Bank Reconciliation Statements BANK RECONCILIATION STATEMENT - MEANING AND NEED

Business concern maintains the cash book for recording cash and bank transactions. The Cash book end of a period.

serves the purpose of both the cash account and the bank account. It shows the balance of both at the 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 or Bank statement. It is usual to tally the firms bank transactions as recorded by the bank with the cash

account. A copy of this account is regularly sent to the customer by the bank. This is called Pass Book book. But sometimes the bank balances as shown by the cash book and that shown by the pass shown by bank column of cash book, the business firm will identify the causes for such difference. It is prepared. This statement is called the Bank Reconciliation Statement. It can be said that: as per the bank column of the cash book and pass book on any given date. Need of preparing Bank Reconciliation Statement

book/bank statement do not match. If the balance shown by the pass book is different from the balance becomes necessary to reconcile them. To reconcile the balances of Cash Book and Pass Book a statement Bank Reconciliation Statement is a statement prepared to reconcile the difference between the balances

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 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. REASONS FOR DIFFERENCE recorded by the businessman in the bank column of the cash book and by the bank in its ledger account.

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 firms 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 firms 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 firms bank account, but the firm gets the information only when it receives the bank statement. In this case, the bank credits the result the balance in the cash book will be less than the balance shown in the Pass book. 4. Bank Charges firms account with the amount received but the same amount is not recorded in the cash book. As a

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 firms 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 firms 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 firms 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. 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. Reconciliation statement. These are: 1. Favourable balances

We may have the following different situations with regard to balances while preparing the Bank

(a) Debit balance as per cash book is given and the balance as per pass book is to be ascertained. 2. Unfavourable balance/overdraft balance ascertained. ascertained.

(b) Credit balance as per pass book is given and the balance as per cash book is to be ascertained. (a) Credit balance as per cash book (i.e. overdraft) is given and the balance as per pass book is to be (b) Debit balance as per pass book (i.e. overdraft) is given and the balance as per cash book is to be

The following steps are taken to prepare the bank reconciliation statement: given:

(i) Favourable balances: When debit balance as per cash book or credit balance as per pass book is (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 statement which should be the same as per the Cash book. pass book. decreasing the balance of Cash book will be deducted. Now extract the net balance shown by the The following illustration helps to understand dealing with the favourable balance as per cash book or 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 is a Bank Reconciliation? Book at any given date.

It is a method of reconciling the balance shown in the Bank Statement and the balance as per the Cash In this context, the word reconcile means, identifying the reasons for the difference between the closing balances shown in the two documents (Bank statement and the Cash Book.) It is important to note that the balances that are being compared must be as at the same date.

For example, if the reconciliation is for the month of March 2000, the balance shown in the Bank 31st March 2000.

statement as at 31st March 2000 should be reconciled with the balance shown in the Cash Book as at Requirement for Bank Reconciliation (a) The Bank Statement (b) The Cash Book The Bank Statement

Let us consider the two documents involved in Bank Reconciliation. These two documents are:

This is a record kept by the bank of all the transactions going through a bank account. following.

In addition to the name of the account and the account number a bank statement will show the 1 An opening balance. 2 A closing balance. 4 Credits (Receipts) 3 Debits (Payments/Outgoings) The opening balance (sometimes called the brought forward balance, B/F) is the balance at the statement for the previous month.

beginning of the month; this balance should be exactly same as the closing balance shown in the The closing balance is the balance on the last day of the month. This will be the balance that will be reconciled with the closing balance shown in the Cash Book. For instance the opening balance for the month of March 2000 is the closing balance at the end of February 2000.

The first thing to check before doing a bank reconciliation for the month of March 2000 is that the opening balance shown in the statement for March is exactly same as the closing balance shown in the statement for February 2000 (the previous month). The Cash Book

This is the record kept in your office to enter all the transactions going through the Bank account. The cashbook also has a DEBIT column and a CREDIT column.

All the money received (Receipts) are entered in the Debit column, and All the payments (Outgoings) are entered in the Credit column. NOTE: - Entries in the cashbook are done in the opposite way to what the Bank does, because a deposit by a Bank client is a liability or credit on the Bank. This happens because both the Bank and the account holder are following the double entry book a decrease in assets (Cash) is credited. The bank is recording from the opposite point of view and therefore the entries are in the opposite side from the cash book. To avoid any confusion caused by this, simply ignore the words debits and credits and treat them as receipts and payments. While reconciling simply compare the receipts shown in the bank statement with the receipts shown in the cashbook and the payments (Outgoings) shown in the bank statement with the payments shown in column. the cashbook without any concern for whether they are under the debit column or under the credit

keeping principles. In double entry book keeping an increase in assets (Cash in this case) is debited and

Terms Used in BRS

Statement which reconciles the balance shown in the cash book at the end of a given accounting period with that shown on the bank statement/passbook supplied by the bank. Cheques not yet presented

Cheques drawn that have been sent to the payee and entered in the cash book but which have not yet been presented to the bank for payment. Outstanding cheques

Cheques drawn that have been sent to the payee and entered in the cash book but which have not yet been presented to our bank for payment or which have not yet passed through the bank clearing system and thus do not appear on the bank statement at the end of the accounting period when the bank reconciliation statement is being prepared. These are otherwise known as unpresented cheques. Outstanding lodgements

Cheques and cash received that have been paid into the bank and entered in the cash book but which lodgements.

have not yet been credited on the bank statement. These are otherwise known as unpresented Unpresented cheques

Cheques drawn that have been sent to the payee and entered in the cash book but which have not yet been presented to our bank for payment or which have not yet passed through the bank clearing system

and thus do not appear on the bank statement at the end of the accounting period when the bank reconciliation statement is being prepared. These are otherwise known as outstanding cheques. Unpresented lodgements

Cheques and cash received that have been paid into the bank and entered in the cash book but which have not yet been credited on the bank statement. These are otherwise known as outstanding lodgements. Unrecorded cheques

Payments that are on the bank statement but which have not been entered in the cash book. Unrecorded lodgements Receipts that are on the bank statement but which have not been entered in the cash book.

The items which may account for the difference between the two balances are: Items entered in the bank columns of the cash book but not in the bank statement:
appear only on the debit side of the cash book.

1) Cheques not credited by the bank - Cheques received by the business but not yet deposited. This will 2) Unpresented Cheques - Cheques drawn by the business and which has not yet been presented to the bank for payment. This appears only on the credit side of the cash book.

Items entered in the bank statement but not in the cash book:

1) Credit Transfer -Payments made by some of the business customers direct to the bank. This is also known as bank giro credit. This appears only on the credit side of the bank statement. the debit side of the bank statement. 2) Bank Charges - Charges paid by the business for using some of the bank services. This will appear on 3) Standing Order - These enable the business to instruct the banks to make regular payments of fixed amounts. Examples are rent, insurance policies and so on. They appear on the debit side of the bank statement.

4) Direct Debits - When the business gives permission to the creditor to obtain the money directly from his bank account. This will appear on the debit side of the bank statement. debit side of the bank statement. 5) Interest on Overdrafts/loans - these interests are paid on loans and overdrafts and appear on the 6) Interest on Deposits - these interests are received on money deposited, generally such interests are added (credited) at the end of the year or half yearly. They appear on the credit side of the bank statement.

Dishonoured cheques are those, which are returned to the business due to lack of cash resources in their accounts. On up-dating the cash book, these are credited.