Bank Reconciliation Statement

            It is a process which provides an explanation regarding the difference in bank statement of the organization and the bank statement being received by the organization from the bank where the account is being held. This is a normal way of doing the balancing of the cash balance of the organization and its bank balance. Bank reconciliation statement is being used for making sure that the payments being released by the organization are being accounted in the bank statement or not. This particular thing is going to help the organization to make sure that, it is being worked well towards the area of ensuring that, best results are being generated in the course of doing the tasks.

            There should actually not be any kind of difference in bank statement and statement of the bank in accounts of the company. This is going to be possible only at the time when the entries are being made in both pass book and cash book without any issue or trouble arising. At a particular date, it is being identified that the entries do not as some of the entries would be made in cash book and few other entries would be made in the passbook, therefore, the difference is definitely going to arise. For such kinds of differences, the statement is being prepared either with bank balance as per cash book or bank balance of the organization as per pass book.

Reasons for Differences

  1. Checks issued but not presented for payment by the payee.
  2. Checks deposited but not cleared by the bank.
  3. Direct payment into bank not recorded in books of accounts
  4. Penalties charges not recorded in books of accounts
  5. Wrong posting in cash book.

Importance of Bank Reconciliation Statement

            Bank reconciliation is a particular tool which is being used for ensuring that, irregularities are being detected and errors or frauds in bank statement could be identified by the organization in a proper way. The characteristics of bank statement are being provided in the present scenario by the organization.

  1. Bank reconciliation statement helps in finding out the efficiency of the balances being shown by passbook or cash book of the organization.
  2. Cash is considered to be most valuable and important asset of the organization. BRS helps in ensuring that, there are no unauthorized withdrawals being made from the bank.
  3. Reconciliation helps in finding out the error which is being missed in the books of accounts.
  4. Helps in finding out the undue delay in clearance of check.
  5. Helps in monitoring cash flows
  6. Helps in synchronization of cash balance and pass book balance.

Causes of Differences in Passbook and Cash Book

  1. Timing difference: Timing differences are the differences which are likely to arise at the time when entries in the cash book and pass book are not being recorded at the same time.
  1. Checks issued but not presented for payment: Here, the bank balance is going to higher in comparison to the cash balance of the organization. This is going to influence the balances until the time, checks are being cleared.
  2. Checks deposited but not cleared: Here, there will be lower balance in books of accounts of the organization and higher balance in bank accounts as the account would not impact as a result of the checks which are being deposited.

                                                          iii.      Amount credit by the bank but not accounted in books. There are certain times when the bank makes payment of interest on the account. In such cases, the funds though are being available in the account but the same is not being reported in books of account of the organization. In this case, the organization would be required to make the changes in books of accounts also.

  1. Debited by the bank but not accounted in books: There are situations wherein, the organization has debts in bank accounts in the name of EMI, LIC payments, online payments etc. In such cases, though, payments are will not be reflected in account books of the organization. In such cases, there will be the difference in balances of pass book and cash book of the organization at a particular point in time.
  2. Dishonor of bills receivable discounted by the bank: In this case, also, there will be differences in bank accounts and balance as per pass book. Necessary entries would be required to be made to make sure that, entries are being made properly without any issue or trouble taking place at a particular point in time.

Error in Recording Entries

            Errors are likely to occur in both the kinds of accounts i.e. cash book as well as in the case of passbook. Normally, banks do not make mistakes but in case, mistakes occur then, the mistakes will give rise to following categories of errors.

  1. Entry omission
  2. Wrong recording of the amount
  3. Entry recording on the wrong side of the book
  4. Incorrect balancing of the book.

Purpose of Bank Reconciliation Statement

           

Effects on balance on

Causes of Discrepancy

Adjustment in the statement of opening balance of

Cash book

Passbook

 

Cash book

Passbook

More

More

Less

Less

a).Check deposited in the bank but not yet cleared

b).Check deposited in the bank  but dishonored

Deduct

Add

Add

Add

Less

Less

More

More

a).Check issued but not presented for payment

b).Check issued but dishonored by the bank

Add

Add

Deduct

Deduct

 

The format of Bank Reconciliation Statement

           

 

Particulars

Amount

Amount

A

Balance as per cash book

 

XXX

B

ADD: 

 

 

  • Checks issued but not presented for payment in Bank

XXX

 

  • Interest credited in the bank but not recorded in cash book

XXX 

 

  • Debtors paid directly into bank but not recorded in cash book

XXX

 

  • Wrong credit by banker

XXX

 

  • Collection by banker as per customer standing instructions

XXX

 

TOTAL: (B)

 XXX

 

C

TOTAL :(A+B)

 

XXX

LESS:

 

 

 

  • Checks deposited but not credited by the bank

XXX

 

 

  • Dishonored checks presented by bank but not in cash book

XXX

 

 

  • Bank charges as per cash book

XXX

 

 

  • Wrong debit by banker

XXX

 

 

  • Payment as per standing instruction

XXX

 

E

                                                         TOTAL: (D)

 

XXX

F

                                                    TOTAL: (C-D)

 

XXX

 

An Example of Bank Reconciliation Statement

 

The bank account of XYZ was overdrawn to the extent of $5,000 as on 1st September 2014 and the bank statement showed a balance of $1,710 on the same date. Scrutiny of the cash book and bank statement finds the following issues:

  1. A check for $1,000 deposited on 31st August 2014 was credited by the bank only on 4th September 2014.
  2. A payment by check for $150 has been entered twice in the cash book on 29th August.
  3. On 31st August 2014, the bank credited an amount of $1,700 received from a customer of X, but the advice was not received by XYZ until 2nd September 2014.
  4. Bank charges amounting to $60 had not been entered in the cash book on 1st September.
  5. On 6th August 2014, the bank credited $1,000 to XYZ in error.
  6. A bill of exchange for $1,500 was discounted by XYZ with his bank. This bill was dishonored on 30th August 2014 but no entry has been made in the books of XYZ.
  7. Checks issued up to 1st September 2014 but not presented for payment up to that date totaled $3,000.

You are required:

  1. a) To show the rectifications in the cash book of XYZ, to arrive at the correct balance on 31st August 2014 and
  2. b) To prepare a BRS as on that date
  3. c) To make journal entries.

A.

CASH BOOK(Bank column)

 

 

 

 

Date: 2014

Particulars

$

Date: 2014

Particulars

$

1st Sept.

To party A/C

150

1st Sept.

By balance b/d

5000

 

To customer A/C

1700

 

By bank charges

60

 

To balance c/d

4710

 

By customer A/C

1500

 

 

6560

 

 

6560

 

 B.

Bank Reconciliation Statement as on 1st Sept.2017

Particulars

$

Overdraft as per cash book

4,710

Add: Check deposited but not collected up to 1st Sept. 2014

1,000

 

5,710 

Less: Check issued but not presented for payment up to 1st Sept. 2014

(3,000)

Credit by bank erroneously on 6th August 2014

(1,000)

Balance as per Bank Statement

1,710

 

 

C.

DATE

DESCRIPTION

Posting Reference

Dr.

Cr.

29th August 2014

Bank

XXX

150

 

 

Payment (Payment entered twice in the cash book)

XXX

 

150

30th August   2014

Debtors

XXX

 1500

 

 

Bank (The bill was dishonored but no entry was made)

XXX

 

 1500

31st August 2014

Bank

XXX

1700

 

 

Customer (Bank credited an amount but no entry has been made in the books of XYZ)

XXX

 

1700

1st September   2014

Bank Charges

XXX

60

 

 

Bank (Bank charges)

XXX

 

60


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