Bank Reconciliation Statement
Bank Reconciliation
Have you ever balanced your checkbook? Why did you do that? Was it to make sure that you didn't make any mistakes when you were adding deposits or subtracting expenses? I bet it was because you wanted to make sure that your balance in your checkbook was the same as the balance in the bank, right? Everything that we just talked about refers to what we in accounting commonly call doing a bank reconciliation. A bank reconciliation is the balancing of a company's cash account balance to its bank account balance.
Need for Reconciliation
It is generally experienced that when a comparison is made between the bank balance as shown in the firm’s cash book, the two balances do not tally.Hence, we have to first ascertain the causes of difference thereof and then reflect them in a statement called Bank Reconciliation Statement to reconcile (tally) the two balances. In order to prepare a bank reconciliation statement we need to have a bank balance as per the cash book and a bank statement as on a particular day along with details of both the books. If the two balances differ, the entries in both the books are compared and the items on account of which the difference has arisen are ascertained with the respective amounts involved so
that the bank reconciliation statement may be prepared..
Reconciliation of the cash book and the bank passbook
balances amounts to an
explanation of differences between them. The differences between the cash book
and the bank passbook is caused by:
- timing
differences on recording of the transactions
- errors made by the business or by the bank.
Timing Differences
When a business compares the balance of its cash book with
the balance shown by the bank passbook, there is often a difference, which is
caused by the time gap in recording the transactions relating either to
payments or receipts. The factors affecting time gap includes :
1(a) Cheques issued by the bank but not yet presented for payment
1(b) Cheques paid into the bank
but not yet collected
1(c) Direct debits made by the
bank on behalf of the customer
1(d) Amounts directly deposited in
the bank account
1(e) Interest and dividends
collected by the bank
1(f) Direct payments made by the
bank on behalf of the customers
1(g) Cheques deposited/bills
discounted dishonoured
Differences Caused
by Errors
2(a) Errors committed in recording
transaction by the firm
2(b) Errors committed in recording
transactions by the bank
Omission or wrong recording
of transactions relating to cheques deposited and wrong totalling, etc.
committed by the bank while posting entries in the passbook also cause
differences between passbook and cash book balance.
When a business compares the balance of its cash book with
the balance shown by the bank passbook, there is often a difference, which is
caused by the time gap in recording the transactions relating either to
payments or receipts. The factors affecting time gap includes :
1(a) Cheques issued by the bank but not yet presented for payment
When cheques are issued by the firm to suppliers or creditors
of the firm, these are immediately entered on the credit side of the cash book.
However, the receiving party may not present the cheque to the bank for payment
immediately. The bank will debit the firm’s account only when these cheques are
actually paid by the bank. Hence, there is a time lag between the issue of a
cheque and its presentation to the bank which may cause the difference between
the two balances.
1(b) Cheques paid into the bank
but not yet collected
When firm receives cheques from its customers (debtors), they are immediately recorded in the debit side of the cash book. This increases
the bank balance as per the cash book. However, the bank credits the customer account only when the amount of cheques are actually realised. The clearing of cheques generally takes few days especially in case of outstation cheques or when the cheques are paid-in at a bank branch other
than the one at which
the account of the firm is maintained.
This leads to a cause of
difference between the bank balance shown
by the cash book and the balance
shown by the bank passbook.
1(c) Direct debits made by the
bank on behalf of the customer
Sometimes, the bank deducts amount for various services from
the account without the firm’s knowledge. The firm comes to know about it only
when the bank statement arrives. Examples of such deductions include: cheque
collection charges, incidental charges, interest on overdraft, unpaid cheques
deducted by the bank – i.e. stopped or bounced, etc. As a result, the balance
as per passbook will be less than the balance as per cash book.
1(d) Amounts directly deposited in
the bank account
There are instances when debtors(customers) directly deposits
money into firm’s bank account. But, the firm
does not receive the intimation from any source till it receives the
bank statement. In this case, the bank records the receipts in the firm’s account at the bank but the same is not recorded
in the firm’s cash book. As a result,
the balance shown
in the bank passbook will be
more than the balance shown in the firm’s cash
book.
1(e) Interest and dividends
collected by the bank
When the bank collects interest and dividend on behalf of the customer, then
these are immediately credited to the customers
account. But the firm will know about these transactions and record the same in the cash book only when it receives a bank statement. Till then the balances
as per the cash book and passbook will differ.
1(f) Direct payments made by the
bank on behalf of the customers
Sometimes the customers give standing instructions to the
bank to make some payment regularly on stated days to the third parties. For
example, telephone bills, insurance premium, rent, taxes, etc. are directly
paid by the bank on behalf of the customer and debited to the account. As a
result, the balance as per the bank passbook would be less than the one shown
in the cash book.
1(g) Cheques deposited/bills
discounted dishonoured
If a cheque deposited by the firm is dishonoured or a bill of exchange drawn by the business
firm is discounted with the bank is dishonoured on the date of maturity, the
same is debited to customer’s account by the bank. As this information is not
available to the firm immediately,
there will be no entry in the firm’s cash book regarding
the above items. This will be known to the firm when it receives a statement from the
bank. As a result, the balance as per the passbook would be less than the cash
book balance.
Differences Caused
by Errors
Sometimes the difference between the two balances may be
accounted for by an error on the part of the bank or an error in the cash book
of the business. This causes difference between the bank balance shown by the
cash book and the balance shown by the bank statement.
Omission or wrong recording of transactions relating to cheques deposited and wrong totalling, etc. committed by the bank while posting entries in the passbook also cause differences between passbook and cash book balance.
Preparation of Bank Reconciliation Statement without adjusting Cash Book Balance
To prepare bank reconciliation statement, under this
approach, the balance as per cash book or as per passbook is the starting
item. The debit
balance as per the cash book
means the balance of deposits held at the bank. Such a balance will be a credit
balance as per the passbook. Such a balance exists when the deposits made by the firm are more than its withdrawals. It indicates the favourable balance as per cash book or
favourable balance as per the passbook.
On the other hand, the credit balance
as per the cash book indicates
bank overdraft. In other words, the excess amount withdrawn
over the amount deposited in the bank. It is also
known as unfavourable balance as per cash
book or unfavourable balance as per passbook.
We may have four different situations while
preparing the bank reconciliation statement. These are :
1.
When debit balance
(favourable balance) as per cash book is given and the balance as per passbook
is to be ascertained.
2.
When credit balance
(favourable balance) as per passbook is given and the balance as per cash book
is to be ascertained.
3.
When credit balance
as per cash book (unfavourable balance/overdraft balance) is given and the
balance as per passbook is to ascertained.
4.
When debit balance as
per passbook (unfavourable balance/overdraft balance) is given and the cash
book balance as per is to ascertained.
.1(a) Dealing with favourable balances
The
following steps may be initiated to prepare the bank reconciliation statement:
(i)
The date on which the
statement is prepared is written at the top, as part of the heading.
(ii)
The first item in the statement is generally the balance as shown by the
cash book. Alternatively, the starting point can also be the balance as per passbook.
(iii)
The cheques deposited but not yet
collected are deducted.
(iv)
All the cheques
issued but not yet presented for payment, amounts directly deposited in the
bank account are added.
(v)
All the items of charges such as interest
on overdraft, payment
by bank on standing
instructions and debited by the bank in the passbook but not entered
in cash book, bills and cheques
dishonoured etc. are deducted.
(vi)
All the credits given by the bank such as interest
on dividends collected, etc. and direct deposits in the
bank are added.
(vii)
Adjustment for errors are made according to the principles of rectification of
errors.
(viii)
Now the net balance
shown by the statement should be same as shown
by the passbook.
It may be noted that treatment of all items shall be the reverse
of the above if we adjust passbook balance as the starting point.
1(b) Dealing with overdrafts
So far we have dealt
with bank reconciliation statement where bank balances
has been positive – i.e., there has been money in the bank account.
However, businesses sometimes have overdrafts at the bank. Overdrafts
are where the bank account becomes negative and the businesses in effect have
borrowed from the bank. This is shown in the cash book as a credit balance. In
the bank statement, where
the balance is followed by Dr. (or sometimes OD) means that there
is an overdraft and called debit balance as per passbook.
An overdraft is treated as negative figure
on a bank reconciliation statement.
Preparation of Bank Reconciliation
Statement with Adjusted Cash Book
When we look at the various items that normally
cause the difference between the passbook balance and the cash book balance, we find
a number of items, which appear only
in the passbook. Why not first record such items in the cash book to work out the adjusted balance
(also known as amended balance) of the cash book and then prepare
the bank reconciliation statement. This shall reduce the number of items
responsible for the difference and have the correct figure of balance at bank
in the balance sheet. In fact, this is exactly what is done in practice whereby
only those items which cause the difference
on account of the
time gap in recording appear in bank reconciliation statement. These
are as (i) cheques issued but not yet presented, (ii) cheques deposited but not
yet collected, and (iii) due to an error in the passbook.
Example
Company A's bank statement dated Dec 31, 2011 shows a balance of 24,594.72. The company's cash records on the same date show a balance of 23,196.79. Following additional information is available:
- Following checks issued by the company to its customers are still outstanding:
- A deposit of 400.00 made on Dec 31 does not appear on bank statement.
- An NSF check of 850 was returned by the bank with the bank statement.
- The bank charged 50 as service fee.
- Interest income earned on the company's average cash balance at bank was 1,237.22.
- The bank collected a note receivable on behalf of the company. Amount received by the bank on the note was $550. This includes 50 interest income. The bank charged a collection fee of 10.
- A deposit of 430 was incorrectly entered as 340 in the company's cash records.
Prepare a bank reconciliation statement using the above information.
Solution:
Account reconciliations are likely to be performed regularly, regardless of the size of your firm. Automation solutions can help to simplify this critical procedure.
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