Describe a Bank reconciliation statement (meaning, importance, reasons for inconsistencies, and the key terms used)

• Cash book (bank column): The part of the business's cash book that records all transactions through the bank account.

• Bank statement: A document issued by the bank showing all transactions and the current balance of the business's account.

• Unpresented cheque: A cheque issued by the business that has been recorded in the cash book but not yet presented to the bank for payment. Also called an outstanding cheque.

• Uncredited cheque: A cheque deposited into the bank but not yet credited by the bank. Also called a deposit in transit or uncleared deposit.

• Dishonoured cheque: A cheque that the bank has refused to pay.

• Bank charges: Fees charged by the bank for operating the account.

• Standing order: An instruction to the bank to make regular payments automatically.

• Direct deposit/transfer: Money paid directly into the bank account, such as an electronic fund transfer or dividend payment.

• Overdraft: When a business withdraws more money than is available in its account, resulting in a negative balance.

• Reconciling items: Items that cause timing differences between the cash book and bank statement, such as unpresented and uncredited cheques.

• Adjusting items: Items that need to be recorded in the cash book after comparing with the bank statement, such as bank charges, standing orders, and direct credits.

Bank reconciliation is important for several reasons:

It helps identify errors in both the cash book and the bank statement, ensuring accurate financial records.

It detects fraud, such as unauthorizedcheques or delays in crediting deposits, protecting the business from losses.

It ensures the business knows the correct bank balance to report in its financial statements.

It helps track all receipts and payments, keeping the cash book up to date.

It identifies customers who frequently issue dishonoured cheques, allowing the business to take appropriate action.

It is a required control procedure for good cash management.

Mr. Bitekerezo Makusaro received his bank statement for December 2021. His cash book showed a balance of TZS 19,648,643, while the bank statement showed a balance of TZS 15,620,843. Upon comparison, the following differences were found:

• Cheque 12652 for TZS 3,200,000 was issued but not presented (unpresented cheque)
• Cheque 212 for TZS 6,940,000 was deposited but not yet credited (uncredited cheque)
• Bank charges of TZS 3,200 were debited by the bank
• NHC standing order for rent of TZS 350,000 was paid by the bank
• Dividend of TZS 65,400 was credited by the bank

To reconcile these balances, we prepare a bank reconciliation statement starting with the adjusted cash book balance:

First, we adjust the cash book for items the bank recorded but the business did not know about:

Adjusted cash book balance = TZS 19,648,643 − TZS 350,000 − TZS 3,200 + TZS 65,400 = TZS 19,360,843

Then we prepare the bank reconciliation statement:

Bank reconciliation statement as at 31 December 2021

The two balances now agree, confirming the reconciliation is correct.

In Tanzania, small business owners such as shopkeepers in Kariakoo or fish mongers at Lake Victoria regularly use bank accounts for their transactions. Every month, they should compare their own records with the bank statement they receive. For example, a sokoni vendor who sells tomatoes and onions might have paid a supplier by cheque last week but the supplier has not yet cashed it. By preparing a bank reconciliation, the vendor knows exactly how much money is actually available in the account, helping them plan for buying more stock or paying school fees for their children.