Bank Reconciliation Statement Meaning
Bank Reconciliation Statement is a record book of the transactions
of a bank account. This statement helps the account holders to
check and keep track of their funds and update the transaction
record that they have made. Bank Reconciliation statement is also
known as bank passbook. The balance mentioned in the bank
passbook of the statement must tally with the balance mentioned in
the cash book. In the statement, all the deposit will be shown in the
credit column and withdrawals will be shown in the debit column.
However, if the withdrawal exceeds deposit it will show a debit
balance (overdraft).
Importance of Bank Reconciliation Statement
Generally while making a comparison between the company’s cash
book and bank balance, the balance does not tally. Therefore, it is
important to determine the cause for the difference and display
them in the bank reconciliation statement and then tally the two
balances. The bank reconciliation statement helps in explaining the
differences in the amount between the company’s cash book and
bank balance. The cash book and the bank passbook differences are
caused by:
• The difference in timing recording the transactions: The
difference in timing can be caused by many factors which are:
o Bank-issued cheque but not yet deposited for payment
o Paid cheque in the bank but yet not cleared
o Bank made direct debit from the customer’s side
o Cheque/ amount deposited directly to the bank account
o Dividends and Interest collected by the bank
o Bank made direct payment from the customer’s side
o Cheques deposited/bills discounted dishonoured
• Errors made by the company or by the bank: In a few
occasions, the error in two balances can be made from the
bank side or in the company’s cash book. Few errors are as
follows:
o Errors made while registering the transaction by the
company
o Errors made while registering the transaction by the bank
Types of Bank Reconciliation Statement
The Bank Reconciliation Statement can be prepared in 2 ways:
• Documenting of bank reconciliation statement without
adjusting the cash book balance.
• Filing of bank reconciliation statement after adjusting the cash
book balance.
Steps to Prepare Bank Reconciliation Statement:
o First, the date on which the statement is recorded is
mentioned.
o After which the balance displayed in the cash book is
mentioned in the statement. Sometimes, the balance
mentioned in the passbook can also be mentioned.
o The deposited cheques which are not collected are
deducted.
o Then the cheques issued but the deposited for payment,
but amount directly deposited in the bank account are
recorded
o All the transactions like overdraft interest, amount
debited by the bank but not recorded in the cash book,
cheques and bills dishonoured are deducted.
o All the credits and profit collected by the company and
directly deposited in the bank is added.
o Adjustments of errors are made
o Now the balance between the cash book and statement
should be equal or the same.
Need for Reconciliation:
1. Detection of Errors: Reconciliation of Cash Book and Pass Book
helps in detecting any error. An error can be either made by the bank
in the Pass Book or by the businessman in the Cash Book. When both
the books are compared, then an error if any, can be easily found.
2. Detection of Cause of Error: Bank Reconciliation Statement not
only helps in detecting the errors but also helps in detecting the
cause of that error. When both the books are compared, then the
cause can easily be found due to which wrong entry the balances are
not tallying.
3. Correction in Cash Book: With the help of Bank Reconciliation
Statement, corrections can be made in the Cash Book by comparing
it with the Pass Book. Cash Book can only be corrected when the
error and its cause is identified.
4. Knowledge of Bank Balance: Sometimes Cash Book shows less
balance, but in reality, bank account has not been debited yet. When
the actual bank balance is known to the business, it helps the
business in making future transactions in a better way.
5. Control over Misappropriation: Misappropriation of funds by the
personnel of the bank as well as the employees of the company can
be avoided if reconciliation is done at regular intervals. Reconciliation
helps in determining the actual position of the balance company as
any misappropriated figure can be detected easily.
Format of Bank Reconciliation Statement:
Illustration:
The balance of cash at bank as shown in the Cash Book of Sahil &
Co. on 31st December 2021 was ₹8,200. On comparing it with the
pass book, the following differences were noted:
1. Cheque sent for collection amounting to ₹6,400 have not
been cleared by the bank so far.
2. Cheque issued but not presented for payment ₹4,000.
3. Bank charges ₹200 not entered in the Cash Book.
4. Credit of ₹500 in the pass book in respect of interest was not
recorded in the Cash Book.
5. A vendor deposited ₹2,000 directly in our bank account which
was only recorded in the pass book.
6. As per standing instructions of Sahil & Co., the bank has made
the following payments:
• Insurance premium : ₹1,200
• Club Fees : ₹1,000
Prepare a Bank Reconciliation Statement as on 31st December
2021.
Solution:
