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CHAPTER 15

BANK RECONCILIATION STATEMENT

We have learnt that the business organisations keep a record of their cash and bank transactions in a cash book. The cash book also serves the purpose of both the cash account and the bank account and shows the balance of both at the end of the period. (Triple Column Cash book, where third column is Discount Account).

Once the cash book has been balanced, it is usual to check its details with the records of the bank transactions as recorded by the bank. To enable this check, the cashier needs to ensure that the cash book is completely up to date and a recent bank statement (or a bank passbook) has been obtained from the bank.

A bank statement or a bank passbook is a copy of a bank account as shown by the bank records. This enables the bank customers to check their funds in the bank regularly and update their own records of transactions that have occurred.

The amount of balance shown in the passbook or the bank statement must tally with the balance as shown in the cash book. But in practice, these are usually found to be different. Hence, we must ascertain the causes for such difference.

It will be observed that a bank statement/passbook shows all deposits in the credit column and withdrawals in the debit column.

(Because for bank, Our money with them is their liability and thus bank will credit our account when we deposit the money in bank & bank will debit our account when we withdraw money from bank).

Thus, if deposits exceed withdrawals it shows a credit balance and if withdrawals exceed deposits it will show a debit balance (overdraft).

Need for Bank Reconciliation

It is generally experienced that when a comparison is made between the bank balance as shown in the firm’s cash book, the two balances do not tally.

Hence, we have to first ascertain the causes of difference thereof and then reflect them in a statement called Bank Reconciliation Statement to reconcile (tally) the two balances (i.e., the bank balance as shown in our cash book & the bank balance as shown in passbook/Bank statement).

In order to prepare a bank reconciliation statement, we need to have a bank balance as per the cash book and a bank statement as on a particular day along with 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 may be prepared.

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(Format of Bank Reconciliation Statement)

The 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 differences on recording of the transactions.

• errors made by the business or by the bank.

Timing Differences

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 time gap includes:

1. Cheques issued 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.

2. Cheques paid into the bank but not yet cleared

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.

Format of Bank Reconciliation Statement

The table shown in the PDF is:

This is the visual Bank Reconciliation Statement format appearing on page 62.

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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 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 passbook.

3. 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, bank interest charged 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.

4. Amounts directly deposited in the bank account by debtors/etc

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.

5. 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.

6. 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 be 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.

7. Interest allowed by Bank

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If the bank has allowed interest to the customer, the entry will be made by bank in customer’s account and customer will come to know about it only after receipt of bank statement.

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 difference between the bank balance shown by the cash book and the balance shown by the bank statement.

1. Errors committed in recording transaction by the firm

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

2. 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.

It may be noted that in practice, the bank reconciliation statement is prepared after adjusting the cash book balance.

Before proceeding further, you must understand that ‘Dr. balance as per cash book’ means deposits in the bank or cash at bank or Cr. balance as per passbook.

Similarly, ‘Cr. balance as per cash book’ means excess amount over deposits withdrawn by the account holder or overdraft balance or Dr. balance as per passbook.

It means that students can start bank reconciliation from any of the following four balances given in the question:

1. Dr. balance as per cash book

2. Cr. balance as per cash book

3. Dr. balance as per passbook

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4. Cr. balance as per pass book

Preparation of Bank Reconciliation Statement without adjusting Cash Book Balance

To prepare bank reconciliation statement, under this approach, the balance as per cash book or as 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.

It indicates the favourable balance as per cash book or favourable balance as per the passbook.

On the other hand, 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.

For reconciliation purposes students can take any of the four balances as the starting point and can proceed further with the causes of differences.

Preparation of Bank Reconciliation Statement after adjusting Cash Book Balance

To prepare bank reconciliation statement, under this approach, the cash book is adjusted for certain adjustments before taking this balance in BRS.

While adjusting the cash-book the following adjustments are considered: -

1. all the errors

(like wrong amount recorded in the cash book, entry posted twice in the cash book, over/ under casting of the balance etc.)

and

2. omissions

(like bank charges recorded in the passbook only, interest debited by the bank, direct receipt or payment by the bank, dishonour of cheques/bills etc.) by the cash book are taken into care.

Only these transactions are considered for adjusting cash book, apart from this delay in recording in the pass-book due to difference in timing (like cheque issued but not presented for payment, cheque deposited but not collected) is taken to bank reconciliation statement.

This adjusted cash-book balance is taken to bank reconciliation statement.

Note:

Errors occurring in the passbook are not to be adjusted in the cash book.

All the adjustments considered in the adjusted cash book are not carried again to the bank reconciliation statement.

YouTube Link for Lecture:

Channel Name:

Lateef’s Commerce Academy

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Visual content included

The principal visual in this PDF is the Bank Reconciliation Statement format on page 62, showing:

• Balance as per cash book

• Add: Cheques issued but not presented

• Add: Interest credited by the bank

• Less: Cheques deposited but not credited by the bank

• Less: Bank charges not recorded in the cash book

• Balance as per passbook

The remaining pages are primarily text-based explanations of timing differences, errors, direct bank transactions, dishonoured cheques/bills, interest allowed by bank, and the two methods of preparing a Bank Reconciliation Statement.