The bank and its customer (that is, a
business entity) maintain independent records in respect of the transactions
taking place between them. Therefore, it is necessary to reconcile the bank
statement balance with the bank balance in the cashbook to be sure that the two
correspond on the amount of money deposited and cheques drawn. Usually, as
earlier pointed out, the bank column balance and bank statement do not agree
hence, they need to be reconciled.
Definition
Bank
reconciliation statement may be defined as a statement showing the items of differences between the cash Brook balance
and the bank balance, prepared on any day for reconciling the two balances.
Bank Reconciliation
Statement is a statement prepared to reconcile the difference between the
balances as per the bank column of the cash book and pass book on any given
date.
Causes
For Differences
A transaction relating to
bank has to be recorded in both the books i.e. Cash Book and bank statement 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:
Unpresented
Cheques
These are cheques issued out but not presented to the bank for payment. Bank balance will exceed cashbook balance to the extent of the value of these cheques. To reconcile both balances, the amount should either be added to cashbook balance or subtracted from the bank balance.
These are cheques issued out but not presented to the bank for payment. Bank balance will exceed cashbook balance to the extent of the value of these cheques. To reconcile both balances, the amount should either be added to cashbook balance or subtracted from the bank balance.
Uncredited
Cheques
These are cheques received from other parties and lodged with the bank but have not been cleared by the bank and credited into the firm’s account. Bank balance will be less than the cashbook balance to the extent of these cheques. To reconcile, the amount should either be deducted from the cashbook balance or added to the bank balance.
These are cheques received from other parties and lodged with the bank but have not been cleared by the bank and credited into the firm’s account. Bank balance will be less than the cashbook balance to the extent of these cheques. To reconcile, the amount should either be deducted from the cashbook balance or added to the bank balance.
Standing Order
Payments
This is an order given to a bank by its customer to make regular payments of a certain amount to another person’s account on his/her behalf. The customer is then notified afterwards through a document known as a debit advice. A good example of this sort of payment is life assurance premium, or any other standing contributions.
This is an order given to a bank by its customer to make regular payments of a certain amount to another person’s account on his/her behalf. The customer is then notified afterwards through a document known as a debit advice. A good example of this sort of payment is life assurance premium, or any other standing contributions.
Standing
Receipts or Remittance
These are incomes flowing directly to a customer’s account from sources such as dividends and interest. The bank receives the income, which may be on a regular basis, on behalf of the customer and subsequently credits his/her account before the relevant credit advice is sent to the customer.
If credit or debit advice has not been received by the date of the reconciliation, the bank balance will exceed the cashbook balance. To reconcile, the cashbook should be adjusted if the income or payment relates to the expired period. If this is not necessarily so, however, the amount should be added to the cashbook balance or deducted from the bank balance.
These are incomes flowing directly to a customer’s account from sources such as dividends and interest. The bank receives the income, which may be on a regular basis, on behalf of the customer and subsequently credits his/her account before the relevant credit advice is sent to the customer.
If credit or debit advice has not been received by the date of the reconciliation, the bank balance will exceed the cashbook balance. To reconcile, the cashbook should be adjusted if the income or payment relates to the expired period. If this is not necessarily so, however, the amount should be added to the cashbook balance or deducted from the bank balance.
Bank
Charges
These consist of all debit advice's raised by the bank to cover sundry fees payable by the customer, for instance, cost of cheque book, commission on turnover, transfer fees, special clearance fees, interest charges, etc. These charges are usually notified to the customer by means of a document known as a “debit advice”. If the customer has not received the relevant advice, the bank balance will be less than the cashbook balance. Therefore, the cashbook should be adjusted with the charges since they invariably relate to the outgoing period.
These consist of all debit advice's raised by the bank to cover sundry fees payable by the customer, for instance, cost of cheque book, commission on turnover, transfer fees, special clearance fees, interest charges, etc. These charges are usually notified to the customer by means of a document known as a “debit advice”. If the customer has not received the relevant advice, the bank balance will be less than the cashbook balance. Therefore, the cashbook should be adjusted with the charges since they invariably relate to the outgoing period.
Dishonoured
Cheque
This is a cheque which a bank's customer lodged into a bank as a collection from a debtor or payment made by cheque from a similar source but returned unpaid for reasons such as irregular signature, alteration in date, name or figure without endorsement, lack of adequate money in the account, etc. To reconcile, the cashbook will need to be readjusted by crediting the adjusted cashbook and debiting the customer’s account. This is a reversal of the entries previously made in those accounts.
This is a cheque which a bank's customer lodged into a bank as a collection from a debtor or payment made by cheque from a similar source but returned unpaid for reasons such as irregular signature, alteration in date, name or figure without endorsement, lack of adequate money in the account, etc. To reconcile, the cashbook will need to be readjusted by crediting the adjusted cashbook and debiting the customer’s account. This is a reversal of the entries previously made in those accounts.
Differences
Caused by Errors
Sometimes
the difference between the two balances may be accounted for by an error on the
part of the bank or an error in the cash book of the business. This causes
difference between the bank balance shown by the cash book and the balance
shown by the bank statement.
- Errors committed in recording transaction by the firm. Omission or wrong recording of transactions relating to cheques issued, cheques deposited and wrong totalling, etc. committed by the firm while recording entries in the cash book cause difference between cash book and passbook balance.
- Errors committed in recording transactions by the bank. Omission or wrong recording of transactions relating to cheques deposited and wrong totalling, etc. committed by the bank while posting entries in the passbook also cause differences between passbook and cash book balance.
Stages in Bank
Reconciliation
- Tick items on the debit side of the cashbook against items on the credit side of the bank statement. Outstanding items on the debit side of the cashbook but missing on the credit side of the bank statement are credited cheques. List them.
- Tick items on the credit side of cashbook against items on the debit side of the bank statement. Items outstanding on the credit side of the cashbook but missing on the debit side of the bank statement are Unpresented cheques. List them.
- The remaining items on the debit side of the bank statement arebank charges and standing order. List them.
- The remaining items on the credit side of the bank statement are amounts paid into the bank directly for the benefit of the business entity by its customers (that is direct credits).
- After all these have been adjusted; it should be possible to reconcile the cashbook balance with the balance on the bank statement. If it is not, then there are some errors, which, further investigation would reveal and be traced to their sources.
Importance Of Bank Reconciliation
Statement
The need and importance of the bank reconciliation statement may be given as follows:
The need and importance of the bank reconciliation statement may be given as follows:
- The reconciliation process helps in bringing out the errors committed either in cash Book or Pass Book.
- Bank reconciliation statement may also show any undue delay in the clearance of cheques.
- 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.
- Charges and interest: granted by the bank for whatever reason can be seen and cashbook adjusted without waiting for debit or credit advice.
- A firm can take advantage of any float that may be seen when the cashbook balance is compared with the bank statement balance. Float is the surplus from the bank statement balance against cashbook balance, which may be as a result of Unpresented cheques.