Bank reconciliation statement

Bank reconciliation statement 

What Is Bank Reconciliation?

Bank reconciliation is the process of comparing and finding out the difference between the bank balance shown in the company’s pass book (bank statement) supplied by the bank and the bank balance shown in company’s own cash book at a particular point of time. It involves preparing a bank reconciliation statement explaining all the causes of difference in balance between them and then reconciling or adjusting the bank balance shown by the cash book with the bank balance shown by the pass book (bank statement) so that they are in agreement with each other.

Need Of Bank Reconciliation:-

When the company receives the bank pass book (bank statement), it compares the entries in the pass book with the entries in the cash book. Generally, entries in the cash book should tally with the entries in the pass book and the balance shown by both the cash book and pass book must also be the same. But many times, the balance shown by both the books differ because of some reasons. In such a case, it is necessary to do bank reconciliation to find out the reasons for the difference in bank balance of cash book and that of the pass book and to take necessary steps to ensure that the balance shown by both the books is the same.

Causes/Reasons For Difference In Bank Balance Of Pass Book And Cash Book:-

Following are the main reasons because of which there is difference in the bank balance shown by the pass book (bank statement) and the cash book:-

Cheques deposited but not yet cleared:- The Cheques deposited by the company are not yet cleared by the bank. Due to the time lag between the deposit of Cheques and their clearance, the bank balance as per pass book will be lower than the bank balance as per cash book as the company debits the bank account as soon as the Cheques are deposited. So it is reflected immediately in the cash book. But the bank credits the company’s account only when the Cheque is actually cleared. So it is reflected later in the pass book.

Cheques issued but not yet presented for payment:- The Cheques issued by the company are not yet presented to the bank for payment. Due to the time lag between the issue of Cheques and their presentation for payment at the bank, the bank balance as per pass book will be higher than the bank balance as per cash book as the company credits the bank account as soon as the Cheques are issued. So it is reflected immediately in the cash book. But the bank debits the company’s account only when the Cheque is actually presented for payment. So it is reflected later in the pass book.

Bank charges not yet recorded in the company’s books:- Charges levied by the bank such as service charges and other charges not yet recorded in the company’s books. Because of the charges levied by the bank, the bank balance as per pass book will be lower than the bank balance as per cash book as the bank debits the company’s account as soon as the charges are levied. So it is reflected immediately in the pass book. But the company credits the bank account only when it comes to know of such charges when it receives the bank statement. So it is reflected later in the cash book.

Interest allowed not yet recorded in the company’s books:- Interest allowed by the bank not yet recorded in the company’s books. Because of the interest allowed by the bank, the bank balance as per pass book will be higher than the bank balance as per cash book as the bank credits the company’s account as soon as the interest is allowed. So it is reflected immediately in the pass book. But the company debits the bank account only when it comes to know of such interest when it receives the bank statement. So it is reflected later in the cash book.

Direct payments by the bank on behalf of the company:- Direct payments by the bank on behalf of the company under the standing instructions of the company. For e.g. bills payable, insurance premium, etc. Because of such direct payments by the bank, the bank balance as per pass book will be lower than the bank balance as per cash book as the bank debits the company’s account as soon as it makes the payments. So it is reflected immediately in the pass book. But the company credits the bank account only when it comes to know of such payments when it receives the bank statement. So it is reflected later in the cash book.

Direct collections by the bank on behalf of the company:- Direct collections by the bank on behalf of the company under the standing instructions of the company. For e.g. bills receivable, dividend, etc. Because of such direct collections by the bank, the bank balance as per pass book will be higher than the bank balance as per cash book as the bank credits the company’s account as soon as it receives the payments. So it is reflected immediately in the pass book. But the company debits the bank account only when it comes to know of such collections when it receives the bank statement. So it is reflected later in the cash book.

Cheque deposited but returned dishonoured:- A Cheque deposited by the company (already credited in the company’s account) gets returned as dishonoured. Because of such dishonour of Cheque, the bank balance as per pass book will be lower than the bank balance as per cash book as the bank debits the company’s account as soon as the Cheque is dishonoured. So it is reflected immediately in the pass book. But the company credits the bank account only when it comes to know of such dishonour when it receives the bank statement. So it is reflected later in the cash book.

Cheque issued but returned on technical grounds:- A Cheque issued by the company (already debited in the company’s account) gets returned due to technical reasons. Because of which the bank balance as per pass book will be higher than the bank balance as per cash book as the bank credits the company’s account as soon as the Cheque is returned due to some technical reasons. So it is reflected immediately in the pass book. But the company debits the bank account only when it comes to know about it on the receipt of the bank statement. So it is reflected later in the cash book.

Errors in the cash book:- Errors in the cash book committed by the company such as Cheques deposited but not recorded in cash book, Cheques issued but not recorded in cash book, recording wrong amount, etc.

Errors in the pass book:- Errors in the pass book committed by the bank such as wrongly crediting amount in the pass book, wrongly debiting amount in the pass book, etc.

Procedure Of Bank Reconciliation:-

Following steps are generally involved in bank reconciliation process:-

(1) Comparing the items appearing on the debit side of the company’s cash book with the items appearing on the credit side of the company’s bank pass book i.e deposits column and placing a check mark against items appearing in both the books and noting down the unchecked items. These unchecked items are considered as the causes of difference in balance.

(2) Comparing the items appearing on the credit side of the company’s cash book with the items appearing on the debit side of the company’s bank pass book i.e withdrawals column and placing a check mark against items appearing in both the books and noting down the unchecked items. These unchecked items are considered as the causes of difference in balance.

(3) Preparing a bank reconciliation statement by taking the balance as per company’s cash book as the starting point and adding those unchecked items which have the effect of higher balance in the company’s bank pass book and deducting those unchecked items which have the effect of lower balance in the company’s bank pass book.

                                                             or

Preparing a bank reconciliation statement by taking the balance as per company’s bank pass book as the starting point and adding those unchecked items which have the effect of higher balance in the company’s cash book and deducting those unchecked items which have the effect of lower balance in the company’s cash book.

(4) Passing the necessary journal entries to adjust the cash book balance and preparing bank reconciliation statement as per adjusted cash book balance.

Format Of Bank Reconciliation Statement:-

There are two methods by which bank reconciliation statement can be prepared.
(1) Taking bank balance as per cash book as the starting point
(2) Taking bank balance as per pass book as the starting point

(1) Taking Bank Balance As Per Cash Book As The Starting Point:-

Format of bank reconciliation statement 1

(2) Taking Bank Balance As per Pass Book As The starting point:-

Format of bank reconciliation statement 2

Example Of Bank Reconciliation:-

Following is the cash book and pass book of a company for June 2015.

bank reconciliation example 1
bank reconciliation example 2
 
 Find out the reasons for the difference in the bank balance of cash book and pass book and prepare a bank reconciliation statement of the company for June, 2015 by taking (a) bank balance as per cash book as the starting point and (b)  bank balance as per pass book as the starting point.
Then pass the necessary journal entries and prepare adjusted cash book.
After that prepare bank reconciliation statement as per adjusted cash book balance by taking (a) adjusted bank balance as per cash book as the starting point and (b) bank balance as per pass book as the starting point.

Solution:-

First we need to see which items appear on the debit side of the cash book and also on the credit side of the pass book and place a check mark against those items. The unchecked items appear only in one book and are the causes of difference in balance. In this example unchecked item on debit side of cash book is To CK a/c 30000 which appears only in cash book and not in pass book and the unchecked items on credit side of pass book are Dividend ECS 2000 and Interest credited 1000 which appear only in pass book and not in cash book. (Do not consider To balance b/d 50000 and Balance brought forward 50000).

Then we need to see which items appear on the credit side of the cash book and also on the debit side of the pass book and place a check mark against those items. The unchecked items appear only in one book and are the causes of difference. In this example unchecked item on credit side of cash book is By CP a/c 33000 which appears only in cash book and not in pass book and the unchecked items on debit side of pass book are Insurance premium 4000 and Service charges 500 which appear only in pass book and not in cash book.

 The total number of unchecked items are six. So we have identified these six items as the reasons for the difference of Rs 1500 in bank balance of cash book and pass book. 
– 29.6.2015 To CK a/c 30000 (Reason- cheque deposited but not yet cleared by bank)
– 17.6.2015 Dividend ECS 2000 (Reason- dividend credited in pass book but not recorded in cash book)
– 31.6.2015 Interest credited 1000 (Reason- interest credited in pass book but not recorded in cash book)
– 30.6.2015 By CP a/c 33000 (Reason- cheque issued but not yet presented for payment)
– 30.6.2015 Insurance premium 4000 (Reason- insurance premium not recorded in cash book)
– 30.6.2015 Service charges 500 (Reason- bank charges not recorded in cash book)

We can now proceed to prepare the bank reconciliation statement by first taking (a) bank balance as per cash book as the starting point and then (b) bank balance as per pass book as the starting point.

(a) Bank balance as per cash book as the starting point:-Bank reconciliation example 3

(b) Bank balance as per pass book as the starting point:-

Bank reconciliation example 3

We need to pass the following journal entries to adjust the cash book balance:-

Cash a/c…..Dr  1000
  To interest a/c        1000

Cash a/c…..Dr  2000
  To dividend a/c      2000

Insurance premium a/c…..Dr  4000
  To cash a/c                                          4000

Bank charges a/c…..Dr  500
  To cash a/c                            500

After passing the journal entries we can prepare the adjusted cash book as under:-

bank reconciliation example 5

We can now prepare bank reconciliation statement as per the adjusted cash book balance by first taking (a) adjusted bank balance as per cash book as the starting point and then (b) bank balance as per pass book as the starting point.

(a) Adjusted bank balance as per cash book as the starting point:-

Bank reconciliation example 6

(b) Bank balance as per pass book as the starting point:-

Bank reconciliation example 7

Earlier the bank balance as per cash book was Rs 28000 and the bank balance as per pass book was Rs 29500. So there was a difference of Rs 1500 in balance of both the books. We identified six causes of difference in balance between the two and then prepared the bank reconciliation statement showing those six causes.

Then we passed four journal entries to adjust the cash book balance and prepared an adjusted cash book.

After preparing the adjusted cash book, the new bank balance as per cash book became Rs 26500 while the bank balance as per pass book remained the same Rs 29500. So the difference between the two became Rs 3000. This difference of Rs 3000 is because of two causes – (i) Cheque deposited but not yet cleared by bank (To CK a/c 30000) and (ii) Cheque issued but not yet presented for payment (By CP a/c 33000). We already have entries for these two causes in the cash book. So we passed journal entries for other four causes so as to reflect those four transactions in the cash book as those transactions were not recorded in the cash book but were present only in the pass book. We then prepared the bank reconciliation statement as per the adjusted cash book balance showing these two causes of difference.

Currently bank balance as per pass book is still showing Rs 29500 because entries for those two causes of difference are not yet reflected in the pass book and are present only in the cash book. But when the Cheque deposited by the company of Rs 30000 is cleared by the bank and the Cheque issued by the company of Rs 33000 is presented for payment by the other party, the bank balance as per pass book would become Rs 26500 (29500+30000-33000) which is the same as cash book balance. Then the bank balance of both cash book and pass book will be exactly the same and match with each other.

 

 

2 thoughts on “Bank reconciliation statement”

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