BANK RECONCILATION STATEMENT

Bank reconciliation statement is a statement prepared mainly to reconcile the difference

Causes of Differences in the Cash Book and Pass Book Balance

The difference may arise on account of the following reasons (a) Differences caused by Time
gap in recording transactions,

(b) Differences caused by errors committed in recording transactions

1. Differences caused by Time Gap in recording transactions

caused by the time gap in recording the transactions. The reasons for time gap a Quite often
the difference between the Cash Book and Pass Book balances follows:

(1) Cheques issued but not yet presented for payment in the Bank Wiena cheque is issued to
a creditor by the firm, it is immediately recorded on the cred of the bank column of the cash
book. But the bank will debit the firm's accout when this cheque is actually presented to the
bank for payment. Generally, them gap of some days between the issue of a cheque and its
presentation to the bank in the case of crossed cheques, the time lag is very high since such
cheques can be present for payment only through some bank. Thus, until the cheques are
presemedie payment, the cash book will show a reduced balance in comparison to the pass
book

(2) Cheques paid into the bank for collection but not yet credited by bank: When a firm
receives cheques, drafts etc. from its customers, they an immediately deposited into bank
for collection and an entry is made on the debit s of the bank column of the cash book. But
the bank will credit the firm's account m when it has actually collected the payment of these

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cheques from other banks, Ague there will be a gap of some days between the depositing of
the cheques into the bun and credit given by the bank. In the case of outstation cheques,
this gap will be ver high. Thus, until the cheques are collected and credited by the bank, the
cash book wil show an increased balance in comparison to the pass book.

(3) Cheques paid into the bank for collection but dishonoured by the bank When the
cheques received from outside parties are deposited with the bank, these at immediately
recorded on the debit side of the bank column of the cash book, but if ile cheques are
dishonoured, bank will not make any entry in the credit of custom account. As a result, the
cash book will show an increased balance in comparison pass book.

(4) Interest allowed by the bank: If a trader maintains a saving bunk aco the bank allows a
certain percentage of interest on the minimum balance of each mo in such an account.
Generally, the amount of such interest is credited by the bank ats end of six months. But the
customer will come to know of the amount of interest on when he gets his pass book
completed after a gap of time. In the intervening perial te balance of cash book will be
comparatively less than the balance of pass book

(5) Interest charged by the bank on Overdraft-When a bank gives a firm facility of
withdrawing in excess of its deposits, this excess withdrawal is called overdraft. The bank
charges interest on this overdraft and debits the firm's account from such interest from time
to time. But the entry for interest will be made in the cash

book only when the customer receives a statement from the bank or when he receives the
pass book duly completed. Until then, the balances of the two books will differ.

(6) Bank Charges and Commission charged by the bank: Bank renders many services to its
clients and charges certain amount for these services. The notable charges levied by the
bank are commission and collection charges on outstation cheques. The bank debits the
customer's account with these charges but the customer wall not make any entry in cash
book until he receives a statement from the bank. In the intervening period, the two
balances will differ.

(7) Direct deposit by customers into the bank :- Some customers may directly deposit the
amount in firm's bank account. The bank will immediately credit the firm's scount on receipt
of such a payment, but the firm will come to know of the deposit anly when it receives the
bank pass book duly completed after a gap of time. This also causes a difference.
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(8) Interest and dividend collected by the bank: Sometimes bank collects interest and
dividend on customer's investments. The bank credits the customer's account immediately
on receipt of such payments, but the customer will make entries in the cash book only when
he receives intimation from the bank pass book duly completed. Until such period, the two
balances will differ.

(9) Direct payment made by the bank on behalf of customers: Sometimes an account holder
gives a standing order to the bank to make certain payments such as insurance premium,
rent etc. on his behalf. The bank makes these payments and debits the party's account, but
the firm will be able to enter the same in its cash book only when the intimation is received
from the bank. In the intervening period, the cash book will show an increased balance in
comparison to the pass book.

(b) Differences caused by Errors Committed in Recording Transactions:

Sometimes the difference between the Cash Book and Pass Book balance may arise due to
errors committed in recording transactions in the Cash Book or in the Pass Book. Hence,
such errors may be of two types:

Errors committed in recording transactions by the firm: Sometimes the firm may commit
errors while recording entries in the Cash book. Such errors may be:

(1) Cheque issued to a creditor but omitted to be recorded in the Cash Book.

(ii) Cheques deposited into the bank but omitted to be recorded in the Cash Book.

(iii) Error in totalling or balancing the bank column of the Cash Book.

Errors committed in recording transactions by the bank: Sometimes the bank commits an
error and records a wrong entry in the customer's account which causes a difference
between the bank balance shown by the cash book and the balance shown by the pass
book.

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 ▪ Need and Importance of Bank Reconciliation Statement
It is essential to prepare a bank reconciliation statement due to the following reasons:-

(1) A bank reconciliation statement locates the errors or omissions that may have
been committed either on the part of the customer or the bank. The errors so
detected can be rectified accordingly.
(2) By preparing a bank reconciliation statement, the customer becomes sure of the
correctness of the bank balance shown by the cash book. It helps him in making
further transactions with the bank. For example, suppose the cash book shows a
bank balance of 20,000, whereas the balance shown by the pass book is ₹15,000.
By reconciling the two, it is disclosed that cheques for ₹5,000 were deposited
into the bank but have not been collected so far (or some of these have been
dishonoured). In such a case, further cheques will be issued by assuming the
bank balance of ₹15,000 only.
(3) A reconciliation statement facilitates the preparation of a revised cash book. For
example, the entries relating to bank charges, interest allowed or charged by the
bank, direct payment by the bank on our behalf etc. will be recorded in the pass
book but for which there is no entry in the cash book. Such entries will now be
recorded in the cash book as well.
(4) Periodic preparation of this statement reduces the chances of embezzlement by
the staff of the firm or even that of the bank. For example, if a cashier merely
makes an entry in the cash book but does not deposit the cash and cheques into
the bank, it will be disclosed by preparing a bank reconciliation statement.
(5) A reconciliation statement helps in revealing the unnecessary delay in the of
cheques by the bank.
(6) It also helps in keeping a track of cheques which have been sent to the bank for
collection.

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