You operate a bank account in which you deposit money and withdraw money from time to time. You maintain a record with yourself of these deposits and withdrawals. One day you get your pass-book (statement issued by the bank) updated but are surprised to find that the balance shown by the pass book was different from what it should have been as per your records. What will you do in this case? It is obvious that you will compare the two sets of records and find out items which are recorded in one but not in the other. Similar situation may arise in case of a business concern which operates a bank account. These business concerns maintain record of all of their banking transactions in their bank column of the cash book. On any particular date the bank balance shown by the bank column cash book and that shown by the pass book should be the same. But if there is difference between the two, the business concern will find out the reasons to reconcile the balance. In this lesson you will learn about reasons for difference and prepare the reconciliation statement called Bank Reconciliation Statement.
OBJECTIVES:
After studying this lesson, you will be able to:
(a) state the meaning and need of Bank Reconciliation Statement ;
(b) explain the reasons for difference between the balances of Cash Book and Pass Book;
(c) prepare the Bank Reconciliation Statement.
1.1 BANK RECONCILIATION STATEMENT - MEANING AND NEED
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.
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.
1.2 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.
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
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.
1.3 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 Statement is prepared. After identifying the reasons of difference, the Bank Reconciliation statement is prepared without making change in the cash book balance. We may have the following different situations with regard to balances while preparing the Bank Reconciliation statement. These are:
1. Favourable balances
(a) Debit balance as per cash book is given and the balance as per pass book is to be ascertained.
(b) Credit balance as per pass book is given and the balance as per cash book is to be ascertained.
2. Unfavourable balance/overdraft balance
(a) Credit balance as per cash book (i.e. overdraft) is given and the balance as per pass book is to be ascertained.
(b) Debit balance as per pass book (i.e. overdraft) is given and the balance as per cash book is to be ascertained.
The following steps are taken to prepare the bank reconciliation statement:
(i) Favourable balances : When debit balance as per cash book or credit balance as per pass book is given :
(a) Take balance as a starting point say Balance as per Cash Book.
(b) Add all transactions that have resulted in increasing the balance of the pass book.
(c) Deduct all transactions that have resulted in decreasing the balance of pass book.
(d) Extract the net balance shown by the statement which should be the same as shown in the pass book.
In case balance as per pass book is taken as starting point all transactions that have resulted in increasing the balance of the Cash book will be added and all transactions that have resulted in decreasing the balance of Cash book will be deducted. Now extract the net balance shown by the statement which should be the same as per the Cash book.
1.4 Unfavourable balance/overdraft balance
Sometimes a businessman withdraws excess amount from the bank account and the closing bank balance of a month is a debit balance. This balance amount is called ‘overdraft balance’ as per Pass Book. This is shown in the cash book as a credit balance.
Credit balance as per cash book/Debit balance as per Pass Book.
Overdraft balance is to be shown in the minus column of statement as the starting point. The other steps shall remain same.
WHAT YOU HAVE LEARNT
1. 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.
2. There are certain reasons due to which a difference in the balance of Pass Book and Cash Book take place. These are as follows:
(a) Cheques issued by the firm but not yet presented for payment.
(b) Cheques deposited into bank but not yet collected.
(c) Amount directly deposited in the bank account.
(d) Bank Charges
(e) Interest and dividend received by the bank.
(f) Direct payments made by the bank on behalf of the customer.
(g) Cheques/discounted bills dishonoured.
(h) Errors committed in recording transactions by the firm.
(i) Errors committed in recording transactions by the Bank.
3. Different situations for preparing the Bank Reconciliation statement.
These are:
Favourable balances
(a) Debit balance as per cash book is given and the balance as per pass book is to be ascertained.
(b) Credit balance as per pass book is given and the balance as per cash book is to be ascertained.
Unfavourable balance/overdraft balance
(a) Credit balance as per cash book (i.e. overdraft) is given and the balance as per pass book is to be ascertained.
(b) Debit balance as per pass book (i.e. overdraft) is given and the balance as per cash book is to be ascertained.
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