Bank Reconciliation Statement

 

Once the cash book has been balanced, it is usual to check its details with the records of the firm’s 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 enable 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 have to 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. Thus, if deposits exceed withdrawals it shows a credit balance and if withdrawals exceed deposits it will show a debit balance (overdraft).

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. 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.

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.

Differences Caused by Time-gap

Cheques issued by the bank but not yet presented for payment

Cheques paid into the bank but not yet collected

Direct debits made by the bank on behalf of the customer

Amounts directly deposited in the bank account

Interest and dividends collected by the bank

Direct payments made by the bank on behalf of the customers

Cheques deposited/bills discounted dishonoured

Differences Caused by Errors

Errors committed in recording transaction by the firm

Errors committed in recording transactions by the bank 

Preparation of Bank Reconciliation Statement without adjusting Cash Book Balance
To prepare bank reconciliation statement, 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. We may have four different situations while preparing the bank reconciliation statement. These are:
1. Favourable balance: (i) When debit balance as per cash book is given and the balance as per passbook is to be ascertained. (ii) When credit balance as per passbook is given and the balance as per cash book is to be ascertained.
2. Unfavourable balance/Overdraft balance: (i) When credit balance as per cash book is given and the balance as per passbook is to be ascertained. (ii) When debit balance as per passbook is given and the cash book balance as per is to be ascertained.
1. Dealing with favourable balances: The following steps may be initiated to prepare the bank reconciliation statement:
(i) The date on which the statement is prepared is written at the top, as part of the heading.
(ii) The first item in the statement is generally the balance as shown by the cash book. Alternatively, the starting point can also be the balance as per passbook.
(iii) The cheques deposited but not yet collected are deducted.
(iv) All the cheques issued but not yet presented for payment, amounts directly deposited in the bank account are added.
(v) All the items of charges such as interest on overdraft, payment by bank on standing instructions and debited by the bank in the passbook but not entered in cash book, bills and cheques dishonoured etc. are deducted.
(vi) All the credits given by the bank such as interest on dividends collected, etc. and direct deposits in the bank are added.
(vii) Adjustment for errors are made according to the principles of rectification of errors.
(viii) Now the net balance shown by the statement should be same as shown by the passbook.
It may be noted that treatment of all items shall be the reverse of the above if we adjust passbook balance as the starting point.
2. Dealing with Unfavourable/Overdrafts balance: So far, we have dealt with bank reconciliation statement where bank balances have been positive – i.e., there has been money in the bank account. However, businesses sometimes have overdrafts at the bank. Overdrafts are where the bank account becomes negative and the businesses in effect have borrowed from the bank. This is shown in the cash book as a credit balance. In the bank statement, where the balance is followed by Dr. (or sometimes OD) means that there is an overdraft and called debit balance as per passbook. An overdraft is treated as negative figure on a bank reconciliation statement. The following solved illustration will help you understand the preparation of bank reconciliation statement when there is an overdraft.

Bank Reconciliation Statement (Format)

As on --------------------------------------------

Taking Balance or Overdraft as per Cash Book

Particulars	Plus (+) Rs.	Minus (-) Rs.
Balance or Dr. Balance as per Cash Book Overdraft or Cr. Balance as per Cash Book Cheques drawn/issued but not yet presented for payment Cheques drawn/issued and presented for payment but dishonoured. Cheques drawn/issued and presented for payment but not recorded in C.B. Cheque sent/paid/deposited into bank but not yet cleared/collected/ credited by the bank. Cheque paid into bank but dishonoured. Cheque paid into bank and credited by the bank but not recorded in Cash Book. Cheques debited in cash book but omitted to be banked. Drafts issued by the bank but not recorded in C.B. Interest and dividend collected by bank. Direct payments/debits made by the bank on behalf of the customer Interest on Overdraft charged by the bank. Bank charges have been debited in P.B. Amounts directly deposited in the bank account by customer. Discounted bills dishonoured by the bank Receipts side of C.B. has been overcast. Receipts side of C.B. has been undercast. Payment side of C.B. has been overcast. Payment side of C.B. has been undercast. Amount wrongly debited in Cash Book Amount wrongly credited in Cash Book Amount wrongly debited in Pass Book Amount wrongly credited in Pass Book	xxxx ----- xxxx xxxx ----- ----- ----- xxxx ----- ----- xxxx ----- ----- ----- xxxx ----- ----- xxxx xxxx ----- ----- xxxx ----- xxxx	----- xxxx ----- ----- xxxx xxxx xxxx ----- xxxx xxxx ----- xxxx xxxx xxxx ----- xxxx xxxx ----- ----- xxxx xxxx ----- xxxx -----

Preparation of Bank Reconciliation Statement with Adjusted Cash Book
When we look at the various items that normally cause the difference between the passbook balance and the cash book balance, we find a number of items, which appear only in the passbook. Why not first record such items in the cash book to work out the adjusted balance (also known as amended balance) of the cash book and then prepare the bank reconciliation statement. This shall reduce the number of items responsible for the difference and have the correct figure of balance at bank in the balance sheet. In fact, this is exactly what is done in practice whereby only those items which cause the difference on account of the time gap in recording appear in bank reconciliation statement. These are as (i) cheques issued but not yet presented, (ii) cheques deposited but not yet collected, and (iii) due to an error in the passbook.