscribe to our channel like this video and share it to those you think it might help.
Till next time, cheers.