understand the use and purpose of a bank statement

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Cambridge IGCSE Accounting (0452) – Bank Reconciliation (3.3)

1. Syllabus Coverage Checklist

Syllabus Unit Content Required Notes Completed?
1. Fundamentals of Accounting Basic concepts, accounting equation, double‑entry ❌ – develop separate notes
2. Sources & Recording of Transactions Source documents, journals, ledgers ❌ – develop separate notes
3. Verification of Accounting Records Bank reconciliation, trial balance, error detection ✅ – this note
4. Accounting Procedures Posting, preparation of accounts, adjusting entries ❌ – develop separate notes
5. Financial Statements Statement of financial position, profit & loss ❌ – develop separate notes
6. Analysis & Interpretation Ratio analysis, cash‑flow interpretation ❌ – develop separate notes
7. Principles & Policies GAAP, ethical considerations, internal control ❌ – develop separate notes

2. Lesson Objective

By the end of this lesson students will be able to:

  • Explain the purpose and usefulness of a bank statement.
  • Identify deposits in transit (uncredited deposits), outstanding (unpresented) cheques and other adjustments.
  • Prepare a full bank‑reconciliation statement, update the cash book and record any correcting entries.
  • Evaluate how the reconciliation influences cash‑flow management and the reliability of financial statements.

3. Why a Bank Statement is Important

  • Shows every transaction the bank has processed for the account during the statement period.
  • Provides independent evidence of cash receipts and payments – essential for verification of accounting records.
  • Helps detect errors, omissions or fraudulent activity in the cash book.
  • Ensures the business’s recorded cash balance agrees with the bank’s records.

4. Key Terminology (exact syllabus wording)

  • Cash Book – the business’s own record of all cash receipts and payments.
  • Bank Statement – the bank’s record of all transactions affecting the business’s account.
  • Deposits in transit (uncredited deposits) – cash or cheques received by the business but not yet credited by the bank at the statement date.
  • Outstanding (unpresented) cheques – cheques issued by the business that have not yet been presented to the bank.
  • Bank charges – fees deducted by the bank (e.g., service fees, cheque‑clearing fees) that are not yet recorded in the cash book.
  • Interest earned – interest credited by the bank on the account balance that is not yet recorded in the cash book.

5. Preparing a Bank Reconciliation – Step‑by‑Step

  1. Obtain the **latest bank statement** and note the balance as per bank statement (the balance shown on the statement date).
  2. Locate the balance as per cash book for the same date.
  3. Identify **deposits in transit (uncredited deposits)** – items recorded in the cash book but absent from the bank statement.
  4. Identify **outstanding (unpresented) cheques** – cheques recorded in the cash book but not yet cleared by the bank.
  5. Record any **bank charges**, **interest earned**, or other adjustments that appear on the bank statement but are not yet in the cash book.
  6. Check for errors (e.g., transposition, omission, wrong amount). Record a correcting journal entry in the cash book** for each error discovered.
  7. Apply the reconciliation formula (see Section 6) to adjust both balances.
  8. Confirm that the adjusted cash‑book balance equals the adjusted bank‑statement balance. This common figure is the reconciled cash balance.

6. Reconciliation Formula (boxed for clarity)

Adjusted Cash‑Book Balance = Cash‑Book Balance + Additions – Deductions = Adjusted Bank‑Statement Balance

Additions: deposits in transit, interest earned, any other credits not yet recorded in the cash book.
Deductions: outstanding cheques, bank charges, any other debits not yet recorded in the cash book.

7. Typical Two‑Column Bank Reconciliation Statement

Cash‑Book Adjustments Bank‑Statement Adjustments
Balance as per cash book 5,200.00 Balance as per bank statement 5,050.00
+ Deposits in transit (uncredited deposits) + 300.00 - Outstanding cheques - 250.00
+ Interest earned + 5.00 - Bank charges - 15.00
Adjusted cash‑book balance 5,505.00 Adjusted bank‑statement balance 5,505.00

Worked Example (Deposits in Transit & Outstanding Cheques)

Data for March:

  • Balance as per cash book (31 Mar): £4,800
  • Balance as per bank statement (31 Mar): £4,620
  • Deposits in transit (uncredited deposits): £150
  • Outstanding cheques: £200
  • Bank service charge (statement only): £12
Cash‑Book Adjustments Bank‑Statement Adjustments
Balance as per cash book 4,800.00 Balance as per bank statement 4,620.00
+ Deposits in transit (uncredited deposits) +150.00 - Outstanding cheques -200.00
- Bank charge (not yet recorded) -12.00
Adjusted cash‑book balance 4,938.00 Adjusted bank‑statement balance 4,938.00

8. Recording Correcting Entries

If an error is discovered during reconciliation, the student must:

  1. Identify the nature of the error (e.g., transposition, omission, wrong amount).
  2. Prepare a correcting journal entry in the cash book (debit or credit the appropriate account).
  3. Update the cash‑book balance before re‑applying the reconciliation formula.

9. Common Errors to Watch For

  • Transposition of digits (e.g., £1,250 entered as £1,520).
  • Omitting a transaction entirely from either the cash book or the bank statement.
  • Recording a cheque for the wrong amount.
  • Failing to post bank charges or interest earned.
  • Using a cash‑book balance that relates to a different date than the bank‑statement balance.

10. Benefits of Regular Bank Reconciliation

  • Maintains an accurate cash balance for sound decision‑making.
  • Provides early detection of fraud, unauthorised withdrawals, or bank errors.
  • Ensures that financial statements reflect the true cash position of the business.
  • Improves cash‑flow forecasting and helps avoid overdraft penalties.
  • Strengthens internal control by highlighting weaknesses in the recording and authorisation processes.

11. Evaluation & Extension (AO3)

Answer each question in 2–3 sentences, using specific examples where possible.

  1. How can a bank reconciliation highlight weaknesses in a company’s internal control system?
  2. What are the possible consequences if a business fails to reconcile its bank statements regularly?
  3. Explain why “deposits in transit (uncredited deposits)” and “outstanding cheques” must be shown separately in the reconciliation statement.
  4. In what ways might frequent bank‑statement errors affect the reliability of a company’s financial statements?

Case‑Study Prompt

Scenario: On reviewing the March bank reconciliation, you notice a discrepancy of £85. The cash book shows a cheque of £185 issued to “Office Supplies”, but the bank statement records a debit of £100 for the same supplier. No other entries explain the £85 difference.

Task: As the junior accountant, decide what steps you would take to investigate and resolve the discrepancy. Discuss possible reasons for the difference and the impact on the cash‑book balance if the issue is not corrected.

12. Suggested Diagram (Flowchart)

Flowchart: Obtain bank statement → Note balance as per bank statement → Note balance as per cash book (same date) → List adjustments (deposits in transit, outstanding cheques, bank charges, interest) → Record any correcting entries → Apply reconciliation formula → Produce adjusted balances → Verify equality.

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