LESSON 8
BANK RECONCILIATION STATEMENT
CONTENTS
8.0 Aims and Objectives
8.1 Introduction
8.2 Bank Reconciliation Statement
8.2.1 Need of Preparing Bank Reconciliation Statement
8.3 Reasons for Difference
8.4 Preparation of Bank Reconciliation Statement
8.5 Favourable Balances
8.5.1 Illustrations
8.6 Unfavourable Balance / Overdraft Balance
8.6.1 Illustrations
8.7 Let Us Sum Up
8.8 Lesson End Activity
8.9 Key Words
8.10 Questions for Discussion
8.11 References
8.0 AIMS AND OBJECTIVES
1. To state the meaning and need of Bank Reconciliation
Statement.
2. To explain the reasons for difference between the balances of
Cash Book and Pass Book.
3. To prepare the Bank Reconciliation Statement.
8.1 INTRODUCTION
Bank is the backbone of modern business world. Cheques
and drafts are normally used for making payments. Business concerns
maintain record of all of their banking transactions in their bank column of
the cash book. But as both the books are related to one person and
same transactions are recorded in both the books so the balance of
both the books should match i.e. the balance as per Pass Book
should match to balance at bank as per cash book. But many a
times these two balances do not agree. Then, it becomes necessary
to reconcile them by preparing a statement which is called Bank
Reconciliation Statement.
8.2 BANK RECONCILIATION STATEMENT
A Bank Reconciliation Statement may be defined as a
statement showing the items of differences between the cash Book
balance and the pass book balance, prepared on any day for
reconciling the two balances.
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Business concern maintains the cash book for recording cash
and bank transactions. The Cash book serves the purpose of both
the cash account and the bank account. It shows the balance of both
at the end of a period. Bank also maintains an account for each
customer in its book. All deposits by the customer are recorded on
the credit side of his / her account and all withdrawals are recorded
on the debit side of his/her account. A copy of this account is
regularly sent to the customer by the bank. This is called ‘Pass Book’
or Bank statement. It is usual to tally the firm’s bank transactions as
recorded by the bank with the cash book. But sometimes the bank
balances as shown by the cash book and that shown by the pass
book/bank statement do not match. If the balance shown by the pass
book is different from the balance shown by bank column of cash
book, the business firm will identify the causes for such difference. It
becomes necessary to reconcile them. To reconcile the balances of
Cash Book and Pass Book, a statement is prepared. This statement
is called the ‘Bank Reconciliation Statement. It can be said that: Bank
Reconciliation Statement is a statement prepared to reconcile the difference
between the balances as per the bank column of the cash book and pass
book on any given date.
8.2.1 Need of Preparing Bank Reconciliation Statement
It is neither compulsory to prepare Bank Reconciliation Statement
nor a date is fixed on which it is to be prepared. It is prepared from time to
time to check that all transactions relating to bank are properly recorded by
the businessman in the bank column of the cash book and by the bank in its
ledger account. Thus, it is prepared to reconcile the bank balances shown by
the cash book and by the bank statement. It helps in detecting, if there is
any error in recording the transactions and ascertaining the correct bank
balance on a particular date.
8.3 REASONS FOR DIFFERENCE
When a businessman compares the Bank balance of its cash
book with the balance shown by the bank pass book, there is often a
difference. As the time period of posting the transactions in the bank
column of cash book does not correspond with the time period of
posting in the bank pass book of the firm, the difference arises. The
reasons for difference in balance of the cash book and pass book
are as under:
1. Cheques issued by the firm but not yet presented for
payment
When cheques are issued by the firm, these are immediately
entered on the credit side of the bank column of the cash book.
Sometimes, receiving person may present these cheques to the
bank for payment on some later date. The bank will debit the
firm’s account when these cheques are presented for payment.
There is a time period between the issue of cheque and being
presented in the bank for payment. This may cause difference to
the balance of cash book and pass book.
Bank Reconciliation
Statement
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2. Cheques deposited into bank but not yet collected
When cheques are deposited into bank, the firm immediately
enters it on the debit side of the bank column of cash book. It
increases the bank balance as per the cash book. But, the bank
credits the firm’s account after these cheques are actually
realised. A few days are taken in clearing of local cheques and in
case of outstation cheques few more days are taken. This may
cause the difference between cash book and pass book balance.
3. Amount directly deposited in the bank account
Sometimes, the debtors or the customers deposit the money
directly into firm’s bank account, but the firm gets the information
only when it receives the bank statement. In this case, the bank
credits the firm’s account with the amount received but the same
amount is not recorded in the cash book. As a result the balance
in the cash book will be less than the balance shown in the Pass
book.
4. Bank Charges
The bank charge in the form of fees or commission is charged
from time to time for various services provided from the
customers’ account without the intimation to the firm. The firm
records these charges after receiving the bank intimation or
statement. Example of such deductions is: Interest on overdraft
balance, credit cards’ fees, outstation cheques, collection
charges, etc. As a result, the balance of the cash book will be
more than the balance of the pass book.
5. Interest and dividend received by the bank
Sometimes, the interest on debentures or dividends on shares
held by the account holder is directly deposited by the company
through Electronic Clearing System (ECS). But the firm does not
get the information till it receives the bank statement. As a
consequence, the firm enters it in its cash book on a date later
than the date it is recorded by the bank. As a result, the balance
as per cash book and pass book will differ.
6. Direct payments made by the bank on behalf of the
customers
Sometimes, bank makes certain payments on behalf of the
customer as per standing instructions. Telephone bills, rent,
insurance premium, taxes, etc are some of the expenses. These
expenses are directly paid by the bank and debited to the firm’s
account immediately after their payment. but the firm will record
the same on receiving information from the bank in the form of
Pass Book or bank statement. As a result, the balance of the
pass book is less than that of the balance shown in the bank
column of the cash book.
7. Dishonour of Cheques / Bill discounted
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If a cheque deposited by the firm or bill receivable discounted
with the bank is dishonoured, the same is debited to firm’s
account by the bank. But the firm records the same when it
receives the information from the bank. As a result, the balance
as per cash book and that of pass book will differ.
8. Errors committed in recording transactions by the firm
There may be certain errors from firm’s side, e.g., omission or
wrong recording of transactions relating to cheques deposited,
cheques issued and wrong balancing etc. In this case, there
would be a difference between the balances as per Cash Book
and as per Pass Book.
9. Errors committed in recording transactions by the Bank
Sometimes, bank may also commit errors, e.g., omission or
wrong recording of transactions relating to cheques deposited
etc. As a result, the balance of the bank pass book and cash
book will not agree.
8.4 PREPARATION OF BANK RECONCILIATION STATEMENT
To reconcile the bank balance as shown in the pass book
with the balance shown by the cash book, Bank Reconciliation
