Definition: Bank Reconciliation Statement is inclined to acquire the balance of the passbook through the balance of cash book or to find the balance of the cash book by taking the balance of passbook on a precise date. The lag does not commonly matter as early or afterwards, the client and bank both will make the entries.

However, to understand the precise position and to make sure that no blunder has committed, the statement is must to clarify the reason behind the difference of the balances of the cash book, and the passbook on a particular date and this statement is known as Bank Reconciliation Statement.

 

Content: Bank Reconciliation Statement

1. What cashbook and passbook are?
2. Process of preparing Bank Reconciliation Statement
3. Reasons for differences
4. Format
5. Importance of Bank Reconciliation Statement
6. Conclusion

What cashbook and passbook are?

• Passbook: Passbook is a booklet accustomed to every client showing transactions of their individual bank account.
• Cashbook: It is the file of all the actions of bank deposits and bank withdrawals contrived by the business enterprise in a given course. Generally, the balances of both passbook and cashbook should tally.

 

Process of preparing Bank Reconciliation Statement

The bank frequently sends the statement to the customers displaying the position of their accounts. Generally, bank passbook is maintained through which bank notify their customer about their account balance and keep its copy at a bank to make sure that the balance of passbook should tally with the balance of the cashbook.

But, sometimes still there are some differences even there was no mistake this is because of some reasons for which Bank reconciliation statement needs to be prepared for correcting these differences arriving because of some entries made in the cash book and not in the passbook.

Similarly, some entries have recorded in passbook but not in the cash book.

 

Reasons for differences

Cheque reported in cashbook but still not credited by the bank: As soon as the cheques get received, immediate entry is made in the cash book, but it may take a day or more to send cheques to the bank, although the bank does not credit the customer’s account until the cheque are realized.

And if the cheque is of another bank it takes a long time for the realization. Meanwhile, the balance of the cash book and the passbook will differ.

• Cheque issued but not conferred for payment: At the time of issue of cheque, immediate entry is made in the cash book.

Still banks make no entry until the cheque gets presented for the payment in the bank which shows the higher balance in the bank and less balance in the cash book.

• Bank charges: The charges rendered for the services given by the bank are termed as bank charges and in case of the bank overdraft the bank also charges the interest.

These bank charges and interest are enrolled in the passbook, and the entry gets listed in the cash book only when passbook is acknowledged.

• Explicit assortment by the bank: The banks are generally allocated with the task of gathering interest among the securities or dividends on shares. The bank will credit the client’s account as soon as the sum is received.

But the entry by the client in the cash book must anticipate receipt of advice by the customer from the bank.

• Payments by the bank as per standing direction: The bank can also generate payments as per the instructions given by the client or against any appropriate direction like payment on demonstrating the documents for goods supply for which letter of credit has been opened already.

In such cases entries in the cash book are made on the certificate of advice from the bank.

Format

By taking the Debit balance of cash book

Particulars	Amount (₹)
Debit balance of cash book	xxx
(-) Entry done in cash book, but not recorded in passbook	(xxx)
(+) Cheque issued but not presented for payment	xxx
(+) Income received entered in passbook, but not in cashbook	xxx
(-) Bank charges not entered in cash book, but entered in passbook.	(xxx)
(+) Cheque directly deposited by the customer in a bank not recorded in the cash book	xxx
(-) Cheque deposited but dishonored.	(xxx)
(+) Amount paid directly to the authorities by the bank.	xxx
Credit balance of pass book (if positive balance)	xxxx
Debit balance of pass book (if negative balance)	(xxxx)

(In case of overdraft or negative balance of cash book, the opening balance should be recorded as negative balance, else assume the problem is that of debit cash balance type and treat accordingly)

 

By taking Credit balance of passbook

Particulars	Amount (₹)
Credit balance of pass book	xxx
(+) Cheque deposited but not cleared by bank	xxx
(-) Cheque expressed but not conferred for payment	(xxx)
(-) Income earned but listed in passbook only, not in cash book	(xxx)
(+) Bank charges listed in passbook but not in cash book	xxx
(-) Customer directly deposited the cheque in bank not entered in cash book.	(xxx)
(+) Cheque accumatted in the bank, dishonoured	xxx
(-) Amount directly paid to the authorities by the bank	(xxx)
Debit balance of cash book (if positive balance)	xxxx
Credit balance of cash book (if negative balance	(xxxx)

(In case of overdraft or negative balance of passbook, the opening balance should be recorded as negative balance, else assume the problem is that of credit cash balance type and treat accordingly)

 

Importance of Bank Reconciliation Statement

• Detect fault: If there has been an error by the accountant while preparing cash book or by the bank, while preparing the customer’s account in its book, they will be identified by preparing bank reconciliation statement.
• Discover inappropriate moratorium in the clearance of cheque: Due of various reasons the cheque deposited in bank delayed for clearing which shows the difference in the cash book and bank balance for identifying such situations Bank reconciliation statement is helpful.

It may be because of the outstation cheques which take a long time for clearing of the cheque; if we prepare the Bank reconciliation statement, we can try to ascertain the reason behind the undue delay.

• Forbid extortion: If the accountant makes an entry in the cash book of the cash received, but not deposited the amount in the bank it becomes difficult for the proprietor to find the reason of the difference.

But if the bank reconciliation statement is inclined, the fraud will easily be recognized.

• Reach at a amend cash balance: With the help of Bank reconciliation statement, we arrive at the balance that should display in the balance sheet at the end of the year.

We consider all the errors, income and expenses and pass necessary entries in the cash book and arrive at the correct bank balance.

 

Conclusion

Bank Reconciliation Statement is a statement, not an account and prepared by the account holder identifying the cause of difference between the bank balance as per cash book and that shown in passbook on a particular date.