Chapter 5: Bank Reconciliation statement

Preparing a bank reconciliation statement is necessary for the following reasons:

1. It helps in identifying the difference between cash books and pass books.
2. It helps in knowing the actual bank balance.
3. It helps in the detection and prevention of fraud and errors in recording banking transactions
4. It helps in knowing the actual bank balance.
5. It helps in creating a revised Cash Book that reflects the true bank balance.
6. It helps in preventing the embezzlement of money from the bank account.

Bank overdraft is created when there is a withdrawal, which is over the bank balance available in the account. It is an obligation to the account holder.

It means that the bank has debited the amount from the users account for some invalid reason. The following instance can help in understanding.

Rajesh’s account is charged overdraft of Rs. 5000 even though his account has sufficient credit balance. It can happen when the cashier has done an incorrect entry in the account.

The following are the causes of difference occurred due to time lag

1. Cheque issued by the firm is not yet presented for payment.
2. Cheque deposited in the bank but yet to be realized.
3. Direct debits done by the bank on behalf of the customer.
4. Amount deposited directly into the bank account.
5. Interest and dividends that are not collected by the bank.
6. Direct payments made by the bank on behalf of the customers
7. Cheques that are deposited or bills discounted which are dishonoured

When the total of the debit column of the Cash Book is more than the total credit column of the Cash Book, it is known as debit balance or favourable balance. A favourable balance is an asset to an account holder. A favourable balance can also be defined as a surplus of deposits over withdrawals.

Differences between cash book and pass book can arise due to some transactions that are recorded in the passbook not being present in the cash book. This can be rectified by recording those transactions in the cash book. The balance thus obtained is called an adjusted balance or amended balance. The following steps describe this process.

1. Note bank balance as per cash book.

2: Make corrections for errors committed in the cash book.

3: Transactions present only on the passbook’s credit side must be updated on the debit side of the cashbook

4. Transactions present only on the passbook’s debit side must be updated on the debit side of the cashbook

5: Calculate the new cash book balance and use it to prepare a Bank Reconciliation Statement.