BANK RECONCILIATION STATEMENT

Bank Reconciliation Statement

The firm records all transactions relating to its bank account in the cash book.

 All deposits are shown in the bank column on the debit side of the cash book and all withdrawals on the credit side.

 The bank also maintains a separate account in its ledger for every customer.

It credits the customer's account with all deposits made by him and debits it with all withdrawals.

 Thus, what is shown on the debit side of the cash book appears on the credit side of the customer's account in bank's ledger, and vice versa.

Reason behind Bank Reconciliation Statement

The main reason why, on a particular date, the balance shown in the pass book differs from the balance shown in the cash book is that many transactions are not recorded on the same date in both of these books.

The difference in balances of these two books has arisen simply because of the time lag. In any case, when you find that the balance in the pass book differs from the balance as per cash book, it becomes necessary to ascertain the exact causes of difference and reconcile the two balances. Only then you can be sure of the accuracy of entries in both the books. Therefore, every firm compares the entries in the cash book with those in the pass book periodically, and lists various causes of disagreement in the form of a statement called 'Bank Reconciliation Statement'.

Causes of difference

1 Transactions that usually appear in the cash book, but not in the pass book.

 2 Transactions that usually appear in the pass book, but not in the cash book.

Transactions that Usually Appear in the Cash Book, but not in the Pass Book

• Cheques deposited into bank but not yet collected
• Cheques issued but not yet presented for payment
• Cheques dishonoured but no entry made in the cash book
• Errors in the cash book

Errors in the cash book

1. A transaction, whether on the debit side or on the credit side, recorded more than once.
2.  A transaction to be recorded on the debit side has been wrongly recorded on the credit side, or vice versa.
3.  Sometimes the firm maintains more than one bank account. It is possible that a cheque issued on one account has been wrongly recorded to the debit of another account. This would affect both the bank accounts.
4. Errors committed in balancing the cash book, or carrying forward the balance to another page

Errors in the pass book:

such errors are:

 i) Omitting to record certain transactions in customer's account.

ii) Recording of a transaction on the wrong side of firm's account.

 iii) Recording of a transaction in the wrong account where the firm has more than one account in the bank.

 iv) Recording of transactions which belong to some other customer in the firm's account.

Transactions that Usually Appear in the Pass Book, but not in  the Cash Book

1. Interest allowed by the bank,
2.  Amounts collected by the bank as per the standing instructions
3. Direct payments into the bank made by firm's customers
4. Bank charges:
5. Interest on overdraft
6. Payments made by the bank as per the standing instructions:
7. Discounted cheques fills receivable dishonored subsequently
8. Errors in the pass book

Procedure for ascertaining the causes of difference and effects thereof

1. Compare the items appearing on the debit side of the cash book with those on the credit side of the pass book (deposits column), and place a tick mark against items appearing in both the books.
2. Compare the items appearing on the credit side of the cash book with those on the debit side of the pass book (withdrawals column), and place a tick mark against items appearing in both the books.

Reconciliation can be done in the following ways –

1. Take the balance as per cash book as the starting point. Adjust the effect of each item causing the difference, and you will arrive at the balance as per pass book.
2. Take the balance as per book as the starting point. Adjust the effect of each item causing the difference, and you will arrive at the balance as per cash book.
3. Generally, firms adopt the first method because the Bank Reconciliation Statement is primarily prepared for verification of the bank balance as per cash book
4. when cash book balance is used as a starting point.

To be added:

1 Cheques issued but not yet presented

 2 Interest allowed by the bank

3 Interest and dividends collected but not recorded in the cash book

4 Direct deposits by customers in the firm's account in the bank

To be deducted:

 1 Cheques deposited but not yet collected

 2 Bank charges

 3 Interest on overdraft

 4 Amount paid by a bank under standing instructions but not recorded in the cash book

 5 Cheques dishonoured but no entry made in the cash book for the dishonour

• If the pass book balance is taken as the starting point, just reverse the above process. Add those which are deducted from the cash book balance as given above, and deduct those which are to be added.

Preparation of BRS when there is overdraft

When the businessman has favorable balance in the bank, the cash book shows a debit balance and the pass book a credit balance.

But in case of overdraft (an unfavorable balance), the cash book will be showing a credit balance and the pass book a debit balance. This is because now the firm owes to the bank.

Bank Reconciliation Statement with corrected ( Adjusted ) Cash Book Balance

Cash Book is corrected (adjusted ) by recording the entries which should have been recorded in the cash book but are not recorded such as Bank Charges, Interest charged on overdraft, interest allowed by bank, etc.

Step – 1 Draw up a cash book having Bank Column only.

Step -2 Pass entries in the cash book in respect of the following items:

1. Amount recorded in the pass book but not recorded in the Cash Book that should be recorded e.g bank charges, bank overdraft interest, direct payment by the bank under standing instructions
2.  Rectifying entries in respect of errors committed in the cash book

Cheque issued but recorded in cash or discount column

Cheques issued recorded in bank column by wrong amount

Over or under casting(totalling) of Bank column

Error in balancing in the bank column

Error in carry forward or brought forward bank balance

At this point it becomes adjusted cash book

It should be noted that the following items must not be recorded in the Amended Cash Book –

1. Cheques deposited into bank but not credited by bank
2. Cheques issued but not presented for payment in the bank
3. Any wrong entry in Pass book

• Prepare Bank Reconciliation Statement as on Dec. 31,2020

1. Favourable balance as per Cash Book Rs. 25,000
2. A cheque  issued in favour of Mr Y Rs. 4000  has not been presented for payment.
3. A cheque for Rs. 1000 deposited in the bank has been dishonoured.
4. A sum of Rs. 800 deposited in the bank has been credited as Rs. 80 in the Pass book
5. Payment of cash book has been under cast by Rs. 400

• Prepare Bank Reconciliation Statement as on Dec. 31,2020

1. Debit balance as per Pass Book Rs. 10,000
2. Bank charges debited by the bank Rs. 200
3. Payments directly received by the bank 3,500
4. Cheque issued but not presented for payment 8,000