A Bank Reconciliation Statement reflects the causes of difference between balance as per bank column of cash book and balance as per Pass Book/Bank Statement.
Whenever we deposit or withdraw money from bank, it is always recorded at two places:
- Bank column of cash book
- Bank statement
So the balance amount shown in the bank statement must tally with the balance of bank column as shown in the cash book . But in practice, whenever a comparison is made between them, they are usually found to be different.
To reconcile this mismatch, we prepare a bank reconciliation statement that shows all causes of difference between them.
CAUSES OF DIFFERENCE :
The difference in the both balances (bank balance as per cash book and bank statement) may arise because of the following reasons:-
(1) Timing Differences:
Sometimes a transaction is recorded at two different times in cash book and the bank statement.
(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 firm receives cheques from its customers (debtors), they are immediately recorded in the debit side of the cash book. This increases the bank balance as per the cash book.
However, the bank credits the customer account only when the amount of cheques are actually realised. The clearing of cheques generally takes few days especially in case of outstation cheques. This leads to a cause of difference between the bank balance shown by the cash book and the balance shown by the bank passbook.
(c) Direct debits made by the bank on behalf of the customer
Sometimes, the bank deducts amount for various services from the account without the firm’s knowledge. The firm comes to know about it only when the bank statement arrives. Examples of such deductions include:
- cheque collection charges,
- incidental charges,
- interest on overdraft,
- unpaid cheques deducted by the bank – i.e., stopped or bounced, etc.
As a result, the balance as per passbook will be less than the balance as per cash book.
(d) Amounts directly deposited in the bank account
There are instances when debtors (customers) directly deposits money into firm’s bank account. But, the firm does not receive the intimation from any source till it receives the bank 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 in the bank passbook will be more than the balance shown in 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 customers account.
But the firm will know about these transactions and record the same in the cash book only when it receives a bank 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 customers give standing instructions to the bank to make some payment regularly on stated days to the third parties.
For example, telephone bills, insurance 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 business firm is discounted with the bank is dishonoured on the date of maturity, the same is debited to customer’s account by the bank.
As this information is not available to the firm immediately, there will b e no entry in 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 less than the cash book balance.
(2) Differences Caused by Errors:
Mistakes or errors made in preparing the accounts either by the bank or the customer can also result in disagreement of the two statements. For this reason rectification of errors is required to be done in both the statements before preparing any Bank Reconciliation Statement.
How to prepare bank reconciliation?
After identifying the causes of difference, the bank reconciliation statement may be prepared in the following two ways:
- Without adjusting cash book balance
- After adjusting cash book balance
1.Without adjusting cash book balance
To prepare bank reconciliation statement, under this approach,
- The balance as per cash book or as the balance per passbook 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 passbook. Such a balance exists when the deposits made by the firm are more than its withdrawals. The debit balance indicates the favourable balance as per cash book or favourable balance as per the passbook.
- The credit balance as per the cash book indicates bank overdraft. In other words, the excess amount withdrawn over the amount deposited in the bank. It is also known as unfavourable balance as per cash book or unfavourable balance as per passbook.
Format of Bank Reconciliation Statement
On 31.12.2018, P. Roy’s Bank Balance as shown by the Cash Book was 75,000. On receipt of Bank Statement it was found that:
- Three cheques of 3,000, 4,000 and 1,500 drawn in favour of suppliers respectively on 28th, 29th and 30th December, 2018 had been debited in the Bank Statement on 2nd January 2019.
- The Bank had credited `8,000 on 30th December, 2018, in respect of collection made by Bank directly from a customer, the intimation not having yet been received.
- Two cheques of 5,000 and 6,000 were deposited into Bank on 30th December, 2018 had been credited in the Bank statement on 4th January, 2019.
- The Bank had debited 30 as incidental charges on 30th December, 2018 but not entered in the Cash Book.
Show the reconciliation of the Bank Balance as per Cash Book with the Bank Balance as per Bank Statement as on 31st December, 2018.
Bank Reconciliation Statement as on 31-12-2018
Importance of bank reconciliation
- The reconciliation will bring out any error that may have been committed either in the cash book or in the bank statement.
- Any undue delay in the clearance of cheques will shown up by the reconciliation.
- A regular reconciliation discourages the accountant from embezzlement.