Chapter 5 Bank Reconciliation Statement

Among other reasons, enlisted below are some of the most important reasons why it is important to prepare a bank reconciliation statement: 

Accuracy

Each month, the passbook of the bank and the cash book of a firm, display a particular amount, which is the balance in the bank as on that date. However, due to delay in the recording time and period of the same in the respective books, there is a high possibility that on the day of comparison the balances in the two books would not match.

Hence, having prepared a bank reconciliation statement, one can determine the reasons and amounts by which the two balances differ. This analysis would further help the accountant in recording the missing amounts in each book. Hence, after the preparation of a bank reconciliation statement, the books of accounts would actually display a true and fair position of the firm.

Check on the Entries

In the process of preparing a bank reconciliation statement, an accountant will be able to point out all entries or amounts, recorded incorrectly in either of the books.

Thus, it is quite useful to prepare a bank reconciliation statement, which would help in eliminating any entries recorded erroneously.

Rectifying Incorrect Entries

In case an amount or entry has been recorded incorrectly in both, the passbook and the cash book, the accountant will be able to rectify those entries, so as to arrive at the amount of correct bank balance in the passbook and the cash book.

Updated Cash Book

Again, due to the irregularity in posting the amount of entries in the cash book and due to the delays in the recording of such amounts, it is quite possible that the cash book would fail to show the updated bank balance of the bank as on a particular date. When compared with the passbook, an accountant would be able to identify such entries and record them in the cash book instantly. This would help in reconciling the balances of both the cash book and the bank book instantly.

Detection of Delays

Due to the preparation of the bank reconciliation statement, it is possible to discover any amount of cheques that get deposited in the bank but have aren’t credited.

This difference would be evident because the amount of such deposits would appear in the cash book but not in the bank book, hence giving rise to a difference in the bank balance of both. Thus, cheques deposited but not yet collected can come to notice quickly.

Check on the Dishonest Behavior of Employees

Preparation of regular bank reconciliation statements has several benefits. It would act as a moral check on employees so that they do not indulge in the embezzlement of bank cheques, which would ultimately cause loss to the firm. This is so because even a low-value cheque can come in detection if it has been accepted but not deposited. In this way, a bank reconciliation statement serves a large purpose for a firm’s accounting cycle and people.

Overdrafts are where the bank account becomes negative and the business in effect has borrowed from the bank. This is shown in the cash book as a credit balance. In other words,when a firm withdraws more than its deposits from the bank, the situation will become bank overdraft and will be treated as liability of the business.

Amount wrongly debited by the bank implies a situation when the bank wrongly debited a Pass Book. The following are the common mistakes that occur in the Pass Book when a bank wrongly debited in the Pass Book. Mistakes occur in case a person has more than one account in a bank. For example, a cheque of Rs. 2,000 issued from his Current Account was wrongly paid through his Savings Account.

i) Cheques issued by the bank but not yet presented for payment.
ii) Cheques paid into the bank but not yet collected.
iii) Direct debits made by the bank on behalf of the customer.
iv) Amounts directly deposited in the bank account.
v) Interest and dividends collected by the bank.
vi) Direct payments made by the bank on behalf of the customers.
vii) Cheques deposited/bills discounted dishonoured.

The favourable balance as per cash book means when the deposits made by the firm are more than its withdrawals in its bank account. 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. The credit balance as per pass book also indicates the favourable balance as per cash book.

The following steps will be followed to ascertain the correct cash book balance

i) The first step is to put the balance of the pass book as the starting point Showing balance as per pass book.
ii) The cheques deposited but not yet collected are added.
iii) All the cheques issued but not yet presented for payment,amounts directly deposited in the bank account are deducted.
iv) All the items of charges such as interest on overdraft,payment by bank on standing instructions and debited by the bank in the pass book, but not entered in the cash book, bills and cheques,dishonoured etc are added.
v) All the credits given by the bank such as interest on dividends collected etc and direct deposits in the bank are deducted
vi) Adjustments for errors are made according to the principles of rectification of errors.
vii) Now, the net balance shown by the statement should be the same as shown by the cash book.

Bank Reconciliation Statement is a statement prepared to reconcile the balances of the cash book maintained by the concern and pass book maintained by the bank at periodical intervals. At the end of every month entries in the cash book are compared with the entries in the pass book. The causes of differences in balances of both the books are scrutinized and then a reconciliation statement is prepared. This statement is prepared for a special purpose and once in a month. It is prepared with a view to indicate items which cause differences between the balances as per the bank columns of the cash book and the bank pass book at a particular date.

1. Differences due to time lag: Differences may arise, if the date of recording transactions in the bank column of the Cash Book is not the same to that of the Pass Book.

2. Cheques issued by the firm but not presented in the bank: Usually, issue of a cheque is recorded in the bank column of the Cash Book on the date that is mentioned (mentioned date) on the cheque. Sometimes, the holder of the cheque does not present the cheque on the date which is mentioned on it. This may lead to differences in the balance between the Pass Book and the bank balance of the Cash Book.

3. Deposit of cheque recorded in the Cash Book at the time of deposit but collected later or not collected by the bank: Deposit of a cheque is recorded in the bank column of the Cash Book on the date of clearance. Usually, date of deposit and date of clearance are not the same. This difference in the two respective dates leads to a mismatch between the Pass Book and the bank balance of the Cash Book.

4. Transactions recorded only in the Pass Book: Transactions, like interest allowed by bank on the deposits, bank charges etc., are recorded first in the Pass Book. After getting intimation from the bank, these are recorded in the bank column of the Cash Book. However, sometimes due to delay in intimation of these transactions to the customers, the Cash Book remains not updated, which leads to the difference between the Pass Book and the bank balance of the Cash Book.

While preparing a bank reconciliation statement, under the amended cash balance approach, the balance as per cash book or as per the cash book or 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 pass book.It is also called the favourable balance as per cash book or favourable balance as per pass book. Such a balance exists when the deposits made by the firm are more than its withdrawals. 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 pass book.

The following steps will be followed in preparation of the bank reconciliation statement :-

i) The first step is to balance the cash book. 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 pass book.Considering the balance as per cash book, the following further steps will be followed.
ii) The cheques deposited but not yet collected are deducted.
iii) All the cheques issued but not yet presented for payment directly deposited in the bank account are added.
iv) All the items of charges such as interest on overdraft,payment by bank on standing instructions and debited by the bank in the pass book but not entered in the cash book, bills and cheques dishonoured etc are deducted.
v) All the credits given by the bank such as interest on dividends collected etc and direct deposits in the bank are added.
vi) Adjustments for errors are made according to the interest to the principle of rectification of errors.
vii) Now, the net balance shown by the statement should be the same as shown by the pass book.

(i) Customer account
(ii) Debit
(iii) Credit
(iv) Debit
(v) Added
(vi) Deducted
(vii) loss
(viii) Loss
(ix) Added
(x) Higher

(b) Bank

(c) Both passbook and cash book

(a) Copy of customer Account

(a) Credit balance in passbook

(c) Debit balance in the cash book

(b) Reconcile the difference between the bank balance shown by the cash book and bank passbook

1. True
2. True
3. False
4. True
5. False
6. True
7. True
8. True
9. False