(a) What is a Bank Reconciliation Statement? (b) Explain the following terms: (i) Bank Charges (ii) Standing order (iii) Credit Transfer (iv) Dishonoured Ch...

Answer Details

(a) What is a Bank Reconciliation Statement?

A Bank Reconciliation Statement is a statement prepared periodically (usually monthly) to reconcile, or agree, the balance shown by the depositor's cash book (bank column) with the balance shown on the bank statement supplied by the bank. Because certain entries appear in one record before the other, the two balances often differ. The statement explains the causes of the difference and proves that both records are correct.

(b) Explanation of the terms

(i) Bank charges: Fees deducted by the bank from the customer's account for services rendered, such as account maintenance, ledger fees or commission. They appear on the bank statement first and must later be entered on the credit side of the cash book.

(ii) Standing order: A written instruction by the customer to the bank to pay a fixed amount to a named party at regular intervals (for example, monthly rent or insurance premium). The bank pays it automatically and records it before the customer enters it in the cash book.

(iii) Credit transfer: An amount paid directly into the customer's bank account by a third party (for example, a debtor settling a debt or dividends received). It increases the bank balance and appears on the bank statement before it is entered on the debit side of the cash book.

(iv) Dishonoured cheque: A cheque that the bank refuses to pay, usually because of insufficient funds, a technical error, or the drawer's account being closed. Where a customer's cheque earlier recorded as a receipt is returned unpaid, the bank reverses it, reducing the balance.

(v) Unpresented cheque: A cheque drawn and issued by the trader and already entered (credited) in the cash book, but which the payee has not yet presented to the bank for payment. It therefore reduces the cash book balance before it reduces the bank statement balance.

(vi) Uncredited cheque: A cheque received and paid into the bank, already entered (debited) in the cash book, but which the bank has not yet cleared and credited to the account. It therefore raises the cash book balance before it raises the bank statement balance.