Meaning

Bank Reconciliation Statement is a statement that shows the reasons of difference between the bank balance shown by the Cash Book and the bank balance shown by the Pass Book and thus reconciles the difference between the bank balances as per these two books.

Cash book is prepared by the customer where as Pass book is prepared by the bank. Cash book shows the transactions of a customer with the bank in view of customer where as pass book shows all these transactions from point of view of the bank.

Cash deposited by a customer in the bank is his asset but the same cash becomes liability for the bank as it is to be returned by the bank sooner or later. In the same manner, cash withdrawn by a customer from his account reduces his asset and thus reduces the liability of the bank in the same case.

So, it should be understood by the student that every transaction will be recorded in the exactly opposite manner in these two books, i.e. cash Book and pass Book.

 

Difference of bank balances

As these two books are prepared by different parties, there arise the chances of difference of bank balances shown by the cash book and pass book due to the following reasons:

1. Time difference in recording the transactions.

2. Errors made by the customer or bank.

1. Time difference in recording the transactions.

There can be time gap in recording the transactions relating either to payments or receipts.

(a) Cheques issued by the bank but not yet presented for payment.

(b) Cheques paid into the bank but not yet collected.

(c) Direct debits made by the bank on behalf of the customer.

(d) Amounts directly deposited in the bank account.

(e) Interest and dividends collected by the bank.

(f) Direct payments made by the bank on behalf of the customers.

(g) Cheques deposited/bills discounted dishonored.

2. Errors made by the customer or bank.

(a) Errors committed in recording transaction by the customer.

There can be excess/short debit/credit entry made in cash book.

There can be omission/double posting of an entry in the cash book.

(b) Errors committed in recording transactions by the bank.

There can be excess/short debit/credit entry made in pass book.

There can be omission/double posting of an entry in the pass book.

 

How to prepare Bank Reconciliation Statement?

Practically, Bank Reconciliation Statement is to be prepared by checking the entries made in cash book and pass book, for the same month.

In examinations, basically, there can be two situations:

1. Only one bank balance as per cash book or pass book is given:

In this case the other bank balance is to be calculated and there can be one of the following cases:

(a) When debit/ favorable balance as per cash book is given.

(b) When credit/ favorable balance as per passbook is given.

(c)When credit/ unfavorable/ overdraft balance as per cash book is given.

(d) When debit/ unfavorable/ overdraft balance as per passbook is given.

2. Both the bank balances are given. In this case it becomes easy for the student, as he is guided by the other balance given in the question.

However, in both the above two cases, method of preparing the Bank reconciliation statement is same.

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