What is Bank Reconciliation Statement?

A bank reconciliation statement is a document that explains the differences between the balance shown in an organization’s bank account and the balance shown in its own accounting records. The purpose of a bank reconciliation statement is to ensure that the two balances match, or to identify and explain any differences between them.

The process of preparing a bank reconciliation statement involves comparing the transactions recorded in an organization’s accounting system with the transactions recorded by the bank.

This includes comparing deposits, withdrawals, and other transactions such as fees, interest payments, and other charges. Any discrepancies between the two sets of records must be identified and explained, and adjustments made as necessary.

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Introduction

For any business firm its cash balance is a very important element of its financial conditions. For exercising greater control over cash, most of the business concerns prefer to operate a Bank Account. The banker acts as a custodian of the funds to be spent by business.

Since the banker is the trustee of the customer, the bank provides to its customer a Pass Book or Bank Statement (at regular intervals), which summarizes payments as well as deposits and other charges for the period. To know the bank balance a firm has two sources of information:

• Bank column of the cash book; an
  
• Bank Statement
  

On principal, two balances should be equal and opposite on a stated date. But usually these two balances do not agree due to various reasons. In view of the above mentioned explanation, it becomes necessary to reconcile the balances.

Therefore a reconciliation statement is prepared that tells us the reason behind non agreement of cash balance per book and cash balance as per bank. Usually these statements are prepared on monthly basis because the bank also provides the statement on monthly basis.

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Causes of Difference

Generally it happens that balance as per bank statements do not agree with the bank balance as per the cash book of the firm. Few of the basic reasons for such difference areas follow :

Cheques issued but not presented for payment

Many a times it is possible that at the time when the balances of the two books are being reconciled, some of the cheques are such which might have been issued but not have been presented for payment thus causing a disagreement between the two balances.

Cheques paid into the bank but not yet credited

Whenever a cheque is deposited into the bank. The bank never gives instant credit of that amount. For clearing process cheques takes atleast 2–3 days. So many a times it happens that in the process of reconciliation there are certain cheques which though have been entered into our books of account but no credit of such cheques have been given to us by the bank.

Dishonour of bill discounted with the bank

When customers get their bills discounted with the bank and the bank is unable to get payment of these bills on the due date due to any reason then the bank will recover the amount by debiting the customers accounts with the amount of the bills together with the noting charges, if any.

Interest allowed by the bank

The bank biannually gives us the interest on our deposit into the bank. Bank never send us the acknowledgement of that interest by bank and that is also one of the reason behind the difference. Because in the books of bank that interest has been entered but we haven t made any such entry into our books of account.

Interest and bank charges debited by bank

The bank charges interest bank charges on overdraft account and are debited by the bank directly to the customer’s account. But the entries in the cash book are made only after receiving the bank statement or the pass book.

Interest and dividend collected by the bank

Many a times it happens that interest on government securities or dividend on shares is collected by the bank and is credited to customer’s account and if they are not entered in the cash book then difference will always arise.

Direct payment by the bank

Many a times due to standing instructions by the clients to their bank, banks makes payment automatically on their own without asking for each payment individually .So the client is unaware of those payments.

Direct payment into the bank account by a customer

Most of the time it has been seen that the customers of the client keep the bank details with them and without informing the client the deposit their dues into the bank account of the client. This also results in difference between the two.

Error committed by the bank

Apart from the above reasons many a times a bank may wrongly charge the customer account with charges or give credit to customers account in both the cases it will cause disagreement between the two balances.

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Need for Bank Reconciliation Statement

• It reflects the actual bank balance position.
  
  
• It helps to detect any mistakein the cashbook and in the passbook.
  
  
• It prevents frauds in recording the banking transactions.
  
  
• It explains any delay in the collection of cheques
  

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Method of Preparation (Without Adjustment)

Basically there are two methods of preparing bank reconciliation statement,namely,

• Bank Reconciliation Statement without any adjustment.
  
  
• Bank Reconciliation Statement with adjustment.

Whenever a bank reconciliation statement is prepared without making the necessary adjustments for omissions, errors in the cashbook the Bank Reconciliation Statement is called as Bank Reconciliation Statement without adjustment.

However,whenever a bank reconciliation statement is prepared after making such necessary adjustments for omissions, errors in the cashbook, it is called as Bank Reconciliation Statement with adjustment i.e. the bank balance is adjusted for the serrors in the cash book.

Bank Reconciliation Statement without adjustment

The bank balance of a business enterprise may either be favourable or unfavourable. When the cashbook shows a debit balance of the bank or a pass book shows a credit balance it is knownas favourable balance, wherein the deposits are comparatively more than the withdrawals.

On the other hand when the cashbook has a credit balance or the pass book has a debit balance then it is termed as unfavourable balance. Finding the balance as per cash book or as per passbook is the first step in bank reconciliation, it is the starting point of reconciliation process. So thereare four different points for preparing bank reconciliation statement :

• Debit balance as per cashbook (favourable).
  
  
• Credit balance as per passbook (favourable).
  
  
• Credit balance as per cashbook, (unfavourable).
  
  
• Debit balance as per passbook (unfavourable).

The items which will increase the passbook balance more than the cash book.

• Interest credited by bank not presented for payment.
  
  
• Debtors directly deposited into bank, not entered in cash Book.
  
  
• Cheque issued but not presented for payment.
  
  
• Dividend collected by bank not recorded in cash book.
  
  
• Bank Charges recorded twice in cash book, etc.

The items which will decrease the passbook balance more than the cash book.

• Debit side of the cash book was overcast.
  
  
• Cheque deposited but not presented for payment.
  
  
• Dishonoured cheque appeared in the passbook but not entered in the cash book.
  
  
• The Direct payment by bank as per standing order has been left in the Cash Book, etc.
  
  
• Credit side of the cash book was under coats.
  
  
• The Bank Charges are not recorded in the cash book.

Illustration : 16

From the following particulars, prepare Bank reconciliation Statement from Shri. S. Banerjeeas at 31 March, 2020.

• Bank balanceas per Cash book 7,000
  
  
• Cheques issued but not presented for payment upto after 31st March 1,000
  
  
• Cheques issued but not presented for payment upto
  after 31st March 1,000 Three cheques were issued for Rs. 500
  Rs. 1,000 and Respectively, but the cheque for 1,000 was not presented
  for payment at all.
  
  
• Cheques issued for payment but forgot to enterin Cash Book 750
  
  
• Cheques deposited into the bank but credit was Given after 31 st March, 250
  
  
• cheques of Rs. 1,000 Rs. 1,200 and Rs. 1,600,
  were deposited but the cheque for Rs. 1,600 was credited on 2nd April
  
  
• Cheques deposited into Bank no entry was madein Cash Book 1,000
  
  
• Receipt side of the cash Book was overcastted or over shown by 500
  
  
• The payment side of the Cash Book was under shown by 800
• Bank Interest received Rs. 150 and bank charges paid
  Rs. 50 Not recorded in Cash Book.
  
  
• Dividend collected directly by bank. 1,000
  
  
• A debtor directly made the payment into bank. 500
  
  
• Rs. 1,500 in respect of dishonoured chequeappeared
  in the Pass book but No entry was donein the Cash Book
  
  
• Bank paid a Bill Payable of the firm for Rs. 1,500 on
  30th March, under advice to the firm on 2 nd April.
  
  
• Bank s Charges (postal) for a cheque bookissue charges
  
  
• by Shri. S. Banerjee Rs. 5, was entered twice in the Cash Book. 29
  
  
• A cheque for Rs. 50 drawn by Mr.Aadvik had been
  charged to Shri. S. Banerjee account in error in March 2020.