Bank Reconciliation Statement

Introduction

Bank Reconciliation Statement is a statement, prepared on a particular date to reconcile the difference between the bank balance shown by the Cash Book(bank column) and the bank balance shown by the Pass Book.

Business enterprises, firms, and companies maintain the cash book for recording cash and bank transactions.

The Cashbook serves the purpose of both the cash account and the bank account. It shows the balance of cash and bank at the end of a period.

Bank also maintains an account for each customer in its book. All deposits by the customer are recorded on the credit side of his/her account and all withdrawals are recorded on the debit side of his/her account. A copy of this account is regularly sent to the customer by the bank. This is called a ‘Pass Book’ or Bank statement.

It is usual to tally the business firm’s bank transactions as recorded by the bank with the cash book.  But sometimes the bank balances as shown by the cash book and those shown by the passbook/bank statement do not match.

If the balance shown by the pass book is different from the balance shown by the bank column of the cash book, the business firm will identify the causes for such difference. It becomes necessary to reconcile them. To reconcile the balances of Cash Book and Pass Book a statement is prepared. This statement is called the ‘Bank Reconciliation Statement.

Also Read: Meaning and advantages of Double Entry System

Features of Bank Reconciliation Statement

• Bank Reconciliation Statement is a statement not  an account.
• It is  prepared on a particular date.
• Bank Reconciliation Statement is  prepared to reconcile the difference between the bank Balance shown by the Cash Book(bank column) and the bank Balance shown by Pass Book.
• It is  prepared by the customers(Business Firms) of the Bank.
• Bank Reconciliation Statement is  not part of ‘Double Entry System of Book-keeping’

Causes of Differences in Cash Book and Pass Book

(A) Transactions recorded in Cash Book but not in Pass Book(Difference due to timing).

(B) Transactions recorded in the Pass Book but not in the Cash Book(Transactions recorded by the bank).

(C) Other transaction errors.

(A) Transactions recorded in the Cash Book but not in the Pass Book

(i) Cheques issued but not presented for payment in the bank.

(ii) Cheques deposited or paid into the bank for collection but not yet credited by bank.

(iii) Cheques deposited but dishonored.

(iv) Working Debit or credit entered

(v) Cheques received recorded in cash book but not deposited in bank.

(B) Transactions recorded in Pass Book but not in Cash Book

(i) Interest allowed by the Bank but not recorded in cash book.

(ii) Interest on overdraft, bank charges and commission etc. charges by Bank but not recorded in cash book.

(iii) Direct deposit by the customers into Bank but not recorded in cash book.

(iv) Interest, dividednd etc. collected by the Bank but not recorded in cash book.

(v) Direct payment made by the Bank on behalf of costomer as per standing instruction but not recorded in cash book.

(C) Other transactions

(i) Error in totaling of Cash Book.

(ii) Transactions recorded twice in Cash Book.

(iii) Transactions recorded twice in Pass Book.

(iv) Error of recording by wrong amount.

(v) Error of recording in wrong side like Debit instead of credit and vice-versa.

(vi) Overcasting of Debit/Credit Column of Cash -Book.

(vii) Cheques deposited or Issued but omitted to be entered in the Cash Book.

(viii) Incorrect amount (if any) entered in the Cash Book

(ix) Error in balancing of Cash Book.

(x) Undercasting of Debit/Credit Column of Cash -Book.

Also Read: 20 transactions with their Journal Entries, Ledger and Trial balance

Need and importance

1. Bank Reconciliation Statement helps in locating and rectifying the errors or omissions committed either by the firms or by the bank.
2. Customer becomes sure of the correctness of the bank balance shown by the cash book.
3. Facilitates the preparation of amended or revised Cash Book.
4. Reduces the chances of fraud by the staff of the firms or bank.
5. Helps in keeping a track of the cheques deposited for collection.
6. Helps in cheques issued to suppliers.

Also Read:Trial Balance : Definition and methods

Procedure of Preparing Bank Reconciliation Statement

A Bank Reconciliation Statement is prepared when we get the duly completed Pass Book from the Bank.

(1) First of all tally the Debit side entries of the cash book with the Credit side entries of the Pass Book and vice versa.

(2) Tick the items appearing in both the books.

(3) Unticked items will be the points of differences.

(4) A Bank Reconciliation Statement is then prepared by taking either the balance as per Cash Book or Pass Book as a starting point.

Important Points

(1) If the Starting point is Cash Book Balance then the ending point will be Pass Book Balance.

(2) If the starting point is Pass Book Balance then the ending point will be the Balance as per Cash Book.

(3) Debit Balance as per Cash Book or Credit Balance as per Pass Book, means that the firm has that much amount of deposit at the bank also called favorable balance  write the amount under plus items.

(4) Credit Balance as per Cash Book or Debit Balance as per Pass Book, means that this much amount has seen withdrawn in excess of deposit  also called overdraft or unfavorable balance write the amount under minus items.

(5)  If Bank Reconciliation Statement is started with Balance as per Cash Book then ending point is Balance as per Pass Book and Vice-Versa.

(6) Debit balance of Cash Book means favorable balance or + Plus Balance

(7) Credit balance of cash Book means unfavorable balance or-Minus Balance.

(8) Credit balance of Pass Book means favorable balance or + Plus Balance.

(9) Debit balance of Pass Book means unfavorable balance or Minus Balance.

EFFECT ON BALANCE OF CASH BOOK AND PASS BOOK

• Items which increase the Pass Book Balance or decreases the Cash Book Balance

(1) Cheques issued but not yet presented for Payment .

(2) Credits made by the bank for Interest.

(3) Amount directly deposited by the customers in our bank A/c.

(4) Interest and dividend collected by the bank.

(5) Cheques deposited  into the bank and credited by bank  but omitted to be recorded in the Cash – Book.

• Items which, decreases the Pass Book Balance or increase the Cash Book Balance

(1) Cheques sent to the bank for collection but not yet credited by the – bank.

(2) Cheques paid into the bank but dishonored.

(3) Direct payments made by the bank.

(4) Bank charges, commission etc. debited by the bank.

(5) Cheques issued but omitted to be recorded in the Cash Book.

Also Read: Best Book for Class 11 CBSE and ISC Accountancy

Bhardwaj Accounting Academy

Bank Reconciliation Statement Practice

 

FAQs on Bank Reconciliation Statement

What is a Bank Reconciliation Statement?

Question: What is a Bank Reconciliation Statement? Answer: A Bank Reconciliation Statement is a statement prepared on a specific date to reconcile the difference between the bank balance shown by the Cash Book (bank column) and the bank balance shown by the Pass Book.

Why is a Bank Reconciliation Statement important?

Question: Why do we need a Bank Reconciliation Statement? Answer: It helps in locating and rectifying errors or omissions by the firm or the bank, ensures the correctness of the bank balance, facilitates the preparation of an amended or revised Cash Book, reduces fraud chances, and helps in tracking cheques deposited for collection and issued to suppliers.

Features of Bank Reconciliation Statement

Question: What are the key features of a Bank Reconciliation Statement? Answer: It is a statement, not an account, prepared on a particular date to reconcile differences between the Cash Book and Pass Book balances. It is prepared by the customers of the bank and is not part of the double-entry bookkeeping system.

Causes of Differences in Cash Book and Pass Book

Question: What causes differences between the Cash Book and Pass Book balances? Answer: Differences can arise due to:

• Transactions recorded in the Cash Book but not in the Pass Book (e.g., cheques issued but not presented).
• Transactions recorded in the Pass Book but not in the Cash Book (e.g., bank charges not recorded).
• Errors such as incorrect amounts, recording on the wrong side, or omission of transactions.

How to Prepare a Bank Reconciliation Statement

Question: What is the procedure for preparing a Bank Reconciliation Statement? Answer:

1. Tally the Debit side entries of the Cash Book with the Credit side entries of the Pass Book and vice versa.
2. Tick items appearing in both books.
3. Identify unticked items as points of difference.
4. Prepare the statement using the balance from either the Cash Book or Pass Book as the starting point.

Understanding Balance Types

Question: What do different balances in Cash Book and Pass Book mean? Answer:

• Debit Balance (Cash Book) / Credit Balance (Pass Book): Firm has a deposit at the bank (favorable balance).
• Credit Balance (Cash Book) / Debit Balance (Pass Book): Amount withdrawn exceeds deposits (overdraft or unfavorable balance).

Effect on Balances

Question: How do certain transactions affect the balances of Cash Book and Pass Book? Answer:

• Increase Pass Book Balance / Decrease Cash Book Balance:
  • Cheques issued but not presented.
  • Bank credits for interest.
  • Direct customer deposits.
  • Interest and dividends collected by the bank.
  • Omitted cheques deposited and credited by the bank.
• Decrease Pass Book Balance / Increase Cash Book Balance:
  • Cheques sent for collection but not credited.
  • Dishonored cheques.
  • Direct bank payments.
  • Bank charges and commission.
  • Omitted issued cheques.