Bank Reconciliation Statement Students preparing for the ICB Level 2 Certificate in Manual Book-keeping examination need to develop competence in preparing a bank reconciliation statement. The syllabus objectives include: • • • Explain the discrepancies between the bank statement and the bank column of the cash book Up-date the cash book Prepare a bank reconciliation statement
The bank reconciliation statement shows the link between the balances in the bank statement and the cash book. Why then is there a need to prepare a reconciliation and what factors cause a difference between the bank statement balance and the cash book? Timing Differences Such differences between the cash book and the bank statement are caused by: Unpresented cheques: these are cheques drawn and entered in the cash book but not yet recorded on the statement as they have not been presented to the bank for payment. Outstanding lodgement: these are amounts paid into the bank but not yet recorded on the statement.
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In addition to these timing differences there are other factors that cause discrepancies between the two balances. It is often the case that items on the bank statement have not yet been entered in the cash book and it needs to be up-dated for these. Such items include: Payments • • • Standing orders and direct debits Bank charges and interest Dishonoured cheques
Receipts • • • Interest credited Bank giro credits received from debtors BACS receipts credited
BANK RECONCILIATION STATEMENT
The procedure for preparing the bank reconciliation statement is: • • • • • Check like with like items in both bank statement and cash book and tick off Enter the unticked items on the bank statement into the cash book Balance the cash book to determine the revised balance The unticked items in the cash book relate to timing differences The reconciliation statement highlights the timing differences
The following mini-case study covers this procedure. Dunn and Carter are registered book-keepers in practice, their cash book for January 2005 showed: Cash Book (Bank Columns) DR Date 1 Jan 10 Jan 12 Jan 14 Jan 25 Jan 29 Jan 31 Jan CR Bank 450.00 141.00 2000.00 50.50 51.25 537.75 £3230.50
Details Balance B/D J Brown & Son R Jones J Roberts B Eves B Crowe Balance B/D
Bank 1650.00 450.00 510.00 160.00 150.50 310.00 £3230.50 537.75
Date 3 Jan 9 Jan 24 Jan 27 Jan 28 Jan 31 Jan
Details Rent 12541 BT 12542 Salaries BACS PDM Autos 12543 Stationers 12544 Balance C/D
Bank Statement Extract Date 1 Jan 10 Jan 10 Jan 13 Jan 13 Jan 15 Jan 24 Jan 26 Jan 27 Jan 30 Jan Details Balance Credit Cheque 12541 Credit Cheque 12542 Credit BACS Credit BACS Credit J Heyes Charges Payments Receipts 450.00 450.00 510.00 141.00 160.00 2000.00 150.50 175.00 30.00 Balance 1650.00 CR 2100.00 1650.00 2160.00 2019.00 2179.00 179.00 329.50 504.50 474.50 CR
BANK RECONCILIATION STATEMENT
The unticked items on the bank statement need entering in the cash book and the balance revising. Cash Book DR Date 31 Jan 31 Jan 1 Feb CR Bank 30.00 682.75 £712.25
Details Balance B/D BACS J Heyes Balance B/D
Bank 537.75 175.00 £712.25 682.75
Date 31 Jan 31 Jan
Details Charges Balance B/D
The bank reconciliation statement would now be prepared to account for those unticked cash book items ie the timing differences. £ 474.50
Balance per the Bank Statement Less unpresented cheques: PDM Autos 12543 Next Stationers 12544
50.50 51.25 101.75 372.75 310.00 £682.75
Add outstanding lodgement: B Crowe Balance per the Cash Book
BANK RECONCILIATION STATEMENT
Disposal of a Fixed Asset Students preparing for ICB Level 3 Diploma examination need to develop competence in accounting for the disposal of fixed assets. The syllabus includes the following objectives: • • • Make correct entries in the accounts for the disposal of a fixed asset including the treatment of a part-exchange allowance. Transfer the profit and or loss on disposal of the asset to the profit and loss account. Calculate depreciation on the remaining assets.
It is most interesting to note that FRS 15 Tangible Fixed Assets sets out the principles of accounting for fixed assets. The objective of the Standard is to ensure that tangible fixed assets are accounted for consistently. This includes concepts such as measurement, valuation and depreciation. Businesses dispose of fixed assets either prior to the end of their useful economic life or at the end of that period. When an asset is sold or scrapped, the proceeds of the sale need to be compared with the book value of the asset and a profit or loss on disposal is determined. This net book value is defined as the cost of the asset less the cumulative depreciation on the asset to date. FRS 15 states that assets should be depreciated over their useful economic life. It is common practice to depreciate an asset in the year of purchase but not in the year of sale. The following mini-case study will illustrate the concepts outlined earlier. Richard Noble is the owner manager of Noble Engineering Services an SME providing agricultural engineering services in North Yorkshire. At the 1 January 2004, the balances relating to Plant and Machinery showed: Plant and Machinery at Cost 170,000
1 Jan
Balance B/D
Plant and Machinery Provision for Depreciation 1 Jan Balance B/D
75,000
BANK RECONCILIATION STATEMENT
An extract from his Balance Sheet at 31 December 2003 would have shown: Fixed Assets Plant and Machinery Cost 170,000 Depreciation 75,000 Net Book Value 95,000
Richard’s policy for depreciation is to depreciate these assets at a rate of 20% a year, on a straight line basis. Depreciation is charged in the year of acquisition (on a full year basis) but not in the year of disposal. On 1 January 2004 he purchases a new ramp for the engineering workshop at a cost of £50,000 plus VAT and is allowed a trade in on a second-hand ramp of £11,750 including VAT, the balance due was paid by cheque. The second-hand ramp that was disposed of was purchased on 1 January 2001 at a cost of £30,000 plus VAT. The net book value of this second-hand ramp on 31 December 2003 was £12,000. The journal entry on both the acquisition and disposal of these items of equipment would show: Journal Entry Date 2004 1 January Details Plant and Machinery VAT Disposal Account VAT Bank Disposal Account Plant and Machinery Account Plant and Machinery Provision for Depreciation Disposal Account Profit and Loss Account Disposal Account F GL GL GL CB GL GL GL GL GL GL DR 50,000 8,750 10,000 1,750 47,000 30,000 30,000 18,000 18,000 2,000 2,000 CR
Being the acquisition of a new ramp and disposal of a second-hand ramp. GL = general ledger
BANK RECONCILIATION STATEMENT
The accounts in the general ledger would then show:
Plant and Machinery at Cost 2004 1 Jan 1 Jan Balance B/D Journal (1) 170,000 50,000 1 Jan Journal (2) 30,000
These entries (1) and (2) show the acquisition and disposal of the items of equipment at cost.
1 Jan Plant at cost (1) Disposal Account 30,000 1 Jan Proceeds (Part X) (2) 1 Jan Provision for depreciation a/c (3) 31 Dec Profit and Loss a/c (4) £30,000 10,000 18,000 2,000 £30,000
Entry (1) is the transfer of the asset from plant and machinery at cost to the disposal account. Entry (2) is the part exchange allowance against the new asset (note net of VAT). Entry (3) is the transfer of the accumulated depreciation to date on the second-hand ramp ie: £30,000 at cost x 20% per annum for three years to 31 December 2003 – £18,000 depreciation. Entry (4) is the loss on the disposal of the asset, as the trade in allowance was £10,000 (net of VAT) and the net book value at the point of disposal was £12,000 (£30,000 – £18,000).
1 Jan Plant and Machinery Provision for Depreciation Disposal a/c (1) 18,000 1 Jan Balance B/D 75,000
Entry (1) is the transfer of the accumulated depreciation to date on the asset disposed. The depreciation charge for the year ended 31 December 2004 would be based on: • • • • Plant and machinery at cost £190,000 (see the account above after the acquisition and disposal) 20% on cost Depreciation 20% x £190,000 £38,000
BANK RECONCILIATION STATEMENT
The journal entry for this would be: Date 2004 31 Dec Details Profit and loss account Plant and machinery provision for depreciation DR 38,000 38,000 CR
Being depreciation charge on plant and machinery for year. The updated accounts for Plant and Machinery at Cost and Plant and Machinery Provision for Depreciation at 31 December 2004 would show:
Plant and Machinery at Cost 2004 1 Jan 1 Jan 2005 1 Jan Balance B/D Journal (acquisition) 170,000 50,000 £220,000 190,000 1 Jan 31 Dec Journal (Disposal) a/c Balance C/D 30,000 190,000 £220,000
Balance B/D
Plant and Machinery Provision for Depreciation 2004 1 Jan 31 Dec Disposal a/c Balance C/D 18,000 95,000 £113,000 1 Jan 31 Dec 2005 1 Jan Balance B/D Profit and Loss a/c 75,000 38,000 £113,000 95,000
Balance B/D
The extract from the Balance Sheet at 31 December 2004 would now show: Fixed Assets Plant and Machinery Cost 190,000 Depreciation 95,000 Net Book Value 95,000
BANK RECONCILIATION STATEMENT