Bank Reconciliation Statement

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Bank Reconciliation

A Bank Reconciliation Statement is the comparison made between the bank balance & as shown in the firm’s cash book, the two balances do not tally. Hence, we’ve to first ascertain the causes of difference thereof then reflect them during a statement called Bank Reconciliation Statement to reconcile (tally) the two balances.

A statement or a bank passbook may be a copy of a checking account as shown by the bank records. This enables the bank customers to see their funds within the bank regularly and update their own records of transactions that have occurred.

The amount of balance shown within the statement must tally with the balance as shown within the cash book. But in practice, these are usually found to vary. Hence, we’ve to determine the causes of such a difference. It will be observed that a bank statement/passbook shows all deposits within the credit column and withdrawals within the debit column. Thus, if deposits exceed withdrawals it shows a credit balance and if withdrawals exceed deposits it’ll show a debit balance (overdraft).

Why the need for Bank Reconciliation?

To prepare a bank reconciliation statement, we’d like to possess a bank balance as per the cash book and a statement on a specific day along with side details of both the books. If the two balances differ, the entries in both the books are compared and the items on account of which the difference has arisen are ascertained with the respective amounts involved so that the bank reconciliation statement could also be prepared.

  Particulars Amount Rs.
Add: Balance as per cash book ———-
  Cheques issued but not presented ———-
  Interest credited by the bank ———-
Less: Cheque deposited but not credited by the bank ———-
  Bank charges not recorded the cash book ———-
  Balance as per the statement ———-
    XXXX
It can also be prepared with two amount columns one showing additions (+ column) and another showing deduction (-column). For convenience, we usually adopt this treatment.

  Particulars Amount Rs. ( + ) Amount Rs. ( – )
  Balance as per cash book ———-  
  Cheques issued but not presented ———-  
  Interest credited by the bank ———-  
    XXXX  
  Cheque deposited but not credited by the bank   ———-
  Bank charges not recorded the cash book   ———-
  Balance as per the statement   ———-
      XXXX
Reconciliation of the cash book and the bank passbook balances amounts to an explanation of differences between them. The differences between the cash book and the bank passbook is caused by:

  • Timing difference on the recording of the transaction.
  • Errors made by the business or by the bank.

Timing Difference

When a business compares the balance of its cash book with the balance shown by the bank passbook, there is often a difference, which is caused by the time gap in recording the transactions relating either to payments or receipts. The factors affecting the time gap includes :

a) Cheques issued by the bank but not yet presented for payment

When cheques are issued by the firm to suppliers or creditors of the firm, these are immediately entered on the credit side of the cash book. However, the receiving party may not present the cheque to the bank for payment immediately. The bank will debit the firm’s account only when these cheques are actually paid by the bank. Hence, there is a time lag between the issue of a cheque and its presentation to the bank which may cause the difference between the two balances.

b) Cheques paid into the bank but not yet collected

When the firm receives cheques from its customers (debtors), they are immediately recorded on the debit side of the cash book. This increases bank balance as per the cash book. However, the bank credits the customer account only when the number of cheques is actually realised. The clearing of cheques generally takes few days especially in the case of outstation cheques or when the cheques are paid-in at a bank branch other than the one at which the account of the firm is maintained. This leads to a cause of difference between the bank balance shown by the cash book and the balance shown by the bank statement.

c) Direct debits made by the bank on behalf of the customer

Sometimes, the bank deducts an amount for various services from the account without the firm’s knowledge. The firm involves realize it only the statement arrives. Examples of such deductions include cheque collection charges, incidental charges, interest on an overdraft, unpaid cheques deducted by the bank – i.e., stopped or bounced, etc. As a result, the balance as per the passbook is going to be but the balance as per the cash book.

d) Amounts directly deposited in the bank account

There are instances when debtors (customers) directly deposit money into the firm’s bank account. But, the firm doesn’t receive the intimation from any source till it receives the statement. In this case, the bank records the receipts in the firm’s account at the bank but the same is not recorded in the firm’s cash book. As a result, the balance shown within the bank passbook is going to be quite the balance shown within the firm’s cash book.

e) Interest and dividends collected by the bank

When the bank collects interest and dividend on behalf of the customer, then these are immediately credited to the customer’s account. But the firm will realize these transactions and record an equivalent within the cash book only it receives a statement. Till then the balances as per the cash book and passbook will differ.

f) Direct payments made by the bank on behalf of the customers

Sometimes the purchasers give standing instructions to the bank to form some payment regularly on stated days to the third parties. For example, telephone bills, premium, rent, taxes, etc. are directly paid by the bank on behalf of the customer and debited to the account. As a result, the balance as per the bank passbook would be less than the one shown in the cash book.

g) Cheques deposited/bills discounted dishonoured:

If a cheque deposited by the firm is dishonoured or a bill of exchange drawn by the firm is discounted with the bank is dishonoured on the date of maturity, the same is debited to the customer’s account by the bank. As this information isn’t available to the firm immediately, there’ll be no entry within the firm’s cash book regarding the above items. This will be known to the firm when it receives a statement from the bank. As a result, the balance as per the passbook would be but the cash book balance.

Differences Caused by Errors:-

Sometimes the difference between the two balances may be accounted for by an error on the part of the bank or an error in the cash book of the business. This causes the difference between the bank balance shown by the cash book and therefore the balance shown by the statement.

a) Errors committed in recording transaction by the firm

Omission or wrong recording of transactions concerning cheques issued, cheques deposited and wrong totalling, etc., committed by the firm while recording entries within the cash book cause difference between cash book and passbook balance.

b) Errors committed in recording transactions by the bank

Omission or wrong recording of transactions relating to cheques deposited and wrong totalling, etc., committed by the bank while posting entries in the passbook also cause differences between passbook and cash book balance.

Preparation of Bank Reconciliation Statement

After identifying the causes of difference, the reconciliation may be done in the following two ways:

a) Preparation of bank reconciliation statement without adjusting cash book balance.

b) Preparation of bank reconciliation statement after adjusting cash book balance.

Preparation of Bank Reconciliation Statement without adjusting Cash Book Balance

To prepare the bank reconciliation statement, under this approach, the balance as per cash book or as per the bank statement is the starting item. The debit balance as per the cash book means the balance of deposits held at the bank.

Such a balance will be a credit balance as per the bank statement. Such a balance exists when the deposits made by the firm are quite its withdrawals. It indicates the favourable balance as per the cash book or favourable balance as per the bank statement. On the opposite hand, the credit balance as per the cash book indicates bank overdraft.

In other words, the surplus amount withdrawn over the quantity deposited within the bank. It is also known as an unfavourable balance as per cash book or an unfavourable balance as per the bank statement.

We may have four different situations while preparing the bank reconciliation statement. These are :

  1. When debit balance (favourable balance) as per cash book is given and the balance as per bank statement is to be ascertained.
  2. When credit balance (favourable balance) as per bank statement is given and the balance as per cash book is to be ascertained.
  3. When credit balance as per cash book (unfavourable balance/overdraft balance) is given and the balance as per bank statement is to ascertain.
  4. When debit balance as per passbook (unfavourable balance/overdraft balance) is given and the cash book balance as per is to ascertain.

Dealing with favourable balances

The following steps may be initiated to prepare the bank reconciliation statement:

  • The date on which the statement is prepared is written at the top, as part of the heading.
  • The first item in the statement is generally the balance as shown by the cash book. Alternatively, the starting point can also be the balance as per the bank statement.
  • The cheques deposited but not yet collected are deducted.
  • All the cheques issued but not yet presented for payment amounts directly deposited in the bank account are added.
  • All the items of charges such as interest on an overdraft, payment by the bank on standing instructions and debited by the bank in the passbook but not entered in the cash book, bills and cheques dishonoured etc. are deducted.
  • All the credits given by the bank such as interest on dividends collected, etc. and direct deposits in the bank are added.
  • Adjustment for errors is made according to the principles of rectification of errors.
  • Now the net balance shown by the statement should be the same as shown by the bank statement.

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