Lecture Notes: Chapter 1 - Uses of Accounting Information and the Basic Financial Statements

Objective

• Demonstrate the control of cash by preparing a bank reconciliation statement.

Bank Reconciliation Statement

• Purpose: Accounts for the differences between the company's records and the bank statement of the same account's balance.
• Common Issues:
  • Cash account balance rarely agrees with the bank statement due to timing and recording differences.

Reasons for Differences

1. Company's Records but Not on Bank's:
   • Outstanding Cheques: Issued but not yet appearing on the bank statement.
   • Outstanding Lodgements: Deposits made but not recorded in time by the bank.
2. Bank Statement but Not on Company's Books:
   • Direct Debits and Standing Orders: Automatic payments not recorded.
   • Dishonored Cheques: Also known as returned, bounced cheques.
   • Interest and Charges: Bank charges and credits not yet recorded.
3. Errors:
   • Bank Errors: Mistakes made by the bank.
   • Cashbook Errors: Incorrect entries by the company.

Bank Reconciliation Steps

1. Identify Reconciled Transactions:
   • Exclude transactions appearing in both the Cash Book and Bank statements with matching amounts.
2. Label Unreconciled Transactions:
   • In Cashbook: Outstanding Cheque, Outstanding Lodgement, Cashbook error.
   • In Bank Statement: Unrecorded direct debit, unrecorded lodgement, bank error.

Illustration of a Bank Reconciliation

• Part I: Adjust bank statement balance:
  1. Add outstanding lodgements.
  2. Subtract outstanding cheques.
  3. Adjust for any bank statement errors.
• Part II: Adjust cashbook balance:
  1. Add unrecorded lodgements.
  2. Subtract unrecorded direct debits and returned cheques.
  3. Adjust for any cashbook errors.
• Final Step: Ensure the adjusted balances (bank statement and cashbook) are equal.

Recording Transactions After Reconciliation

• Record all items reported by the bank but not yet recorded by the company (e.g., unrecorded direct debits and lodgements).

Test Yourself Questions

• Why might the balance per cashbook not agree with the bank statement?
• Define key terms:
  • Outstanding lodgement
  • Outstanding cheque
  • Unrecorded lodgement
  • Unrecorded cheque
• How to determine if a transaction is a cashbook error or a bank error?