Chapter 5: Bank Reconciliation statement

A statement that is prepared to rectify or tally the difference that exists between the user passbook and cashbook of the firm, so that the cause of the difference can be determined and rectified is known as Bank Reconciliation Statement. The following are the reasons for its preparation:

1. To determine if the balance reported by the company’s cashbook is the correct amount.
2. Rectifies any errors present in the cash book so that proper statements can be generated.
3. It prevents fraudulent activities like embezzlement and improves accountability.
4. To discover any errors made by the bank and apply corrective measures.
5. Helps check the accuracy of information recorded in both books.

Here are some of the reasons which result in a mismatch between the bank passbook balance and the bank column of the cash book.

I. Timing Differences:

1. Cheques issued by the firm but not yet presented for payment: Cheques issued by the firm to the suppliers or creditors are immediately recorded on the credit side of the cashbook. However, there will be a time gap when the receiving party presents it to the bank. So the bank cannot debit the amount. It will result in changes in the balance amount between the two books.

2. Cheques are deposited into the bank but not yet collected: A firm receives cheques from its debtors/customers, which are then immediately recorded on the debit side of the cashbook. However, when those cheques are deposited in the bank, the bank credits the firm’s account only after the cheques are actually realised. It creates a difference between the two balances.

3. Direct debits made by the bank on behalf of the customer: Bank deducts various charges like cheque collection charges, interest on overdraft, and check bounce charges. The firm will not be aware of such debits, and hence these changes will not be reflected in the firm’s cash book. Due to this reason, the cashbook will not be in sync with the passbook.

4. Amounts directly deposited in the bank account: When debtors or customers directly deposit money into the firm’s bank account, the firm will not be aware of such deposits. Due to this, these entries will not be recorded into the cashbook. This will also create an imbalance between the bank passbook and firm’s cashbook.

5. Interest and dividends collected by the bank: The bank collects interest and dividends on behalf of the customer. It will not be known to the customer and hence will not be recorded into the firm’s cash book. This creates an imbalance between the bank passbook and the firm’s cashbook.

6. Direct payments made by the bank on behalf of customers: When the customers give standing instructions to the bank for making payments to third parties, like paying telephone bill, insurance premium, rent taxes etc., the firm will not be aware of these payments, and hence such transactions will not be recorded in the firm’s cashbook. It is also a reason for imbalance.

7. Cheques deposited and bills dishonoured: A cheque deposited by the firm if dishonoured or a bill of exchange drawn by the business firm which is discounted with the bank is dishonoured on the date of maturity, the same is debited to customer’s account by the bank. This information is not available to the firm immediately, and it will not be recorded in the firm’s cashbook. This will also create an imbalance between the bank passbook and the firm’s cashbook.

II. Differences due to recording errors: The difference between the two balances could be due to an error of human nature. The following types of errors can occur:

1. Errors committed in recording transactions by the firm: When a wrong recording of transactions relating to incorrect totalling, cheques issued, cheques deposited, etc., are committed by the firm in the cashbook, it will create an imbalance between the bank passbook and the firm’s cashbook.

2. Errors committed in recording transactions by the bank: When a wrong recording of transactions related to cheques issued, wrong totalling, cheques deposited, etc., are committed by the bank in the passbook. It will create an imbalance between the bank passbook and the firm’s cashbook.

Differences between the cash book and passbook 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.