Bank Reconciliation Statement Part 1

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Every business firm maintains all transactions relating to bank in a special book, called Cash Book (under Bank Column Cash Book). Also, every bank maintains an account for each customer. Under this account they record all deposits by the customer (business firm) on credit side and all withdrawals by the customer on debit side of his/her account. Sometimes, there may be a difference between these two books i.e. Bank Column Cash Book and Pass Book. In that situation we need to correct either Cash Book or Pass Book, it may be difficult and confusing. In order to avoid such difficulty every business firm prepares a separate statement to balance those two books. We call those statements as Bank Reconciliation Statements (BRS).

Bank Reconciliation Statement:

Bank Reconciliation Statement is a statement prepared to reconcile the difference between the balances as per the bank column of the cash book and pass book on any given date.

Need of Preparing BRS:

  • Preparation of BRS is not compulsory and there is not fixed date on which it is to be prepared.

  • It helps in detecting any errors in recording of transactions and ascertaining the correct bank balance on a particular date.

Reasons for Difference:

There are many reasons for difference in balance of cash book and pass book. Those are –

  1. Cheques issued by the firm are immediately recorded on the credit side of the bank column of the cash book. Receiving person may present the cheque in bank on some other date for payment. This creates a difference.

  2. Cheques deposited into bank are immediately recorded on the debit side of the bank column of the cash book. But, the bank credits the firm’s account after realisation of cheques. This creates a difference.

  3. Sometimes customers of the firm directly deposit the money into the bank and recorded in pass book. That is not recorded in cash book until the firm received a bank statement.

  4. Banks charge fees towards banking services like credit card issue, SMS alerts, interest on overdraft balance, cheque collection charges, maintenance charges etc. Those charges are recorded in pass book. The firm records those transactions after receiving the bank statements.

  5. Firms may hold shares in the share market. Banks deposit the interest or dividends received on debentures or shares by the firm, directly into the bank through Electronic Clearing System (ECS). Those transactions are recorded in pass book. The firm records those transactions after receiving the bank statements.

  6. Sometimes bank made direct payments (relating to Telephone bills, Rent, Insurance premium, Taxes etc.) as per standing instructions (auto pay) by the firm. Those transactions are recorded in pass book. The firm records those transactions after receiving the bank statements. As a result, the balance of pass book is greater than the balance of cash book.

  7. Sometimes, cheques deposited by the firm or bill receivables may be dishonored and the same is debited from the firm’s account, and record transaction in pass book. The firm later records the transaction in cash book after receiving bank statement.

  8. Firms may not record some transactions (omission of transactions) or record transactions wrongly in the cash book. As a result, there will be a difference in pass book and cash book.

  9. Bank may not record some transaction (omission of transactions) or record transactions wrongly in the pass book. As a result, there will be a difference.

Preparation of Bank Reconciliation Statement:

Bank Reconciliation Statements are prepared as per the situation. There are two such cases –

Favourable Balances: Firm’s deposits are more compared to withdrawals. It is a favourable condition for the firm.

  • Debit balance as per cash book is given and the balance as per pass bookis to be ascertained.

  • Credit balance as per pass book is given and the balance as per cash book is to be ascertained.

Procedure for BRS under favourable balance:

If we take starting balance as per Cash Book

  • Add all the transactions that have resulted in increasing the balance of pass book.

  • Deduct all transactions that have resulted in decreasing the balance of pass book.

  • Extract the net balance shown by the statement which should be same as shown in the pass book.

If we take starting balance as per Pass Book

  • Add all the transactions that have resulted in increasing the balance of cash book.

  • Deduct all transactions that have resulted in decreasing the balance of cash book.

  • Extract the net balance shown by the statement which should be same as shown in the cash book.

Example: From the following particulars of M/s Ananaya Industries, prepare bank

reconciliation statement as on December 31, 2006

  1. Bank balance as per cash book Rs.32,5000 or Bank Balance as per Pass book 40,700.

  2. Cheques deposited into bank but not credited upto December 31, 2006 Rs.8,900.

  3. Cheques issued but not presented for payment Rs. 12,500.

  4. Bank credited Rs.5,000 for receiving dividend through Electronic Clearing System.

  5. Bank charges debited by Bank Rs.400

Solution:

If we take starting balance as per Cash Book:

Bank Reconciliation Statement of M/s Ananya Industires as on December 31, 2006

Table of if We Take Starting Balance as Per Pass Book: Bank Reconciliation Statement of M/S Ananya Industires as on December 31, 2006
Title: Table of If we take starting balance as per Pass Book: Bank Reconciliation Statement of M/s Ananya Industires as on December 31, 2006

Particulars

(Plus)

Amount (Rs.)

(Minus)

Amount (Rs.)

  1. Balance as per Cash Book

  2. Cheques deposited but not credited by the bank

  3. Cheques issued but not presented for payment

  4. Divided received through ECS

  5. Bank charges debited by bank

    Balance as per pass book

32,500

12,500

5,000

8,900

4,00

40,700

50,000

50,000

If we take starting balance as per Pass Book:

Bank Reconciliation Statement of M/s Ananya Industries as on December 31, 2006

Bank Reconcliation
Ttile: Table of If we take starting balance as per Pass Book: Bank Reconciliation Statement of M/s Ananya Industires as on December 31, 2006

Particulars

(Plus)

Amount (Rs.)

(Minus)

Amount (Rs.)

  1. Balance as per Pass Book

  2. Cheques deposited but not credited by the bank

  3. Cheques issued but not presented for payment

  4. Divided received through ECS

  5. Bank charges debited by bank

Balance as per Cash book

40,700

8,900

4,00

12,500

5,000

32,500

50,000

50,000