Bank Reconciliation (Grade 12 NSC Matric Accounting): Revision Notes
Bank Reconciliation
What is bank reconciliation?
Bank reconciliation is a crucial accounting process that compares your business's cash records (found in the Cash Receipts Journal and Cash Payments Journal) with the bank's records (shown on the bank statement). This comparison helps identify differences and ensures both records are accurate and complete.
Think of it like checking your personal bank statement against your own record of spending - sometimes there are transactions that appear on one record but not the other, and you need to understand why these differences exist.
The bank reconciliation process is like being a detective - you're looking for clues to explain why two related records don't match perfectly. Every difference has a logical explanation, and your job is to find it!
Why do we need bank reconciliation?
Differences between your business records and the bank statement occur naturally due to timing differences, bank charges, or errors. Bank reconciliation helps you:
- Identify and correct errors in your records or the bank's records
- Account for bank charges and interest that you may not have recorded
- Track cheques that haven't been presented for payment yet
- Ensure your actual cash position is accurately reflected
Without regular bank reconciliation, you could be making business decisions based on inaccurate cash information. This could lead to bounced cheques, overdraft fees, or missed opportunities for investment.
Common differences between business records and bank statements
Bank charges and interest
What happens: Banks charge fees for various services like account maintenance, overdraft interest, or transaction fees. These charges appear on your bank statement but may not be recorded in your business journals yet.
Worked Example: Recording Bank Charges
Your bank charges R60 for various fees (R10 tax levy + R20 service fees + R30 cash deposit fee) and R40 for overdraft interest. These amounts will appear on the bank statement but need to be recorded in your Cash Payments Journal.
Journal Entry Required:
- Record R60 + R40 = R100 total charges in your CPJ as bank charges expense
How to handle: Record these charges in your CPJ as expenses when you discover them during reconciliation.
Interest earned on bank accounts
What happens: If your business has a current account with a positive balance, the bank may pay you interest. This interest appears on the bank statement before you record it in your books.
Worked Example: Recording Interest Earned
The bank statement shows R50 interest earned on your current account. You need to record this in your Cash Receipts Journal as income.
Journal Entry Required:
- Record R50 in your CRJ as interest income
How to handle: Record the interest earned in your CRJ as additional income.
Direct deposits
What happens: Sometimes customers or tenants pay money directly into your bank account without going through your normal receipt process. These payments appear on the bank statement but may not be recorded in your CRJ yet.
Worked Example: Direct Deposit from Tenant
A tenant pays R800 rent directly into your bank account. The bank statement shows this deposit, but you haven't recorded it in your CRJ yet.
How to handle:
- Record R800 in your CRJ as rental income once identified
Stop orders and debit orders
What happens: These are automatic payments set up with your bank for regular expenses like insurance premiums. The bank processes these payments automatically, so they appear on the bank statement but may not be recorded in your CPJ yet.
Worked Example: Insurance Debit Order
Your bank statement shows a R367 debit order for insurance to Santam. You need to record this in your CPJ as an insurance expense.
Journal Entry Required:
- Record R367 in your CPJ as insurance expense
Outstanding cheques
What happens: When you write cheques to pay suppliers or expenses, you record them immediately in your CPJ. However, the recipient may not present the cheque to the bank immediately, so it doesn't appear on your current bank statement.
Worked Example: Outstanding Cheques
You wrote cheque no. 67 for R200 and cheque no. 69 for R300, but they haven't been presented to the bank yet. These amounts reduce your CPJ balance but don't affect your bank statement balance yet.
Bank Reconciliation Treatment:
- These cheques appear as "Debit outstanding cheques" totaling R500 in the bank reconciliation statement
Late deposits and credit deposits
What happens: Money you deposit late in the month (especially on the last day) may not appear on the current month's bank statement due to processing delays.
Worked Example: Late Deposit
You made a R9,000 deposit on the last day of May, but it only appears on June's bank statement. Your CRJ shows this deposit, but the May bank statement doesn't.
Bank Reconciliation Treatment:
- This appears as "Credit late deposit R9,000" in the bank reconciliation statement
Dishonoured cheques
What happens: When a customer's cheque bounces due to insufficient funds, the bank reverses the deposit and charges the money back to your account. You need to reverse the original receipt and record the dishonoured cheque as a debtor balance.
Dishonoured cheques require two accounting actions:
- Reverse the original receipt in your records
- Record the customer as owing you money again (debtors control)
Worked Example: Dishonoured Cheque
A cheque for R170 from P Pillay was dishonoured.
Required Actions:
- Reverse the original CRJ entry for R170
- Record R170 in CPJ as debtors control (P Pillay now owes this amount again)
Post-dated cheques
What happens: Sometimes you receive or issue cheques with future dates. These cheques cannot be processed until the date written on them arrives.
Received post-dated cheques: If you receive a post-dated cheque, you might record it in your CRJ when you receive it, but the bank cannot process it until the written date arrives.
Worked Example: Post-dated Cheque Received
You received a R157 cheque from B Bud dated 21 July 2014, but deposited it in May. The bank will dishonour it until July arrives.
Bank Reconciliation Treatment:
- Appears as outstanding item until the cheque date arrives
Issued post-dated cheques: If you write a post-dated cheque, it will appear in your CPJ but not on the bank statement until the date arrives.
Stale cheques
What happens: Cheques older than six months become "stale" and banks will not honour them. These create differences because the cheque may still be recorded in your books but cannot be processed by the bank.
Stale Cheque Rule: Any cheque older than 6 months cannot be processed by banks and must be cancelled and reissued if still needed.
Received stale cheques: If someone gives you a very old cheque, the bank will not accept it, and you need to request a new one.
Issued stale cheques: If you wrote a cheque months ago that was never presented, you may need to cancel it and issue a new one, or reverse the original entry if the payment is no longer needed.
Worked Example: Stale Cheque
You wrote cheque no. 120 to Shezi Stat for R100 in November 2013 for stationery, but it was never presented. By May 2014, it's stale and should be cancelled.
Required Action:
- Cancel the stale cheque and either issue a new one or reverse the original CPJ entry
Lost cheques
What happens: Sometimes cheques get lost in the post or misplaced. When this happens, you need to cancel the original cheque and issue a new one with a different number.
Worked Example: Lost Cheque
Cheque no. 255 for R500 to PNA for printing was lost.
Required Actions:
- Cancel cheque no. 255 in your records
- Issue new cheque no. 365 for R500 to PNA for printing
- Record both the cancellation and new cheque issuance
Errors made by the business
What happens: Sometimes you make mistakes when recording transactions in your journals. These errors create differences between your records and the bank statement.
Common errors include:
- Recording the wrong amount
- Recording a transaction in the wrong account
- Arithmetic mistakes
Worked Example: Business Recording Error
You recorded a payment to Makro as R646 in your CPJ, but the actual cheque was for R664. Your records are understated by R18.
Required Action:
- Make an adjustment entry in CPJ to record the additional R18 expense
Errors made by the bank
What happens: Banks can also make mistakes, such as debiting your account for someone else's cheque or crediting your account with someone else's deposit.
Bank errors are less common than business errors, but they do happen. Always verify that transactions on your bank statement actually belong to your account.
Examples:
- The bank debited your account for a R1,500 cheque that actually belonged to ZITHA Stores
- The bank credited your account with a R2,000 deposit that was meant for the business owner's personal account
How to handle: Contact the bank to have them correct their error. These items appear in the bank reconciliation statement until the bank fixes them.
Format of the bank reconciliation statement
The bank reconciliation statement follows a standard format that helps you systematically account for all differences:
Critical Rule: The bank reconciliation statement ALWAYS starts with the bank statement balance and ends with your calculated bank account balance. The debit and credit columns must balance exactly.
Structure:
| BANK RECONCILIATION STATEMENT | DEBIT | CREDIT |
|---|---|---|
| Credit balance as per Bank Statement | [Amount] | |
| Add: Items that increase the bank balance | [Amount] | |
| Less: Items that decrease the bank balance | [Amount] | |
| Calculated balance as per Bank account | [Total] | [Total] |
Key principles:
- Always start with the bank statement balance
- End with the calculated bank account balance from your records
- The debit and credit columns must balance (be equal)
- Add items that increase the actual cash available
- Subtract items that decrease the actual cash available
Example items in each category:
Credit side (increases bank balance):
- Bank statement starting balance
- Direct deposits not yet recorded
- Interest earned
- Deposits in transit
- Bank errors that overstated debits
Debit side (decreases bank balance):
- Outstanding cheques
- Bank charges not yet recorded
- Overdraft interest
- Stop orders not yet recorded
- Bank errors that understated credits
Exam Tips for Bank Reconciliation:
- Read carefully: Always identify whether each item appears on the bank statement, in your journals, or both
- Check dates: Pay attention to dates for post-dated and stale cheques
- Follow the format: Use the standard bank reconciliation statement format
- Balance your work: The debit and credit totals must always be equal
- Show all working: Include all journal entries needed to correct errors
- Double-check arithmetic: Verify all your calculations
Key Points to Remember:
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Bank reconciliation compares your cash journals (CRJ/CPJ) with the bank statement to identify and explain differences
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Common differences include bank charges, interest, outstanding cheques, direct deposits, and errors by either the business or bank
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The bank reconciliation statement always starts with the bank statement balance and ends with your calculated bank account balance
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All differences must be properly accounted for, and thedebit and credit sides of the reconciliation must balance
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Post-dated cheques cannot be processed until their written date, while stale cheques (over 6 months old) cannot be processed at all