Bank Reconciliation Statement

A bank reconciliation statement is a statement that is prepared to reconcile the balances shown by the cash book and the pass book by finding the causes of difference between two balances.

“Bank reconciliation statement is prepared at periodical intervals with a view to indicate the items which cause disagreement between the balance as per the bank columns of the cash book as the bank pass book on the given date.” – J.R. Batliboi

“A statement which is drawn up to show the cause for the disagreement between the bank balances as shown by the cash book and the balances shown by passbook on a particular date is called bank reconciliation statement.” – U.P. Haldar

From the above definitions, it is obvious that bank reconciliation statement is the statement that is prepared mainly to reconcile the balances shown by the cash book and pass book by finding the causes of difference between the two balances.

Need and importance

Bank reconciliation statement is an important technique by which the accuracy of the bank balance shown by the pass book and cash book is ensured. The need and importance of bank reconciliation statement can be stated as follows:

• It ensures the accuracy of the balances shown by the pass book and the cashbook.
• It provides a check on the accuracy of entries made in both the books.
• It helps to detect and rectify any error committed in both the books.
• It helps to update the cash book by discovering some entries not yet recorded.
• It indicates any undue delay in the collection and clearance of some cheques.

Reasons for disagreement between cash book and pass book balances

The following are the important causes or reasons for the disagreement between the balances shown by the pass book and the cash book:

• Cheques issued but not presented for payment
  As soon as the cheques are issued by the business, they are entered in bank column on the credit side of the cash book. However, the bank cannot enter such cheques in the pass book unless they are presented to it for payment. If some of the cheques issued are not presented in the bank for the payment until a certain date on which the bank reconciliation statement is being prepared, the passbook will show a higher balance than the cashbook by the amount of the cheques not yet presented.
  
  
• Cheques paid or deposited but not collected and credited by the bank
  Whenever cheques are received from customers and sent to the bank for collection, they are immediately debited in the bank column of the cash book. However, they are not credited in the pass book until they are cleared and collected by the bank. If some of the cheques are not cleared and collected by the bank until the date of bank reconciliation statement being prepared, the passbook will show a lower balance than the cash book by the amount of cheques not yet collected and credited.
  
  
• Interest credited by bank but not entered in cash book
  The bank allows interest on deposit by crediting the customer's account. But, if the necessary information to that effect is not provided to the customer until a certain date and hence, interest allowed by bank is not recorded in the bank column of the cash book on the date the bank reconciliation statement is being prepared, the balances shown by the cash books will be greater than cash book.
  
  
• Bank charges, commission and interest on overdraft debited by the bank but not entered in cash book
  The bank also charges for the services it provided to its customers by debiting their account that includes bank charges, commission, and interest on overdraft. However, if necessary, information to that effect is not intimated to the customer until a certain date and hence, the charges of the bank are not credited in the bank column of the cash book on the date bank reconciliation statement is being prepared, the balances shown by the two books will be different.
  
  
• Expenses directly paid by bank on behalf of customer but not recorded in cash book
  Sometimes, the bank receives standing instruction from its customers to pay some of their regular expenses such as insurance premium and rent directly on their behalf. In such a case, if the bank directly pays such expenses as per the standing instructions, the amount of such expenses is immediately debited by the bank in the customer's account. However, the entry of such payment will be made in the bank column of the cash book only when necessary information to that effect is received from the bank. If the entries are made only in passbook but not in cash book at the time of reconciliation then the balance shown by the pass book and cash book will be different.
  
  
• Incomes directly collected by the bank on the behalf of customer but not recorded in cash book
  Similarly, the bank may also receive standing instruction from its customers to collect some of their regular incomes such as dividends on shares, interest on investments and rent directly on their behalf. In such a case, if the bank directly collects such incomes as per the standing instruction, the amount of such incomes is immediately credited by the bank in the customer’s account. However, such receipts will be debited in the bank column of the cash book only when necessary information to that effect is received from the bank. If they are not recorded in the cash book till the date of preparing bank reconciliation statement, the balances shown by two books will be different.
  
  
• Amount directly deposited into the bank by debtors but not entered in cash book
  The debtors of the business may directly deposit the amount due to them in their creditor’s account in the bank. Upon such deposits, the bank immediately credits the customer’s account in its book. However, the entry of such deposits will be made in the bank column of the cashbook only when necessary information to that effect is received. If the information is not received until a certain date from the bank and hence, the amount directly deposited into the bank is not entered in the bank column of the cash book on the date the bank reconciliation statement is being prepared, the balances shown by the two books will be different.
  
  
• Cheque deposited into the bank but dishonoured
  Whenever cheques are received from the customers and sent to the bank for the collection, they are immediately debited in the bank column of the cash book. However, they are not credited in the pass book until they are cleared and collected by the bank. If some of the cheque sent are dishonoured and the information to that effect is not given by the bank until the date when the bank reconciliation statement is being prepared, the passbook will show a lower balance than the cashbook by the amount of the cheques not yet collected and credited.
  
  
• Dishonor of bill discounted with the bank
  Sometimes, the customer gets their bills discounted with the bank. If the bank is unable to get the payment of such bills on their due dates, it immediately debits the customer’s account by the amount of the bills of the bills discounted. If the information to this effect is not provided to the customer until the date on which the bank reconciliation statement is being prepared, it is not recorded in the bank column of the cash book. As a result, the passbook balance and the cashbook balance will be different.
  
  
• Errors committed in the cashbook and passbook
  Besides any errors committed either in the cash book or in the passbook, or in both the books will also result in the difference in the balances shown by the two books.