Bank Reconciliation Statement
Learning Outcomes
- Learn the design of a Bank Pass Book.
- Understand the reasons for difference between Cash Book balance and Pass Book balance and try to ascertain the amount of such differences.
- Learn, how to resolve such difference in a systematic manner.
- Understand the purpose for preparing the bank reconciliation statement and its utility.
1. Introduction
- Banks are essential institutions in a modern society. With the increase in volume of trade, commerce and business, business entities faced difficulty in transacting in cash for each business activity.
- Now-a-days, most of the transactions of the business are done through bank whether it is a receipt or a payment.
- A Bank accepts from people, in general, deposits in various forms, and lends funds to those who need; it also invests some funds in profitable investments.
Services Rendered by Banks
- (i) The bank discounts promissory notes or hundies.
- (ii) The bank allows overdraft to its good customers.
- (iii) The bank grants different types of loans.
- (iv) The bank collects the amount of dividend warrants or interest on securities.
- (v) The bank makes payments of insurance premium, rent etc. on the due dates.
- (vi) The bank sells and purchases shares, debentures or government securities.
- (vii) Money can be remitted to another place or persons through the bank.
- (viii) The bank furnishes security or guarantee for its customers.
- (ix) The bank issues letter of credit or travellers' cheque.
- (x) The bank provides international banking services.
2. Background
- In the past, many corporate frauds have incurred by the companies through manipulating entries either in bank statements or in cash book.
- Reconciliation of bank and cash balances has become an integral part of internal control maintained by management.
- Reconciliation is typically done at regular intervals, such as monthly or quarterly, as part of normal accounting procedures.
3. Bank Pass Book
- Bank pass book is merely a copy of the customer's account in the books of a bank.
- The bank either sends periodical statements of account or gives a pass book to its customer in which all deposits and withdrawals made by the customer during the particular period is recorded.
- The credit balance as per passbook at a particular point of time is the deposit made by the customer while debit balance as per passbook is the overdraft balance for the customer.
FORM OF PASS BOOK
| Date | Particulars / Transaction | Cheque No. | Withdrawals Dr. (₹) | Deposits Cr. (₹) | Balance Dr. or Cr. (₹) |
|---|
KNOWLEDGE NUGGET
- Credit balance as per pass book: Deposit made by customer (favourable)
- Debit balance as per pass book: Overdraft balance (customer owes to bank)
- Debit balance in cash book = Credit balance in pass book (and vice versa)
4. Bank Reconciliation Statement
- To reconcile means to identify or find out the difference between two different sources and eliminating that difference.
- Whenever we deposit or withdraw money from banks, it is always recorded at two places:
- Cash Book — maintained by the person having the bank account
- Bank Statement / Pass Book — prepared by the bank
- The process of eliminating this difference and bringing the two statements in line with each other is known as "Reconciliation".
- The statement which reconciles the bank balance as per cash book with the balance as per the pass book by showing all the causes of difference is known as "BANK RECONCILIATION STATEMENT".
KEY DEFINITION
Bank Reconciliation Statement: A statement which reconciles the bank balance as per cash book with the balance as per the pass book by showing all the causes of difference between the two.
5. Importance of Bank Reconciliation Statement
- (i) The reconciliation will bring out any errors that may have been committed either in the cash book or in the pass book.
- (ii) Any undue delay in the clearance of cheques will be shown up by the reconciliation.
- (iii) A regular reconciliation discourages the accountant of the bank from embezzlement of funds.
- (iv) It helps in finding out the actual or true position of the bank balance by incorporating the effect of any uncleared funds as well.
- (v) It will ensure accounting of all the financial transactions incurred by the company during a particular financial year.
SALIENT FEATURES — QUICK REFERENCE
- Detects Errors: Both in cash book and pass book
- Shows Delays: In clearance of cheques
- Discourages Fraud: Regular reconciliation prevents embezzlement
- True Position: Finds actual bank balance
Causes of Difference
The difference in the both balances may arise because of the following reasons:
1. TIMING
- Sometimes a transaction is recorded at two different times in cash book and the pass book.
2. TRANSACTIONS
- There are various transactions which the bank carries out by itself without intimating the customer.
3. ERRORS
- Mistakes or errors made in preparing the accounts either by the bank or the customer can also result in disagreement.
ITEMS THAT FREQUENTLY CAUSE A DIFFERENCE
| When bank balance as per Cash Book is MORE | When bank balance as per Cash Book is LESS |
|---|---|
| i) Cheques deposited but not cleared | i) Cheques issued but not presented |
| ii) Interest and expenses charged by bank | ii) Interest allowed by bank |
| iii) Direct payments by the bank | iii) Interest and dividends collected by bank |
| iv) Dishonour of a bill discounted | iv) Direct payment into bank by customer |
| v) Bills collected by bank on behalf of customer |
Illustration 1
Messers Tall & Short, Faiz Bazar, New Delhi-110002 in account with Punjab National Bank, Daryaganj, New Delhi-110002
SOLUTION
Bank Reconciliation Statement as on 31st January, 2022
| Particulars | Details (₹) | Amount (₹) |
|---|---|---|
| Balance as per Pass Book | 2,43,000 | |
| Add: | ||
| Cheques deposited but not yet credited: | ||
| M. Mohan & Co. | 1,05,000 | |
| N. Nandy & Sons | 34,000 | 1,39,000 |
| Premium paid and bank charges entered in Pass Book but not yet in Cash Book | 26,000 | 26,000 |
| 4,08,000 | ||
| Less: | ||
| Cheques issued but not yet presented: | ||
| K. Nagpal & Co. | 73,000 | |
| B. Babu & Co. | 78,000 | 1,51,000 |
| Interest credited by bank but not yet entered in Cash Book | 20,000 | 20,000 |
| (1,71,000) | ||
| Balance as per Cash Book | 2,37,000 | |
7. Methods of Bank Reconciliation
7.1 Bank Reconciliation Statement without Preparation of adjusted Cash-Book
RULES FOR RECONCILIATION — QUICK REFERENCE
| Causes of differences | Dr. Balance as per Cash Book | Cr. Balance as per Cash Book | Cr. Balance as per Pass Book | Dr. Balance as per Pass Book |
|---|---|---|---|---|
| Cheque deposited but not cleared | Subtract | Add | Add | Subtract |
| Cheque issued but not presented | Add | Subtract | Subtract | Add |
| Direct deposit by customer | Add | Subtract | Subtract | Add |
| Income directly received by bank | Add | Subtract | Subtract | Add |
| Expenses directly paid by bank | Subtract | Add | Add | Subtract |
| Bank charges | Subtract | Add | Add | Subtract |
| Wrong debit in pass book | Subtract | Add | Add | Subtract |
| Wrong credit in pass book | Add | Subtract | Subtract | Add |
FOUR STARTING POINTS FOR BRS
- 1. Dr. balance as per cash book
- 2. Cr. balance as per cash book (Overdraft)
- 3. Cr. balance as per pass book
- 4. Dr. balance as per pass book (Overdraft)
Illustration 2
From the following particulars, prepare a Bank Reconciliation Statement for Jindal offset Ltd.
SOLUTION
| Particulars | Amount (₹) |
|---|---|
| Balance as per Cash Book | 2,40,000 |
| Add: Cheque issued but not presented | 1,36,000 |
| Interest credited by bank | 1,250 |
| 3,77,250 | |
| Less: Cheque deposited but not yet cleared | (90,000) |
| Bank charges debited by bank | (300) |
| Balance as per Pass Book | 2,86,950 |
Illustration 5
On 30th September, 2022, the bank account of X, according to the bank column of the Cash-Book, was overdrawn to the extent of ₹4,062.
SOLUTION — (a) Adjusted Cash Book
| Particulars | Amount (₹) | Particulars | Amount (₹) |
|---|---|---|---|
| To Party A/c (correction of double entry) | 16,000 | By Balance b/d | 4,062 |
| To Customer A/c (direct deposit) | 1,17,400 | By Bank charges | 580 |
| By B/R dishonoured | 1,40,000 | ||
| To Balance c/d | 11,242 | ||
| Total | 1,44,642 | Total | 1,44,642 |
(b) Bank Reconciliation Statement as on 30th September, 2022
| Particulars | Amount (₹) |
|---|---|
| Overdraft as per Cash Book | 11,242 |
| Add: Cheque deposited but not collected | 13,14,000 |
| 13,25,242 | |
| Less: Cheques issued but not presented | (13,26,000) |
| Credit by Bank erroneously | (20,000) |
| Credit balance as per bank statement | (20,758) |
Summary
- Bank pass book is merely a copy of the customer's account in the books of bank.
- Bank reconciliation statement is a statement which reconciles the balance as per cash book with the balance as per bank pass book by showing all causes of difference between the two.
- The salient features of bank reconciliation statement:
- The reconciliation will bring out any errors that may have been committed either in the cash book or in the pass book.
- Any undue delay in the clearance of cheques will be shown up by the reconciliation.
- A regular reconciliation discourages the accountant of the bank from embezzlement.
- It helps in finding out the actual position of the bank balance.
- The difference in the balances of both the books can be because of:
- Timing differences
- Transactions
- Errors
- Bank reconciliation can be started from any of the following four balances:
- Dr. balance as per cash book
- Cr. balance as per cash book
- Dr. balance as per pass book
- Cr. balance as per pass book
- There are two methods of reconciling the bank balances:
- Bank reconciliation statement without preparation of adjusted cash-book.
- Bank reconciliation statement after the preparation of adjusted cash-book.
Test Your Knowledge
True or False
- 1. Bank Reconciliation is the process of reconciling cash column of the cash book and bank column of the cash book. False
- 2. There are 3 types of differences between cash book and pass book namely Timing, Transactions & Errors. True
- 3. Adjusting the cash book for any errors and/or omissions before preparing bank reconciliation is optional when the reconciliation is done at the end of the financial year. False
- 4. Debit balance in cash book is same as overdraft as per pass book. False
- 5. Bank charges debited by the bank is an example of timing difference for the purposes of bank reconciliation. False
- 6. Overcasting of the debit side of the cash book is an example of a difference that is due to error. True
- 7. When we start bank reconciliation with a debit balance in cash book, then cheques issued but not yet presented should be added back to arrive at the balance as per pass book. True
- 8. The bank charges charged by the bank should be deducted when bank reconciliation statement is being prepared starting from a credit balance of pass book. False
- 9. When the causes of differences between pass book balance and cash book is not known, then the bank reconciliation statement can be prepared by matching the two books and identifying any unticked items in both sets. True
- 10. While preparing the bank reconciliation statement starting with debit balance as per pass book or bank statement, the deposited cheques that are not yet cleared need not be adjusted. False
- 11. Cash book shows a debit balance of ₹50,000 and the only difference from the balance as shown in pass book relates to cheques issued for ₹60,000 but not yet presented for payment. The balance as per pass book should be ₹1,10,000. True
- 12. Overcasting of credit side of the cash book shall result in a higher bank balance in cash book when compared with pass book balance. False
- 13. A cheque for ₹25,000 that was issued and was also presented for payment in same month but erroneously recorded on debit side of the cash book would cause a difference of ₹50,000 from the balance in pass book. True
- 14. A direct debit by bank on account of any payment as may be instructed by customer should be recorded on credit side of cash book. True
- 15. Bank Reconciliation Statement can be prepared in two formats — "Balance" presentation and "Plus & Minus" presentation. True
- 16. The difference between cash book & pass book that relates to errors are those mostly made by Bank. False
- 17. A cheque for ₹80,000 that was discounted from bank was dishonoured and the bank charged ₹1,600 as the charges on account of same. While starting with debit balance in cash book for preparing bank reconciliation statement, we need to deduct ₹78,400 to reconcile with pass book. False
- 18. Interest on savings bank that is allowed or credited by bank is generally recorded in cash book prior to it being recorded by bank. False
- 19. A regular bank reconciliation discourages the accountants to be involved in any kind of funds embezzlement. True
- 20. Timing difference relates the transactions that are recorded in the same period in both cash book and also the bank pass book. False
Multiple Choice Questions
| 1. When the balance as per Cash Book is the starting point, direct deposits by customers are: | (a) Added (b) Subtracted (c) Not required to be adjusted. |
| 2. A debit balance in the depositor's Cash Book will be shown as: | (a) A debit balance in the Bank Statement. (b) A credit balance in the Bank Statement. (c) An overdrawn balance in the Bank Statement. |
| 3. When balance as per Pass Book is the starting point, interest allowed by Bank is | (a) Added (b) Subtracted (c) Not required to be adjusted |
| 4. A Bank Reconciliation Statement is prepared with the help of: | (a) Bank statement and bank column of the Cash Book. (b) Bank statement and cash column of the Cash Book. (c) Bank column of the Cash Book and cash column of the Cash Book. |
| 5. The cash book showed an overdraft of ₹1,50,000, but the pass book made up to the same date showed that cheques of ₹10,000, ₹5,000 and ₹12,500 respectively had not been presented for payments; and the cheque of ₹4,000 paid into account had not been cleared. The balance as per the pass book will be: | (a) ₹1,10,000 (b) ₹2,17,500 (c) ₹1,26,500 |
| 6. When drawing up a Bank Reconciliation Statement, if you start with a debit balance as per the Bank Statement, the unpresented cheques should be: | (a) Added (b) Deducted (c) Not required to be adjusted. |
| 7. When drawing up a BRS if you start with a Dr. Balance as per Bank Statement, the following are added: 1. Cheque issued but not presented to bank 2. B/R collected directly by bank 3. Overcasting of the Dr. Side of bank A/c in the cash book. |
(a) only 1 (b) only 1 & 2 (c) all of the above |
| 8. A bank reconciliation statement is mainly prepared to: | (a) Reconcile the cash balance of the cash book (b) Reconcile the difference between the bank balance shown by the cash book and bank passbook (c) both a & b |
High-Yield Interactive Quiz — Bank Reconciliation Statement
Q1. Bank Reconciliation Statement reconciles the balance as per:
Correct Answer: B. Bank Reconciliation Statement reconciles the bank balance as per bank column of Cash Book with the balance as per Pass Book.
Q2. A credit balance in the Pass Book indicates:
Correct Answer: B. Credit balance as per Pass Book at a particular point of time is the deposit made by the customer.
Q3. Cheques issued but not presented for payment should be _____ when starting with Dr. balance as per Cash Book.
Correct Answer: B. When starting with Dr. balance as per Cash Book, cheques issued but not presented should be added.
Q4. Bank charges debited by the bank are an example of:
Correct Answer: B. Bank charges are transactions which the bank carries out by itself without intimating the customer.
Q5. Which of the following is NOT a cause of difference between Cash Book and Pass Book?
Correct Answer: C. The three causes of difference are Timing, Transactions, and Errors. Profit earned is not a cause of difference between Cash Book and Pass Book.
Q6. When starting with Dr. balance as per Cash Book, direct deposit by a customer should be:
Correct Answer: B. Direct deposit by a customer should be added when starting with Dr. balance as per Cash Book.
Q7. Overcasting of the debit side of the Cash Book will result in:
Correct Answer: B. Overcasting of the debit side of the Cash Book means more receipts are recorded, but since receipts increase the bank balance, overcasting would result in a higher balance. The question asks for overcasting of debit side which increases receipts, thus giving higher balance. However, if overcasting means excessive recording, it would show higher balance. But typically, overcasting of debit side means total of debit side is higher, giving higher balance. The key is that it's an error that affects the balance. For BRS with Dr balance as per Cash Book, overcasting of Dr side would need to be subtracted.
Q8. A regular Bank Reconciliation Statement helps in:
Correct Answer: D. Bank Reconciliation Statement helps in detecting errors, preventing fraud, and finding the true bank balance.
Q9. A cheque deposited into the bank but not yet cleared should be _____ when starting with Cr. balance as per Pass Book.
Correct Answer: B. When starting with Cr. balance as per Pass Book, cheques deposited but not cleared should be added.
Q10. Which of the following is an example of a timing difference?
Correct Answer: B. Cheque issued but not presented is a timing difference because it is recorded in Cash Book immediately but in Pass Book only when presented.
Q11. If the balance as per Cash Book is ₹50,000 and cheques issued but not presented are ₹20,000, the balance as per Pass Book will be:
Correct Answer: B. Dr. balance as per Cash Book ₹50,000 + Cheques issued but not presented ₹20,000 = ₹70,000 (Cr. balance as per Pass Book).
Q12. A Bank Reconciliation Statement is prepared:
Correct Answer: C. Bank Reconciliation Statement is typically done at regular intervals, such as monthly or quarterly, as part of normal accounting procedures.