Bank Reconciliation

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BANK RECONCILIATION STATEMENTS
What is Bank Reconciliation Statement?

Bank reconciliation statement is a financial statement prepared to reconcile the differences in the
balance of the bank column of cashbook and bank statement by showing all the causes of
difference between the two.
Importance of Bank Reconciliation Statements

Here are some simplified points that will help you understand the importance of bank
reconciliation statements:
a) A bank reconciliation statement shows errors made in both the books by customers or
banks and helps to rectify it.
b) It helps in making future transactions secure with the bank if the customer is sure about
the correctness of balance in the cash book.
c) It helps in preparing the revised cash book as entries like bank charges, interest allowed or
charged by the bank, etc. are recorded in the bank statement and will be recorded in the
cashbook in the future.
d) Any fraud made by the bank or any other party can be disclosed through it. For Example:
If any staff shows any type of deposit in the bank but it is actually not deposited, then it
can be disclosed easily with the help of this statement.
e) It helps in keeping track of cheque sent to the bank for collection and reveals the delay in
the collection of cheque by the bank.
Reasons for differences in the bank statement and cash book

Differences will fall into one of the following classes:
a) Items (not consisting of errors) which appear in the bank statement but which are not in
the cash book such as dishonoured cheques, interest and bank charges, dividends, standing
order (an order made to the bank to make regular payment), bills or interest income
credited direct to the bank and payments by customers which are paid direct to the bank
account.
b) Items (not consisting of errors) which appear in the cash book but do not appear in the
bank statement. These are confirmed to outstanding deposits and unpresented cheques.
c) Errors made in the compilation of cash book or bank statement.
In order to be able to understand the terms used in a bank statement some important
terms need to be defined:
Direct Bank Transfer 

Is an automatic transfer of money from a firm's account to a creditor, or to employees to pay their
salaries and wages.
Unpresented Cheque 
A cheque paid by your firm to a creditor which has not yet cleared through the banking system.
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Bank Overdraft 
When we have paid more out of our bank account than we
have paid into it. In this situation the firm will owe the bank the difference in the
balance.
Direct Debit 
Is an agreement by the firm for a creditor to automatically draw out a variable amount of money
from its bank account. For example, at the end of each month a firm might set up a direct debit
which gives the mobile phone supplier the power to draw out enough money to pay the monthly
charges for phone calls.
Standing Order 
Is an agreement by the firm for a creditor to automatically draw out a fixed amount of money
from it's bank account. For example, a firm may set up a standing order for it's insurance
company to take out a fixed sum of money from it account over an agreed time period.
Bank Lodgement 
A cheque received by your firm from a debtor which has not yet cleared through the banking
system.
Dishonoured Cheque 
When a cheque is received from a customer and paid into the bank, it is recorded on the debit side
of the cash book. It is also shown on the bank statement as a banking by the bank. However, at a
later date it may be found that his bank will not pay us the amount due on the cheque. Therefore
the bank has failed to honour the cheque.
Balance as per cashbook can either be credit or debit:

Credit balance as per cash book shows the amount which has been withdrawn more than deposit
and credit balance as per cash book is also known as overdraft balance as per cash book.
Debit balance as per cash book shows that the firm or customer has so much balance of deposit in
the bank.
Balance as per bank statement can be either credit or debit:

Credit balance as per bank statement shows that the firm or customer has a given amount in
balance of deposit in the bank.
Debit balance as per bank statement shows the amount which has been withdrawn more than the
deposit and debits balance as per passbook is also known as overdraft balance as per bank
statement.
Bank reconciliation Statement Rules

i. Any debit balance in the cash book is referred to as the deposits of the business entity.
ii. Debit in cash book is equal to credit in bank statement.
iii. Credit balance in cash book means unfavorable balance
iv. Debit balance in cash book means favorable balance
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v. Cheques that are issued but in any case not presented are adjusted in the cash book.
Steps to Prepare Bank Reconciliation Statements

A bank reconciliation statement is prepared when customers or firms get their passbook updated
from the bank. The customers or firms then tally the entries and balance of both cashbook and
bank statement. Following steps are required to prepare the bank reconciliation statements:
Step 1:
Tick the items on the debit side of the cashbook which tally with the items on the credit side of
the bank statement, and note down the unticked items, which is the cause of the difference in
balances of both the books
Step 2:
In the same way, tick the items on the credit side of the cash book, which tally with the items on
the debit side of the bank statement and note down the unticked items which do not tally in both
the books, which is the cause of the difference.
Step 3:
Now a bank reconciliation statement can be prepared by taking the balance as per the cash book
as a starting point. If the statement is started with the bank column of the cashbook, then the
answer arrived will be the balance as per the bank statement. Then, you can add the items which
have the effect of higher balancein the bank statement and deduct the items which influence lower
balance in the bank statement.
Practical example of a Bank Reconciliation Statement
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Bank Reconciliation

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MR KAYBEE

BANK RECONCILIATION STATEMENTS

What is Bank Reconciliation Statement?

Importance of Bank Reconciliation Statements

Reasons for differences in the bank statement and cash book

Direct Bank Transfer 

Balance as per cashbook can either be credit or debit:

Balance as per bank statement can be either credit or debit:

Bank reconciliation Statement Rules

Steps to Prepare Bank Reconciliation Statements

Practical example of a Bank Reconciliation Statement

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