Unit – 3 Bank Reconciliation Statement

➢ Meaning

Bank Reconciliation Statement is a record book of the transactions of a bank account. This
statement helps the account holders to check and keep track of their funds and update the
transaction record that they have made. Bank Reconciliation statement is also known as bank
passbook. The balance mentioned in the bank passbook of the statement must tally with the balance
mentioned in the cash book. In the statement, all the deposit will be shown in the credit column
and withdrawals will be shown in the debit column. However, if the withdrawal exceeds deposit
it will show a debit balance (overdraft).

The cash Book and Pass Book are prepared separately. The Businessman prepares the Cash Book
and the Pass Book is prepared by the Bank (here by cash book we mean three column cash Book).
But as both the books are related to one person and same transactions are recorded in both the
books so the balance of both the books should match i.e. the balance as per Pass Book should
match to balance at bank as per cash book. But many a times these two balances do not agree then,
it becomes necessary to reconcile them by preparing a statement which is called Bank
Reconciliation Statement.

A BANK RECONCILIATION STATEMENT may be defined as a statement showing the items

➢ Importance of Bank Reconciliation Statement

Generally while making a comparison between the company’s cash book and bank balance, the
balance does not tally. Therefore, it is important to determine the cause for the difference and
display them in the bank reconciliation statement and then tally the two balances. The bank
reconciliation statement helps in explaining the differences in the amount between the company’s
cash book and bank balance. The cash book and the bank passbook differences are caused by:

• The difference in timing recording the transactions: The difference in timing can be caused
by many factors which are:

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 • Bank-issued cheque but not yet deposited for payment

• Paid cheque in the bank but yet not cleared

• Bank made direct debit from the customer’s side

• Cheque/ amount deposited directly to the bank account

• Dividends and Interest collected by the bank

• Bank made direct payment from the customer’s side

• Cheques deposited/bills discounted dishonoured

• Errors made by the company or by the bank: In a few occasions, the error in two balances
can be made from the bank side or in the company’s cash book. Few errors are as follows:

• Errors made while registering the transaction by the company

• Errors made while registering the transaction by the bank

➢ Types of Bank Reconciliation Statement

The Bank Reconciliation Statement can be prepared in 2 ways:

• Documenting of bank reconciliation statement without adjusting the cash book balance.

• Filing of bank reconciliation statement after adjusting the cash book balance.

Steps to Prepare Bank Reconciliation Statement:

• First, the date on which the statement is recorded is mentioned.

• After which the balance displayed in the cash book is mentioned in the statement.
Sometimes, the balance mentioned in the passbook can also be mentioned.

• The deposited cheques which are not collected are deducted.

• Then the cheques issued but the deposited for payment, but amount directly
deposited in the bank account are recorded

• All the transactions like overdraft interest, amount debited by the bank but not
recorded in the cash book, cheques and bills dishonoured are deducted.

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 • All the credits and profit collected by the company and directly deposited in the
bank is added.

• Adjustments of errors are made

• Now the balance between the cash book and statement should be equal or the same.

➢ NEED AND IMPORTANCE OF BANK RECONCILIATION STATEMENT

The need and importance of the bank reconciliation statement may be given as follows:

1. The reconciliation process helps in bringing out the errors committed either in cash Book or
Pass Book.

2. Bank reconciliation statement may also show any undue delay in the clearance of cheques.

3. Sometimes the cashier may have the tendency of cheating like he may made entries in the Cash
Book only but never deposit the cash into bank. These types of frauds by the entrepreneur’s staff
or bank staff may be detected only through bank reconciliation statement. So this way bank
reconciliation statement acts as a control technique too.

➢ Causes for differences

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A transaction relating to bank has to be recorded in both the books i.e. Cash Book and Pass Book
but sometimes it happens that a bank transaction is recorded only in one book and not recorded
simultaneously in other book this causes difference in the two balances. The causes for difference
may be illustrated in detail as follows:

Format of Bank reconciliation Statement

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Example – 11
Markson’s & Co. has a balance as per pass book of $1,000 as on 31st March 2019. It has a balance
as per Cash Book as on 31st March 2019 of $1050. Further details are as follows:

1. A cheque of $300 was deposited, but not collected by the bank.

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Example –12
Wright Inc. has a balance in a Passbook of $10,000 as on 31st December 2018. These are the other
details:

1. Three cheques of $2,000, $1,500 and $2,500 were deposited in the bank on 30th December
2018 but were recorded in the bank statement in January 2019.
2. Cheque of $500 issued on 31st December 2018 was not presented for payment.
3. A dividend of $1,000 on stocks was credited in Bank Account, but not recorded in Cash
Book.
4. A direct deposit of $400 was made in Bank Account by a customer, which was not recorded
in Cash Book.
5. Bank charges of $100 were entered only in Bank Passbook
6. Balance as per Cash Book on 31st December 2018 was $14,200.

Solution:

Bank Reconciliation Statement of Wright Inc. as on 31st December 2018

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Example –13
Rutherford Inc. has a difference in the balance as per Cash Book and bank statement as on
31st March 2019. You are advised to prepare a Bank Reconciliation Statement as on that date with
the following information:

1. Balance as per Bank Statement as on 31 st March 2019 is $4,000. Balance as per Cash Book
is $1,400.
2. Cheque of $1,000 and $500 issued as on 30th March 2019, but not yet cleared
3. An insurance premium paid by bank $200. It is not yet recorded in Cash Book.
4. An outgoing cheque of $2,000 recorded twice in the Cash Book. It is properly recorded in
the bank statement.
5. Payment of a cheque of $400 recorded twice in PassBook.
6. Dividends received $500 recorded only in the bank statements and not Cash Book.
7. Cheque of $700 deposited on 29th March 2019. But, it is not yet collected.
8. Bank charges of $100 debited only in Bank PassBook.

Solution: Bank Reconciliation Statement of Rutherford Inc. as on 31st March 2019

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➢ Extra Examples

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Bank Reconciliation Statement can be prepared as per the balance shown by Pass Book as the

starting point.

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Where abstracts from the cash book and the pass book are given

Illustration III:

From the following entries in the Bank column of Cash Book and the corresponding Pass Book,

prepare Bank Reconciliation Statement as on 30th June, 2006.

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