Bank Reconciliation Statement
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 Pass Book.
Business enterprises, firms and companies maintains the cash book for recording cash and bank transactions.
The Cash book 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 ‘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 that shown by the pass book/bank statement do not match.
If the balance shown by the pass book is different from the balance shown by bank column of 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.
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 Pass Book but not in Cash Book(Transactions recorded by the bank).
(C) Others transactions errors.
(A) Transactions recorded in Cash Book but not in 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.
Need and importance
- Bank Reconciliation Statement helps in locating and rectifying the errors or omissions committed either by the firms or by the bank.
- Customer becomes sure of the correctness of the bank balance shown by the cash book.
- Facilitates the preparation of amended or revised Cash Book.
- Reduces the chances of fraud by the staff of the firms or bank.
- Helps in keeping a track of the cheques deposited for collection.
- Helps in cheques issued to suppliers.
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.
(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.