1
BANK RECONCILIATION STATEMENT
Definition and Explanation:
It is important for businesses to make sure their financial information is accurate, complete
and consistent. Among other tools used to accomplish this, preparing accounting
reconciliations represents one of the more important ones. First, preparing reconciliations on
a regular basis helps ensure that cash is not stolen from your business. Next, reconciliations
serve as a means of identifying and fixing accounting errors (i.e., making sure all sales were
recorded, etc.). Finally, reconciliations can assist in finding un-posted bank transactions or
bank mistakes.
From time to time the balance shown by the bank and cash column of the cash book required
to be checked. The balance shown by the cash column of the cash book must agree with
amount of cash in hand on that date. Thus reconciliation of the cash column is a simple
matter. If it does not agree it means that either some cash transactions have been omitted
from the cash book or an amount of cash has been stolen or lost. The reason for the difference
is ascertained and cash book can be corrected. So far as bank balance is concerned, its
reconciliation is not so simple. The balance shown by the bank column of the cash book
should always agree with the balance shown by the bank statement, because the bank
statement is a copy of the customer's account in the banks ledger. But the bank balance as
shown by the cash book and bank balance as shown by the bank statement seldom agrees.
Periodically, therefore, a statement is prepared called bank reconciliation statement to find
out the reasons for disagreement between the bank statement balance and the cash book
balance of the bank, and to test whether the apparently conflicting balance do really agree.
BANK RECONCILIATION STATEMENT - MEANING AND NEED
Business concern maintains the cash book for recording cash and bank transactions. The Cash
book serves the purpose of both the cash account and the bank account. It shows the balance
of both at the end of a period. Bank also maintains an account for each customer in its book.
All deposits by the customer are recorded on the credit side of his/her account and all
withdrawals are recorded on the debit side of his/her account. A copy of this account is
regularly sent to the customer by the bank. This is called Bank statement. It is usual to tally
the firm’s bank transactions as recorded by the bank with the cash book. But sometimes the
bank balances as shown by the cash book and that shown by the bank statement do not match.
If the balance shown by the bank statement is different from the balance shown by bank
column of cash book, the business firm will identify the causes for such difference. It
becomes necessary to reconcile them. To reconcile the balances of Cash Book and bank
statement is prepared. This statement is called the ‘Bank Reconciliation Statement. It can be
said that: Bank Reconciliation Statement is a statement prepared to reconcile the
difference between the balances as per the bank column of the cash book and bank
statement on any given date.
Need of preparing Bank Reconciliation Statement
It is neither compulsory to prepare Bank Reconciliation Statement nor a date is fixed on
which it is to be prepared. It is prepared from time to time to check that all transactions
relating to bank are properly recorded by the businessman in the bank column of the cash
book and by the bank in its ledger account. Thus, it is prepared to reconcile the bank balances
shown by the cash book and by the bank statement. It helps in detecting, if there is any error
in recording the transactions and ascertaining the correct bank balance on a particular date.
, 2
REASONS FOR DIFFERENCE
When a businessman compares the Bank balance of its cash book with the balance shown by
the bank statement, there is often a difference. As the time period of posting the transactions
in the bank column of cash book does not correspond with the time period of posting in the
bank book of the firm, the difference arises. The reasons for difference in balance of the cash
book and bank book are as under :
1. Checks issued by the firm but not yet presented for payment
When checks are issued by the firm, these are immediately entered on the credit side of the
bank column of the cash book. Sometimes, receiving person may present these checks to the
bank for payment on some later date. The bank will debit the firm’s account when these
checks are presented for payment. There is a time period between the issue of check and
being presented in the bank for payment. This may cause difference to the balance of cash
book and bank statement.
2. Checks deposited into bank but not yet collected
When checks are deposited into bank, the firm immediately enters it on the debit side of the
bank column of cash book. It increases the bank balance as per the cash book. But, the bank
credits the firm’s account after these checks are actually realized. A few days are taken in
clearing of local checks and in case of outstation checks few more days are taken. This may
because the difference between cash book and bank book balance.
3. Amount directly deposited in the bank account
Sometimes, the debtors or the customers deposit the money directly into firm’s bank account,
but the firm gets the information only when it receives the bank statement. In this case, the
bank credits the firm’s account with the amount received but the same amount is not recorded
in the cash book. As a result the balance in the cash book will be less than the balance shown
in the bank book.
4. Bank Charges
The bank charge in the form of fees or commission is charged from time to time for various
services provided from the customers’ account without the intimation to the firm. The firm
records these charges after receiving the bank intimation or statement. Example of such
deductions is: Interest on overdraft balance, credit cards’ fees, outstation checks, collection
charges, etc. As a result, the balance of the cash book will be more than the balance of the
bank statement.
5. Interest and dividend received by the bank
Sometimes, the interest on debentures or dividends on shares held by the account holder is
directly deposited by the company through Electronic Clearing System (ECS). But the firm
does not get the information till it receives the bank statement. As a consequence, the firm
enters it in its cash book on a date later than the date it is recorded by the bank. As a result,
the balance as per cash book and bank book will differ.
6. Direct payments made by the bank on behalf of the customers
Sometimes, bank makes certain payments on behalf of the customer as per standing
instructions. Telephone bills, rent, insurance premium, taxes, etc are some of the expenses.
These expenses are directly paid by the bank and debited to the firm’s account immediately
after their payment. but the firm will record the same on receiving information from the bank
BANK RECONCILIATION STATEMENT
Definition and Explanation:
It is important for businesses to make sure their financial information is accurate, complete
and consistent. Among other tools used to accomplish this, preparing accounting
reconciliations represents one of the more important ones. First, preparing reconciliations on
a regular basis helps ensure that cash is not stolen from your business. Next, reconciliations
serve as a means of identifying and fixing accounting errors (i.e., making sure all sales were
recorded, etc.). Finally, reconciliations can assist in finding un-posted bank transactions or
bank mistakes.
From time to time the balance shown by the bank and cash column of the cash book required
to be checked. The balance shown by the cash column of the cash book must agree with
amount of cash in hand on that date. Thus reconciliation of the cash column is a simple
matter. If it does not agree it means that either some cash transactions have been omitted
from the cash book or an amount of cash has been stolen or lost. The reason for the difference
is ascertained and cash book can be corrected. So far as bank balance is concerned, its
reconciliation is not so simple. The balance shown by the bank column of the cash book
should always agree with the balance shown by the bank statement, because the bank
statement is a copy of the customer's account in the banks ledger. But the bank balance as
shown by the cash book and bank balance as shown by the bank statement seldom agrees.
Periodically, therefore, a statement is prepared called bank reconciliation statement to find
out the reasons for disagreement between the bank statement balance and the cash book
balance of the bank, and to test whether the apparently conflicting balance do really agree.
BANK RECONCILIATION STATEMENT - MEANING AND NEED
Business concern maintains the cash book for recording cash and bank transactions. The Cash
book serves the purpose of both the cash account and the bank account. It shows the balance
of both at the end of a period. Bank also maintains an account for each customer in its book.
All deposits by the customer are recorded on the credit side of his/her account and all
withdrawals are recorded on the debit side of his/her account. A copy of this account is
regularly sent to the customer by the bank. This is called Bank statement. It is usual to tally
the firm’s bank transactions as recorded by the bank with the cash book. But sometimes the
bank balances as shown by the cash book and that shown by the bank statement do not match.
If the balance shown by the bank statement is different from the balance shown by bank
column of cash book, the business firm will identify the causes for such difference. It
becomes necessary to reconcile them. To reconcile the balances of Cash Book and bank
statement is prepared. This statement is called the ‘Bank Reconciliation Statement. It can be
said that: Bank Reconciliation Statement is a statement prepared to reconcile the
difference between the balances as per the bank column of the cash book and bank
statement on any given date.
Need of preparing Bank Reconciliation Statement
It is neither compulsory to prepare Bank Reconciliation Statement nor a date is fixed on
which it is to be prepared. It is prepared from time to time to check that all transactions
relating to bank are properly recorded by the businessman in the bank column of the cash
book and by the bank in its ledger account. Thus, it is prepared to reconcile the bank balances
shown by the cash book and by the bank statement. It helps in detecting, if there is any error
in recording the transactions and ascertaining the correct bank balance on a particular date.
, 2
REASONS FOR DIFFERENCE
When a businessman compares the Bank balance of its cash book with the balance shown by
the bank statement, there is often a difference. As the time period of posting the transactions
in the bank column of cash book does not correspond with the time period of posting in the
bank book of the firm, the difference arises. The reasons for difference in balance of the cash
book and bank book are as under :
1. Checks issued by the firm but not yet presented for payment
When checks are issued by the firm, these are immediately entered on the credit side of the
bank column of the cash book. Sometimes, receiving person may present these checks to the
bank for payment on some later date. The bank will debit the firm’s account when these
checks are presented for payment. There is a time period between the issue of check and
being presented in the bank for payment. This may cause difference to the balance of cash
book and bank statement.
2. Checks deposited into bank but not yet collected
When checks are deposited into bank, the firm immediately enters it on the debit side of the
bank column of cash book. It increases the bank balance as per the cash book. But, the bank
credits the firm’s account after these checks are actually realized. A few days are taken in
clearing of local checks and in case of outstation checks few more days are taken. This may
because the difference between cash book and bank book balance.
3. Amount directly deposited in the bank account
Sometimes, the debtors or the customers deposit the money directly into firm’s bank account,
but the firm gets the information only when it receives the bank statement. In this case, the
bank credits the firm’s account with the amount received but the same amount is not recorded
in the cash book. As a result the balance in the cash book will be less than the balance shown
in the bank book.
4. Bank Charges
The bank charge in the form of fees or commission is charged from time to time for various
services provided from the customers’ account without the intimation to the firm. The firm
records these charges after receiving the bank intimation or statement. Example of such
deductions is: Interest on overdraft balance, credit cards’ fees, outstation checks, collection
charges, etc. As a result, the balance of the cash book will be more than the balance of the
bank statement.
5. Interest and dividend received by the bank
Sometimes, the interest on debentures or dividends on shares held by the account holder is
directly deposited by the company through Electronic Clearing System (ECS). But the firm
does not get the information till it receives the bank statement. As a consequence, the firm
enters it in its cash book on a date later than the date it is recorded by the bank. As a result,
the balance as per cash book and bank book will differ.
6. Direct payments made by the bank on behalf of the customers
Sometimes, bank makes certain payments on behalf of the customer as per standing
instructions. Telephone bills, rent, insurance premium, taxes, etc are some of the expenses.
These expenses are directly paid by the bank and debited to the firm’s account immediately
after their payment. but the firm will record the same on receiving information from the bank
