Bank Reconciliation

Meaning and concept of Bank Reconciliation Statement

A bank reconciliation statementis such a statement which is prepared to show how the Bank Balance as per Cash Book and the Bank Balance as per Pass Book use to differ each other. Generally, a modern business performs its transactions through bank. While doing so, it receives cash through bank deposits and makes the cash payments by issuing the cheques. To keep records of its transactions, the bank maintains a cash book, with bank columns. It is in fact the bank account in the books of the business. On the other hand, bank also maintains customer's account in their books. Everytime the business opens an account in the bank by depositing some amount, the bank provides it with a cheque book to provide the facility of the withdrawal or the payment of cash, and it also prepares a pass book which is used to show detailed statement of the customer's account in the bank.

Any transaction that takes place through bank is supposed to be done properly without any mistake recorded in the books. As for example, if the cash is deposited in the customer's account, it is debited in the bank column of the cash book while it is credited in the pass book. Similarly, if cash is withdrawn from bank or payment is made through bank, the bank column of the cash book is credited and pass book is debited. As a result, it supposed that the cash balance at bank shown by both the cash book and the pass book is always same. But, sometimes , the balance shown by the pass book hardly equals the balance shown by the bank column of cash book. The disagreement between the balance shown by pass book and the cash book comes because of some transactions or errors that appear only in the cash book but not in the pass book, or only in the pass book but not in cash book. However, it is essential to reconcile the difference in the balances shown by the pass book and the cash book for ensuring their accuracy. In order to reconcile the balances that are shown by them, an statement is prepared or made which is known as bank reconciliation statement. A bank reconciliation statement is the statement which is prepared to reconcile the balances which are shown by the pass book and cash book both by finding out the causes of difference and inequality between both balances.

While defining the Bank Reconciliation Statement, different authors have defined differently. Some of the important definition can be quoted as below:

According to P. Haldar, " A statement which is drawn up to show the cause for disagreement between the bank balances as shown by cash book and the balances shown by die pass book on a particular date is called Bank Reconciliation statement".

According to J R Batliboi, " Bank reconciliation statement is prepared at periodical intervals with a view to indicate the items which causes disagreement between the balance as per the bank columns of the cash book and the bank pass book on the given date".

Objectives of Bank Reconciliation Statement

Bank reconciliation statement is an important technique with the help of which the accuracy of the bank balance can be clearly shown by the pass book and cash book. The need or importance of bank reconciliation statement can be summarized with the help of the following points.

• Bank reconciliation statement ensures the accuracy of balances shown by the pass book and cash book.

• Bank reconciliation statement provides a check on the accuracy of entries made in both pass book and cash book.

• Bank reconciliation statement helps to rectifyand detect any error committed in both the books.

• Bank reconciliation statement helps to update the cash book by discovering some entries not yet recorded.

• Bank reconciliation statement indicates any undue delay in the collection and clearance of some cheques.

Reasons for disagreement between cash book and pass book balance

The following are the important causes or reasons for the disagreement between the balances shown by the pass book and cash book.

• Cheques issued but not presented for payment.

• Cheques paid or deposited but not collected and credited by the bank.

• Interest credited by the bank but entered in cash book.

• Bank charges, commission and interest in overdraft debited by the bank but not entered in cash book.

• Expenses directly paid by the bank on behalf of customer but not recorded in cash book.

• Incomes directly collected by the bank on behalf of customer but not recorded in cash book.

• Amount directly deposited into the bank by debtors but not entered in cash book.

• Cheque deposited into the bank but dishonoured.

• Dishonoured of bill discounted with the bank.

Preparation of Bank Reconciliation Statement

The following procedures are followed while preparing the bank reconciliation statement:

• Compare cash book and pass book items.

• Give sign to all the items of cash book and pass book which are matched with each other.

• Make a list of unmatched items found in cash book and pass book.

• Prepare bank reconciliation statement taking balance either from cash book or pass book as a basis.

• Adjust the items which cause the disagreement in the balances.

• Add the items which have decreased the balance on the book with which reconciliation is to be made. On the contrary subtract the amount of those items which have increased the balance.

• These procedures should be followed only when the cash book and pass book are to be compared. But it causes of differences are already given, the above procedures need not be followed.

If the causes of disagreement between the cash book and pass book balances are given, the bank reconciliation statement can be prepared either by taking the balance of cash book or pass book. The bank reconciliation statement can be prepared by using either of the following bases.

• Debit balance shown by cash book.
• Credit balance shown by cash book (bank overdraft) .
• Credit balance shown by pass book .
• Debit balance shown by pass book (bank overdraft).

First Method (Starting With the Cash Book Balance):

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

(b) If the bank balance of the cash book is a credit balance (overdraft), then add to it all the cheques, drafts, etc., paid into the bank but are 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 be then agree with the balance of the bank statement.

Second Method (Starting With the Bank Statement(Pass Book) Balance):

(a) If the bank statement balance is a debit balance (or an overdraft), deduct it from 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 agree with the balance of the cash book.

(b) 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.

(Joginder Goet , Bhesh Raj Banjade, 2012)

Bibliography

Joginder Goet , Bhesh Raj Banjade. (2012). Principal of Accounting. Kalimati, Kathmandu: Dreamland publication.