Sometimes the bank balance shown in the Cash book does not tally with pass book or balance shown by the statement of account provided by the bank. To reconcile the balances, bank reconciliation statement is prepared.
The causes of difference between the two balances are as follows :
Cheques Paid in to Bank but not yet Collected : When a business concern deposits cheques with a bank, it is immediately debited in the bank column of the Cash book. But the bank credits the enterpriser’s account after the realisation of these cheques through the clearing process.
Cheques Issued but not yet Presented for Payment : When an enterprise issues a cheque, it is immediately recorded in the Cash book. But the bank debits the enterpriser’s account only when it is presented for payment.
Interest and Expenses Charged by Bank : The bank charges interest on overdraft and commission etc. for the services rendered by it. The enterprises credits them only when he comes to know about it.
Interest Credited by the Bank : Bank credits enterpriser’s account for the interest allowed by it on his deposits. The enterpriser does so only on receiving the bank statement only.
Direct Payment by the Bank : Business enterprises, generally, instruct their bankers to make payments of certain accounts regularly, such as insurance premium. The bank debits the parties whereas they made entries on receipt of bank statement.
Direct Deposits by the Parties : When parties deposit directly in the enterpriser’s account, the bank balance increase without their knowledge.
Dishonour of Cheque/Bill : The customer discounts a bill of exchange from the bank but it may not be honoured by the drawee. In that case, the bank will debit the account of the drawer. Similarly, cheques sent for collection are also dishonoured on the due dates causing difference in the books of the bank and the customer.
Credit by Bank : The bank, under the instructions of the parties, collects interest, dividend etc. and credit their accounts but the parties make entries only after receiving the bank statement.
Errors and Omissions : Errors or Omissions either on the part of the bank or the customer cause the difference between the balances of their books. The balance will tally only when the errors are rectified.
Importance of bank
Reconciliation statement
1. It helps to detect any mistake either in the cash book or the book of the bank.
2. It identifies the record of valid transactions in both the books.
3. It indicates any delay in the collection of cheques.
4. This statement is an important control method on the staff.
5. The statement reduces chances of embezzlement or fraud by the staff.
6. It ensures that the bank balance shown by the bank column of the cash book reonciles with the bank pass book.
7. It points out the mistakes both in the cash book and the pass book.
Rules of Preparing Bank Reconciliation statement
+Items
1. Cheques issued/drawn but not presented for payment during that period.
2. Interest allowed/credited by the bank.
3. Interest collected by the bank on investment.
4. Direct deposit by a customer in the bank.
5. Rebate on retiring of a bill.
6. Cheques paid into bank for collection but not debited or omitted to be recorded in the cash book.
+Items
1. Cheques paid/deposited/sent for collection but not collected in the pass book.
2. Bank charges/commission or interest debited by the bank.
3. Dishonour of bill of exchange or cheques.
4. Any payment made by bank on standing orders by the business.
5. Cheques issued but omitted to be recorded in the Cash book.
6. Any amount wrongly debited by bank in the pass book.
7. Cheque entered in the cash book for collection.
Preparing by Pass Book
When preparing bank reconciliation statement by the pass book…
1. Plus items will be written in minus items.
2. Minus items will be written in plus items.
3. When the total of plus items is greater than that of minus items, answer will be debit balance as per cash book, when starting the question with cash balance and the total of minus items are more than the plus items the answer will be overdraft.
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