Bank Reconciliation Statement

The bank pass book indicates the amount paid into the bank and the amount withdrawn there from. The pass book balance on any given date must be the same as the balance shown by the bank column of the cash book on the same date. But in actual practice the bank pass book balance seldom agrees with the balance shown by the bank column of the cash book. This happens when some of the transactions appear in the cash book but not in the pass book or in the pass book but not in the cashbook. The difference between the two balances are due to the following reasons.

1. Cheques issued but not presented for payment. When cheques are issued, the entry in the cash book is made immediately. In the books of the bank, the entry is made only when the cheque is presented for payment. It is possible that at the time when the balance of the two books are being compared, some of the cheques might have been issued but might not have been presented for payment thus causing a disagreement between the two balances.

2. Cheques paid into the bank but not yet cleared. As soon as the cheques arc deposited into the bank, the entry is passed on the debit side of the bank column in the cash book. The customer’s account is credited by the bank only when the cheques are cleared. It is possible that when the cashbook is compared with pass book some of the cheques deposited by the concern may remain uncollected.

3. Interest allowed by the bank. Bank might have credited the account of the customer with the interest and may have made the entry in the pass book. It is possible that the entry 10 respect of such interest may not have been made by the customer in the bank column of the cash book thus causing a disagreement between the two balances.

4. Interest and bank charges debited by bank. The bank debits the account of the customer by way of interest on overdraft. It also debits the account of the customers by way of incidental charges and collection charges. As soon as these charges are made the bank debits the customer’s account. But the entries in the cash book are made by the customer .only when he receives the bank statement or the pass book.

5. Interest, dividend etc. collected by the bank. Sometimes interest on government securities or dividend on shares is collected by the bank and is credited to customer’s account. If the entry for these do not appear in the cash book, the balance will differ.

6. Direct payment by the bank Sometimes under standing instructions from the client, certain payments like insurance premium, club fees etc. are made by the bank. The entry in the bank column of the cash book is only made when the necessary intimation to that effect is received from the bank by the client. The entries in the cash book and pass book may be on different dates.

7. Direct payment into the bank by a customer. Sometimes our customers deposit money direct into the account in the bank, the corresponding entry for which may not appear in the cash book, due to delay in necessary instructions by the customers.

8. Dishonor of bill discounted with the bank. Sometimes customers get their bills discounted with the bank. If the bank is not able to get payment of these bills on the due date, it will debit the customers accounts with the amount of the bills together with the noting charges, if any. The customer will pass the entry in his books on receipt of the information from the bank.

9. Any error committed by the bank Besides the above reasons if any error is committed either by the bank or by the customer himself while recording the transactions in their respective books it will cause disagreement between the two balances.

A reconciliation statement is, therefore, prepared at periodical intervals with a view to indicate the items which cause such disagreement between the balance as shown by the bank column of the cash book and the bank pass book on any given date. Other advantages of preparing a reconciliation statement are :

(1) The errors that might have been committed either in the cash book or pass book are revealed.

(2) The reconciliation statement will also indicate any undue delay in the clearance of outstation cheques.

(3) A reconciliation statement prepared at regular intervals will discourage the staff of either or the bank from committing the acts of embezzlement. It is possible that the cashier might have made the entry in the cash book but might not have deposited the amount in the bank.