What is a Bank Reconciliation Statement? 

As a commerce student, we all know that every business has to maintain a cash book to maintain all his cash and bank transactions. A cash book is a book which has two columns, one cash column and one bank column.  

Availability of cash in the firm is shown in the Cash column of the cash book and the availability of cash at bank with the firm is shown in the bank column of the cash book. 

 It is quite common and also compulsory for every bank to keep the record of their customer in their books of account. Like every customer deposit is recorded in the credit of the customer account and any withdrawal by any customer is recorded by the bank in the debit side of their account.  

But, sometimes it may happen that balances in the cash book don’t match with the balances available in the pass book. In that situation, business has to identify the reason for the mismatch between the balances of the pass book and the cash book, so that corrective measures should be taken to reconcile the differences. 

 So, a reconciliation statement is prepared to reconcile the differences between the passbook and the cash book, and that statement is known as the Bank Reconciliation statement. 

From the above book, you can see that the cash book and pass book shows a difference of $260. So through bank reconciliation statements businesses concile these differences so that cash book balances will be equal to passbook balances. 

Reasons for the Difference Between Cashbook and Passbook Balances 

So, given below is the explanations of the differences are: 

Cheques recorded in cash book but not yet credited by bank: This problem arises when ,if any business receives any cheques,then business immediately does entry on the debit side of the cash book. After receiving the cheque, the firm sends it to the bank for collection, but the bank will debit the firm account only when the bank receives the cheques. So, it may be possible that it takes some time so till that time cash book and pass book balances show some difference i.e. cash book shows more balances than pass book in the customer account. 

For example companies receive a cheque on 2/04/2019 and send it to the bank for collection but the bank does the entry on 5/04/19 so, till that time the balances between the cash book and pass book differ. 

Cheque issued but not yet presented for payment in the bank:whenever a cheque is issued to a creditor by the business, firm record this transaction immediately on the credit side of the cash book. But the bank will debit the business account only when this cheque is presented in the bank. So, the difference in the days in the process of issuing and presenting cash books and passbooks showing different balances. In this case, the cash book shows more balances than the pass book. 

For example, Firm issues a cheque to its creditor on 1st July 2018 but the creditor goes to the bank after some days i.e. on 7th July 2018. So, from the date 2nd, July 2018 to 6th July 2010, cash and passbooks show different balances. 

Bank charges: As the bank provides various services to its customers, the bank charges some amount for the services they provide. So take an example of one service overdraft facility, so if the bank provides overdraft facility to its customer the bank charges some interest for this facility and the bank makes an entry in the debit side of the pass book but the firm records it in their cash book when they are informed about these charges. So between this time, the cash book and the pass book balances differ from each other. 

Interest and dividend collected by the bank: Sometimes the customer trusts the bank instruct them to collect all the interest on investment or dividend on shares or any due amount on bills of exchange. So, whenever the bank receives any interest on the account of customer they immediately credit their pass book with the respective amount but no entry is made in the cash book. So, till that time the pass book shows more balances than the cash book. 

Direct payment through bank: sometimes, the customer instructs the bank to make payment for any expenses like loan installment, electricity expense. So the bank makes payment according to the customer instructions on behalf of them, and after payment bank debit the pass book but no entry is made in the cash book till the time the customer doesn't receive information about the payment. So, it is one of the reasons due to which balances of cash book and pass book differ.  

Direct payment into the bank by a customer:suppose any customer have any due amount with the bank, and that customer directly pay the due amount in to the firm account then the bank the bank credit the balance in the pass book but no entry is made in the cash book till the firm didn’t receive the bank statement. Therefore, the balance as per pass book shows higher as compared to balance as per cash book. 

Errors and omission: while maintaining the pass book by the bank or cash book by the firm, there may be chances of some error or omission committed from any side. For example – suppose a cheque $12000 is issued to a creditor but it is recorded as an $1200 in the pass book . so, because of this error, the pass book shows less amount than the pass book. 

Another example of omission, suppose a cheque is deposited in the bank $20,000 but related to this transaction there is no entry made in the cash book. So, sue to this omission, pass book balances and cash book balances differ from each other. 

Interest allowed by the bank: Time- To–time bank provides interest to its customer on the deposit. So, when the bank provides any such interest they credit the passbook at that time no such entry is done in the cash book regarding such payment. So, because of this, the balance of the cash book and the balance of the passbook doesn’t match each other.

How Reconciliation is Done

From the above picture, it can conclude that bank statements are prepared by business and bank. Businesses keep all the records in the cash while the banks keep all the records in the bank statement and whatever is the difference that is adjusted by both of them in their respective books  and then the reconciliation is done. 

Practice Problem 

Company X has a balance as per cash book on 31st march 2018 $5000.

• A check of $5000 was deposited in the bank, but yet not received by the bank.
•  A check of $2000 is issued to a creditor, but yet not presented in the bank.
• A bank collected a direct deposit of $500 in the bank account of the account holder, but not recorded in the cash book.
• Bank charges of $700 recorded in the pass book, but no such entry is done in the cash book.
• Balance as per pass book on 31st march 2018 $1,800.

We will prepare the bank reconciliation statement as follows:

Context and Applications   

This topic is significant in the professional exams for both undergraduate and graduate courses, especially for: 

• Bachelors of Commerce
• Masters of Commerce