Slide 1 This video will discuss Why bank reconciliations?

Slide 2 Why is a bank reconciliation necessary? If a bank and entity keep record of the same transactions
the balance of the bank statement and the bank account in the books of the business, must be
same. Because if you record it in your books and the bank record it in their books then there the
balance should be then same. In your books if the balance is R10 000 favourable, meaning a R10
000 debit balance, and all the transactions were also recorded in the books of the bank then the
bank should have a balance of also R10 000, but a credit balance. In order to ascertain if the bank
account in the books of the entity corresponds with the bank statement a bank reconciliation
statement is prepared. This means the balance of the bank account in the books of the entity is
reconciled with the balance on each the bank statements. That is physically comparing you balance
in your books in the general ledger then with the balance of the bank statement.
Slide 3 This reconciliation process involves two steps.
First, the entities records are updated to account for actual transactions reflected in the bank
statement. Those are all the transactions that were already recorded on the bank statement by
the bank, but they still need to be recorded in the cash receipts journal or cash payments
journal. For example, bank charges, direct deposits by debtors, debit orders that you have
missed, interest paid, interests received on your either favourable bank balance or unfavourable
bank balance. So, those are transactions that have already been recorded on the bank
statement, but they still need to be recorded in either the cash receipts or cash payments
journal. So, those entries you need to go and adjust in your cash journals.
Secondly, those transactions that the bank must still attend to are recorded in the bank
reconciliation statement. So, transactions that you have already recorded in your cash journals,
but they are not on your bank statement, so the bank has not recorded those transactions as
yet so those must hopefully appear on the following bank statement, but with your reconciliation
you are going to record those transactions that must go through the bank statement you then
going to go and record in the bank reconciliation statement, because the bank reconciliation
statement is a document that you as the business prepared to reconcile your books with the
bank statement.
Slide 4 The bank reconciliation statement could be seen as an extension of the bank statement. An
 outstanding item that will be credited from the bank statement must be credited on the bank
reconciliation statement and vice versa. Your deposits which are credits on the bank statement will
be credits on the bank reconciliation statement and your payments which will be debits on the bank
statement will be debits on the bank reconciliation statement.
Slide 5 A favourable bank account balance is on the debit side of the bank account as well as on the bank
reconciliation statement. So, your bank account in the general ledger when it’s favourable it will
have a debit balance because we said assets have debit balances. So, if it’s favourable it will have a
debit balance when you are going to reflect the balance of the bank account on the bank
reconciliation statement, that debit balance will also then be reflected on the debit side of the bank
reconciliation statement.
Slide 6 An unfavourable or overdrawn bank account balance is on the credit side of the bank account as
well as on the bank reconciliation statement. So, then the opposite when you have an overdrawn
bank account you will now suddenly have an unfavourable bank balance and that will be a credit
balance in the general ledger and when you show your balance as per bank account on the bank
reconciliation statement it must also reflect on the credit side.
Slide 7 A favourable bank statement balance is on the credit side of the bank statement as well as on the
bank reconciliation statement. We said our bank account in the books of the bank when if
favourable then it must be a liability in their books and when it’s a liability then it will have a credit
balance because liabilities have credit balances. So, it’s very important to know your rules. To know
what is an asset, what is a liability, what is equity, what is expense, what is income and know the
rules. Assets increase on the debit side, decrease on the credit side. Liabilities increase on the credit
side, decrease on the debit side. Equity increase on the credit side, decrease on the debit side.
Expenses increase on the debit side decrease on the credit side. Income increases on the credit
side, decrease on the debit side. So, these rules are basically the foundation of accounting. You
need to know then also you need to know examples of assets, examples of liabilities, examples of
expenses, examples of income. When you get transactions, you must always analyse that
transaction to see which element is there, it is increasing is it decreasing. So, it’s questions that you
are going to ask yourself every time and if you don’t know these rules you won’t get to the answer.
If you know them wrongly your are going to apply, them wrongly. So, it’s very important to know
these rules and then to apply them correctly to get to the correct answer.
Slide 8 An unfavourable or overdrawn bank statement balance indicated by DT, DR, or OD is on the debit
side of the bank statement as well as on the bank reconciliation statement. If you think of an
overdraft when it’s on the bank statement, then suddenly you aren’t anymore a creditor of that bank
because you now owe them money and when you owe them money you become a debtor of them.
So, if you are a debtor then you will be an asset, an asset increase on the debit side. So, when your
bank account is unfavourable or overdrawn you will then have a debit balance on the bank
statement.
Slide 9 So, you see it’s important to know when it is an asset, when is it a liability, the rules for assets
the rules for liabilities, because if you don’t know them you are going to struggle.

Slide 10 Thank you.