Bank Reconciliation Statement

 

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Bank Reconciliation Statement

Meaning

 

A businessman maintains a Cash Book with bank column in his ledger, wherein he records all banking transactions. The bank column in his Cash Book represents bank current account. Bank being the other party records these transactions in their ledger known as Pass Book. When businessman deposits money or cheque into bank for collection it is recorded in the Cash Book on the debit or receipt side. Bank records this on the credit or receipt side of Pass Book.

 

Similarly, when businessman issues cheque for making payments, it is recorded on the credit or payment side of Cash Book. Bank records this transaction on the debit side or payment side of Pass Book / bank statement. Thus, whatever is recorded by businessman in the Cash Book is invariably recorded in the Pass Book / bank statement. Ideally then, Cash Book bank balance and Pass Book balance should be the same. The only difference would be that if Cash Book has a debit balance the Pass Book will have a credit balance and vice versa.

But in practice Cash Book bank balance is sometimes different from the Pass Book balance. You will learn about the causes of differences and method of reconciling balance of these two books by preparing bank reconciliation statement. A copy of bank statement is issued to the current account holder periodically by the bank. Bank statement is compared with the Cash Book for analysing the causes of difference in the balance of the two books.

 

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Definition

 

‘Bank reconciliation statement is a list in which the various items that cause a difference between bank balance as per cash book and pass book on any given date are indicated’.

 

Need and importance of Bank Reconciliation Statement

It explains and clarifies the causes of disagreement between bank balance as per Cash Book and Pass Book.

 

It helps in detecting errors and omission made in Pass Book and Cash Book.

 

It reduces the chance of fraud by the staff dealing in cash.

 

It helps to check whether the bank makes proper entries for banking transactions.

It helps to have a moral check on the staff of business organisations to keep Cash Book up to date.

It is an important mechanism of internal check and gives information of cash inflow and outflow.

Causes of difference in Cash Book and Pass Book

Cheque issued but not presented: As soon as a cheque is issued, it is entered on the credit side of the Cash Book but the bank makes no entry for cheque until it is presented for payment. It means if the cheque is not presented for payment up to the date of preparation of bank reconciliation statement, the balance in the Pass Book will be higher than the balance as per Cash Book on that date.

 

Cheques deposited / paid into bank but not cleared: As soon as cheques are received and deposited into the bank they are recorded in the Cash Book on debit side which increase the balance at bank as per Cash Book but bank does not give credit for the cheques deposited until it is cleared and collected by bank. Therefore, a difference will arise on the date of preparation of bank reconciliation statement.

 

Interest credited by bank: If the bank allows interest to customer it credits the customer account and the bank balance as per Pass Book will increase. But customer will make corresponding entry in the Cash Book only when he receives the intimation from the bank. Until then the balance as per Pass Book would be more than the balance as per Cash Book.

 

Direct collection on behalf of customer: As per the standing instructions of the customer, bank can collect interest, dividend, rent etc. directly from the person concerned and credit the customer’s account and increase the balance as per Pass Book. But the same will be entered in Cash Book only when the customer receives the statement or intimation of the same from bank. Till then the balance as per Cash Book and bank statement (Pass Book) will differ.

 

Direct payment by bank: As per standing instructions bank can pay certain expenses on behalf of the customer e.g. insurance premium, electricity bill, telephone bill, loan instalments etc. As soon as such payments are made bank debits customer account in bank Pass Book / bank statement but the customer has no information of the same till it is informed to him. Till then balance as per Pass Book / bank statement will be less than balance as per Cash Book.

 

Bank charges, interest on overdraft, commission charged by bank: Sometimes bank charges their customers for various services provided to them. It may be in the form of bank charges or commission. Similarly, bank can charge interest on overdraft facility provided to the customer. Bank debits the customer’s account for such facilities time to time. However, the firm will know about these charges, commission etc. only when it goes through the bank Pass Book / bank statement. So, on the date of reconciliation balance as per Pass Book will be less than that of Cash Book.

Dishonour of cheques or bill of exchange: When cheque or Bill of exchange discounted with the bank is dishonoured, the same is debited in the Pass Book / bank statement but not given effect in the Cash Book until intimation is received. Similarly, when customer makes the payment by cheque and if it is dishonoured, bank credits the same in Pass Book / bank statement to cancel the earlier effect of cheque but will not give effect of dishonour of cheque in the Cash Book until the intimation is received from bank. Thus, the balance differs.

 

Amount directly deposited in the bank account: There are instances when debtors directly deposit money in businessman’s bank account. Businessman is not aware of this transaction till he receives the intimation in bank statement. In this case bank records the receipt in customers account but the same is not recorded in the businessman’s Cash Book. As a result, the balance shown in bank Pass Book will be more than the balance shown in Cash Book.

 

Note: IMPS (Immediate Payment Service) is an instant payment interbank electronic funds transfer system in India. When an account holder needs to transfer funds immediately, IMPS can be used because this service is available 24/7 throughout the year including bank holidays.

 

Note: NEFT(National Electronic Funds Transfer) is suitable for small money transfers(less than 2 Lakhs) and RTGS (Real Time Gross Settlement) is suitable for larger money transfers (greater than 2 Lakhs).

 

Due to errors and omission made by bank or businessman: Sometimes bank may commit errors while recording the transactions in the Pass Book / bank statement which may disagree with the balance as per Cash Book and Pass Book. For e.g.

 

Recorded on wrong side.

Recording wrong amount.

Wrong balancing and totaling.

Double recording.

Omission of a transaction.

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How to Prepare a Bank Reconciliation Statement

To prepare the bank reconciliation statement, the following rules may be useful for the students:

Check the cash book receipts and payments against the bank statement.

Items not ticked on either side of the cash book will represent those which have not yet passed through the bank statement.

Make a list of these items.

Items not ticked on either side of the bank statement will represent those which have not yet been passed through the cash book.

Make a list of these items.

Adjust the cash book by recording therein those items which do not appear in it but which are found in the bank statement, thus computing the correct balance of the cash book.

Method of Prepare a Bank Reconciliation Statement

Prepare the bank reconciliation statement reconciling the bank statement balance with the correct cash book balance in either of the following two ways:

First method (Starting with the cash book balance)

Second method (Starting with the bank statement balance)

First Method (Starting With the Cash Book Balance)

If the cash balance is a debit balance, deduct from it all cheques, drafts etc., paid into the bank but not collected and credited by the bank and added to it all cheques drawn on the bank but not yet presented for payment. The new balance will agree with bank statement.

If the bank balance of the cash book is a credit balance (overdraft), add to it all cheques, drafts, etc., paid into the bank but not collected by the bank and deduct from it all cheques drawn on the bank but not yet presented for payment. The new balance will then agree with the balance of the bank statement.

Second Method (Starting With the Bank Statement Balance)

If the bank statement balance is a debit balance (an overdraft), deduct from it all cheques, drafts, etc., paid into bank but not collected and credited by the bank and add to it all cheques drawn on the bank but not yet presented for payment. The new balance will then be agreed with the balance of the cash book.

If the bank statement balance is a credit balance (in favor of the depositor), add to it all cheques, drafts, etc., paid into the bank but not collected and credited by the bank and deduct from it all cheques drawn on the bank but not yet presented for payment. The new balance will agree with the balance of the cash book.

Specimen/Format/Performa of Bank Reconciliation Statement