Financial Accounting Unit 8

Unit 8 Bank Reconciliation Statement

Structure:
8.1 Introduction
Objectives
8.2 Meaning of Bank Reconciliation Statement
8.3 Importance of Bank Reconciliation Statement
8.4 Reasons for Difference
8.5 Procedure for Reconciliation
8.6 Summary
8.7 Terminal Questions
8.8 Answers

8.1 Introduction
In the previous unit you have learnt how to prepare final accounts of both
trading and corporate firms. Financial statement consists of trading and
profit and loss account, position statement (balance sheet) and cash flow
statement.
In this unit, you will learn about bank reconciliation statement which details
the difference between bank balance shown in the firm’s book of accounts
and bank statement issued by the banker of the firm. There are various
types of transaction that are omitted or not known in either of the records.
Time to time reconciling is a necessity in the form of bank reconciliation
statement.
Objectives:
After studying this unit, you should be able to:
 define the meaning of bank reconciliation statement
 identify the reasons for difference
 formulate the procedure for reconciliation
 construct bank reconciliation statement

8.2 Meaning of Bank Reconciliation Statement

Business concern maintains the cash book for recording cash and bank
transactions. All the bank transactions will be recorded in the bank column
of cash book and cash transactions will be in the cash column. In Cash book
all deposits/receipts will be recorded on the debit side of cash book and all
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withdrawals/payments will be recorded on the credit side. The format of

three columnar cash book is given in Unit 4 [Refer Table 4.7 – Specimen
of Cash Book with bank and discount column]
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 as per the
Bank books.
A copy of this account is regularly sent to the customer by the bank which is
called as ‘Pass Book’ or “Bank statement”. Often, it is seen that both the
balances will not get tallied due to non-record of some transactions in either
of the books.
A reconciliation statement has to be prepared to identify the reasons for
non-agreeing of the balances and reasons for that. Such kind of statement
is called as “Bank Reconciliation statement”

A bank reconciliation statement is a statement prepared to explain the

reasons for the disagreement between the bank balance as shown by
the cash book and the bank balance as shown by the pass book as on a
particular date.

8.3 Importance of Bank Reconciliation Statement

The bank balance shown in the cash book cannot be taken as an authentic
figure unless you identify the difference between the bank balance as per
cash book and the balance shown by the bank in the bank statement. Once
you identify the reasons for the difference, you must see to it that there is no
accounting error or omission. If there is any, it should be immediately
recorded in the books of accounts. On the other hand, if the error or
omission is on the part of the bank they should be informed to the bank
immediately. Pending correction by the bank the difference would remain.
The importance of the bank reconciliation statement may be given as
follows:
1. It helps in identifying the difference and the reason for difference.
2. It helps to identify the errors committed either in cash book or pass
book.

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3. It also shows the undue delay in the clearance of cheques

4. It helps in locating the various entries entered by bank with regard to
bank interest, bank charges, etc...
Self Assessment Questions:
Fill in the blanks with suitable word:
1. The customer’s account with the bank is called as _____________.
2. In the bank column of the cash, the cheques deposited are entered on
the __________ book.
3. Bank Reconciliation statement is prepared to ____________ the bank
balance as shown by the cash book and the bank statement.
4. Cheques issued are posted on the ____________ side of the bank
column of Cash Book.
5. The credit column of pass book should be equal to ___________
column of cash book and debit column of pass book should equal to
_____________ column of cash book, if there are no differences.

8.4 Reasons for Difference

There are so many reasons which cause differences in the balances
between cash book and pass book. 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 pass book of the firm, the difference
arises. The reasons for difference in balance of the cash book and pass
book are as under:
1) Cheques issued to suppliers but not yet presented for payment:
Whenever the cheques are issued, the payments side of the bank
column of cash book will be recorded but the corresponding entry will be
done by bank in the pass book only after the cheque is presented for
payment and duly paid. This may take some days’ time and hence
causes the difference on a particular date.
2) Cheques deposited into the bank but not yet collected
When the cheques are deposited into bank, the receipts side of bank
column of cash book will be recorded and corresponding entry will be
done by the bank in the passbook only after the cheque is collected.
This may take generally some days and in case of outstation cheques, it

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may take few more days which may cause the difference of balances on
a particular date.
3) Amount directly deposited in the bank account
It happens sometimes, the debtors or customers of the business may
deposit some amount which is due from them into the firm’s account
directly and the bank will immediately enter the amount. But the firm will
come to know about it only after receiving the bank statement. This is
also one reason to cause the difference on a particular date.
4) Cheques received and entered in the cash book but not deposited
into bank for collection:
Sometimes the customer might have received a cheque from a third
party and entered in the cash book but forgotten to send it to the bank
for collection. As the cheque has not been sent to the bank for
collection, no entry was made for this transaction in the ledger as well as
in the pass book. In such a case, if the two balances are compared, they
will not agree with each other.
5) Cheques issued and entered in the cash book but dishonoured by
the bank:
When the cheques are issued, they will be immediately entered in credit
side of cash book bank column, but when they were presented for
payment, it got dishonored due to some technical reason. In this case,
no entry will be made by the bank in the ledger as well as in the pass
book. In such a case, if the cash book balance and the pass book
balance are compared, they will differ from each other.
6) 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.
7) Interest and dividends or any incomes 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

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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 the cash book and pass
book will differ.
8) 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 but the firm will record the same on receiving information
from the bank in the form of Pass Book or bank statement. As a result,
the balance of the pass book is less than that of the balance shown in
the bank column of the cash book.
9) Dishonour of Cheques/Bill discounted:
If a cheque deposited by the firm or bill receivable discounted with the
bank is dishonoured, the same is debited to firm’s account by the bank.
But the firm records the same when it receives the information from the
bank. As a result, the balance as per cash book and that of pass book
will differ.
Self Assessment Questions:
State whether the following statements are True or False:
6. Bank credits firm’s account as soon as it receives cheques from the
firm.
7. Bank charges are entered in the pass book first.
8. Banks make certain payments on behalf of the customer under his
standing instructions.
9. In case of cheques issued but not encashed, the balance of pass book
will be less than the balance of Cash Book.
10. Direct deposits in the bank by a customer would increase the balance
shown by the Pass Book.

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Activity 1: Fill in the blank column

Cash book shows
Cash book shows
debit balance i.e.,
credit balance i.e.,
bank statement
Information bank statement
shows credit
shows debit balance
balance
CB to BS BS to CB CB to BS BS to CB
Cheques issued but not presented in
Add Less
the bank
Cheques paid into bank but not
Less Add Less
collected and credited by the bank
Credit, if any in the bank statement Add Less
Debit, if any in the bank statement Add Add

Source: http://www.accountingformanagement.com/three_column_cash_ book.htm

8.5 Procedure for Reconciliation

Now, a reconciliation statement needs to be prepared to reconcile the
balance in pass book balance with cash book balance or vice-versa. We
may have the following different situations with regard to balances while
preparing the Bank Reconciliation statement. These are:
1. Favourable balances
a) Debit balance as per cash book is given and the balance as per pass
book is to be ascertained
b) Credit balance as per pass book is given and the balance as per
cashbook is to be ascertained

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Figure 8.1: Depicts the procedure for reconciliation from Cash book (debit
balance) to Pass book

Fig. 8.1: Procedure for Reconciliation-1

Figure 8.2 Depicts the procedure for reconciliation from Pass book (credit
balance) to Cash book

Fig. 8.2: Procedure for Reconciliation-2

The following steps are taken to prepare the bank reconciliation statement:
(i) Favourable balances: When debit balance as per cash book or credit
balance as per pass book is given :
a) Take balance as a starting point say Balance as per Cash Book.

Step 1: Debit balance as per Cash Book

E.g.: As on 31st March 2006, the bank column of its cashbook
showed a debit balance of Rs.20,000.

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b) Add all transactions that have resulted in increasing the balance of the
pass book.

Step 2: Add all transactions that have resulted in increase in

pass book balance
E.g.: 1.Cheque issued but not yet presented
2. Cheques received by the bank directly but not recorded in
the cash book.

c) Deduct all transactions that have resulted in decreasing the balance of

pass book.

Step 3: Deduct all transactions that have resulted in decrease

in pass book balance
Eg: 1. Cheques deposited but not yet credited
2. Bank charges not yet recorded in the Cash Book

d) Extract the net balance shown by the statement which should be the
same as shown in the pass book.

Step 4: After the adjustments balance arrived = Pass book

balance
E.g.: Balance as per Pass book

Illustration 1:
XYZ Ltd. maintains a current account with the Syndicate Bank of India. As
on 31st March 2006, the bank column of its cashbook showed a debit
balance of Rs.20,000. However, the bank statement showed a different
balance as on that date. The following are the reasons for such a difference:
1. Cheque deposited but not yet credited by the bank 3,000
2. Cheque issued but not yet presented 2,000
3. Bank charges 3,000
4. Cheques received by the bank directly 7,000
5. Insurance premium paid by the bank as per standing
instructions not yet intimated 3,000

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Prepare bank reconciliation statement and find out the balance as per the
bank statement
Solution:
Bank Reconciliation Statement as on 31st March 2006
Balance as per cash book (given) (step 1) 20000
Add: (step 2)
 Cheques issued but not presented 2000
 Cheques received by the bank directly but not
recorded 7000 9000
29000
Less: (step 3)
 Cheques deposited but not yet credited 3000
 Bank charges not yet recorded in the CB 3000
 Insurance premium paid by the bank directly 3000 9000
Balance as per Pass book (step 4) 20000

(ii) Favourable balances: When credit balance as per pass book is given:
a) Take balance as a starting point say Balance as per Pass Book.

Step 1: Credit balance as per Pass Book

E.g.: Balance as per the pass book Rs.35,750

b) Add all transactions that have resulted in decreasing the balance of pass
book.
Step 2: Add all transactions that have resulted in decrease in
pass book balance
E.g.: 1. Cheques deposited but not yet credited
2. Bank charges not yet recorded in the Cash Book

c) Deduct all transactions that have resulted in increasing the balance of

the pass book.
Step 3: Deduct all transactions that have resulted in increase in
pass book balance
E.g.: 1.Cheque issued but not yet presented
2. Cheques received by the bank directly but not recorded in
the cash book
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d) Extract the net balance shown by the statement which should be the
same as shown in the pass book.

Step 4: After the adjustments balance arrived = Cash book

balance
E.g.: Balance as per Cash book

Illustration 2:
From the following particulars of Reena Traders, prepare a bank
reconciliation statement on June 30, 2006.
1. Balance as per the pass book Rs.35,750
2. Rs.250 charges for credit card fee is debited by bank, which is not
recorded in cash book.
3. Cheques for Rs.7,550 are deposited in the bank but not yet collected by
the Bank.
4. There was also a debit in the pass book of Rs.3,500 in respect of a
discounted bill dishonoured.
th
Bank Reconciliation Statement as on 30 June, 2006

Bank balance as per pass book ( step 1) 35750

Add: (Step 2)
 Credit card charges not yet recorded in the cash 250
book
 Cheques deposited but not yet credited 7550
 Discounted bill dishonoured 3500 11300

Bank balance as per cash book ( step 4) 47050

Self Assessment Questions:

From the following transactions, please specify which transactions are to be
added or deducted to the cash book balance given: Mention “A” if to be
added and “D” if to be deducted:
11. Interest allowed by Bank ( )
12. Cheques deposited with bank and dishonoured ( )
13. Cheques issued but not encashed ( )
14. Bank charges ( )
15. Insurance premium paid by bank ( )
16. Dividends on share collected by bank ( )

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2. Unfavourable balance/overdraft balance

The firm can use overdraft or cash credit facility and withdraw excess
amount from the bank according to the limit sanctioned by the bank. In such
a case, the account will show a negative balance or debit balance. This
balance amount is called ‘overdraft balance’ as per Pass Book. This is
shown in the cash book as a credit balance and in the pass book on debit
side.
Figure 8.3 Depicts the procedure for reconciliation from Cash book (credit
balance) to Pass book balance.

Fig. 8.3: Procedures for Reconciliation-3

Figure 8.4 Depicts the procedure for reconciliation from Pass book (debit
balance) to Cash book.

Fig. 8.4: Procedure for Reconciliation-4

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a) Credit balance as per cash book (i.e. overdraft) is given and the balance
as per pass book is to be ascertained.

Illustration 3:
On December 31, 2006, the cash book of the M/s. Mona Plastics shows the
credit balance Rs.6,500. Cheques amounting to Rs.3,500 deposited into
bank but were not collected by the bank. Firm issued cheques of Rs.1,000
which were not presented for payment. There was a debit in the pass book
of Rs.200 for interest and Rs.400 for bank charges. Prepare Bank
Reconciliation Statement.
Bank Reconciliation Statement as on 31st December, 2006
Particulars Amount Amount
Overdraft Balance as per Cash book (Given) 6500
Less: Cheques issued but not presented for payment (1000) (1000)

Add:
 Cheques deposited but not yet collected by the bank 3500
 Bank charges not yet recorded 400
 Interest not yet intimated 200 4100
Overdraft Balance as per Pass Book 9600

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Illustration 4:
The following particulars are available for Ashima Travels as of 31st July
2006.
Bank overdraft as per Cash Book on 31st July, 2006 Rs.45,000
Cheques issued but not presented for payment Rs.17,500
Cheques deposited but not yet collected by the bank Rs.9,600
Interest on investment collected by the bank Rs.2,300
Bank charges Rs.350 debited by the bank not yet entered in the cash book.
Prepare a Bank reconciliation statement of Ashima Travels as on
31st July, 2006.
st
Bank Reconciliation Statement of Ashima Travels for 31 July 2006
Particulars Amount Amount
Bank Overdraft as per Cash book 45000
Less:
 Cheques issued but not presented for payment 17500
 Interest on Investment collected by bank 2300 (19800)
Add:
 Cheques deposited but not yet collected by the 9600
bank
 Bank charges not yet recorded 350 9950
Bank Overdraft as per Pass Book 35150

Illustration 5:
ABC Ltd.’s cashbook showed a bank overdraft of Rs.12,000 as on 30th June
2004. The bank statement as on that date also showed an overdraft but the
figure is different. The following are the causes.
1. Cheques deposited but not yet collected Rs.1,500
2. Cheques issued but not yet presented for payment Rs.2,000
3. A cheque of Rs.1,500 deposited on 15th May, 2004 was dishonoured on
19th June, 2004 but not intimated by the bank till 30th June, 2004
4. Bank charges not recorded in the cash book Rs.1,000
5. Interest on overdraft not intimated Rs.1,200

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Bank Reconciliation Statement for 30th June 2004

Particulars Amount Amount
Bank Overdraft as per Cash book 12000
Less:
 Cheque issued but not presented for payment 2000
(2000)
Add:
 Cheque deposited but not yet collected by the 1500
bank
 Cheque dishonoured by bank but not recorded 1500
in the cash book
 Bank charges not yet recorded 1000
 Interest on Overdraft not intimated 1200 5200
Bank Overdraft as per Pass Book 15200

b) Debit balance as per pass book (i.e. overdraft) is given and the balance
as per cash book is to be ascertained.

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illustration 6:
From the following particulars of Neha and Co. prepare Bank Reconciliation
Statement on March 31, 2008.
Rs.
Overdraft as per pass book 16,500
Interest on overdraft 1,600
Insurance premium paid by the bank 800
Cheques deposited but not yet credited 5,500
Cheques issued but not present for payment 6,000
Wrong credit to firm account by the bank 1,000
st
Bank Reconciliation Statement as on 31 March, 2008
Particulars Amount Rs. Amount Rs.
Bank overdraft as per Pass Book 16,500

Add:
Cheques issued but not presented for payment 6,000
Wrong credit to firm account by Bank 1,000
7,000
Less : 23,500
Interest on Overdraft 1,600
Insurance Premium paid by Bank 800
Cheques deposited but not credited 5,500 (7,900)

Overdraft Balance as per Cash Book 15,600

Self Assessment Questions:

Fill in the blanks with suitable word:
17. Overdraft means _________ balance.
18. The balance of cash book is __________ in case of overdraft.
19. Bank charges will __________ in case of overdraft as per Cash Book
20. Cheques issued but not encashed will __________ the overdraft as per
Pass Book.
21. Interest allowed by bank will be __________ in case of the favourable
balance of cash book.

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Activity 1

Cash book shows

Cash book shows
debit balance i.e.,
credit balance i.e.,
bank statement
bank statement
Information shows credit
shows debit balance
balance

CB to BS BS to CB CB to BS BS to CB

Cheques issued but not

Add Less Less Add
presented in the bank

Cheques paid into bank but not

collected and credited by the Less Add Add Less
bank

Credit, if any in the bank

Add Less Less Add
statement

Debit, if any in the bank

less Add Add Less
statement

8.6 Summary
Let us recapitulate the important concepts discussed in this unit:
 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.
 There are certain reasons due to which a difference in the balance of
Pass Book and Cash Book take place. These are as follows:
(a) Cheques issued by the firm but not yet presented for payment.
(b) Cheques deposited into the bank but not yet collected.
(c) Amount directly deposited in the bank account.
(d) Bank Charges
(e) Interest and dividend received by the bank.
(f) Direct payments made by the bank on behalf of the customer.
(g) Cheques/discounted bills dishonoured.

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 Different situations for preparing the Bank Reconciliation statement.

These are:
1. Favourable balances
(a) Debit balance as per cash book is given and the balance as per
pass book is to be ascertained.
(b) Credit balance as per pass book is given and the balance as
per cash book is to be ascertained.
2. Unfavourable balance/overdraft balance
(a) Credit balance as per cash book (i.e. overdraft) is given and the
balance as per passbook is to be ascertained.
(b) Debit balance as per pass book (i.e. overdraft) is given and the
balance as per cashbook is to be ascertained.

8.7 Terminal Questions

1. What is a Bank Reconciliation statement?
2. Why there is a need of preparing Bank Reconciliation statement?
3. Enumerate the causes of difference in the balance of cash book and
pass book.
4. From the following particulars, prepare Bank Reconciliation statement as
on December 31, 2006.
1) Balance as per Cash Book Rs.4,200
2) Cheques issued but not presented for payment Rs.2,000
3) Cheques deposited but not collected Rs.3,000
4) Bank charges debited by the bank Rs.250.
5. Prepare Bank Reconciliation statement as on March 31, 2006. On this
date the Passbook of M/s Noopur Industries showed a balance of
Rs.27,500.
1) Cheques of Rs.14,000 directly deposited by a customer.
2) Cheques for Rs.13,500 were issued during the month of March but
of these cheques for Rs.1,500 were not presented by the end of
March.
3) The bank collected Rs.2,500 as dividend on shares.
4) Cheques of Rs.17,500 were paid into bank but of Rs.8,500 were
realised in the month of April.

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5) On April 1, 2006, Rohan had an overdraft of Rs.16,000 as shown by

the cash book.
6) Cheques amounting to Rs.6,000 had been paid by him but not
collected by the bank till date.
7) He issued cheques of Rs.8,000 which were not presented to the
bank for payment.
8) There was a debit in his passbook of Rs.500 for interest and Rs.200
for bank charges and a cheque of Rs.5,000 was paid into bank but
the same was debited twice in the cash book. Prepare Bank
Reconciliation Statement.
6. Overdraft shown by the passbook of M/s. Mohit trader is Rs. 40,000.
Prepare Bank Reconciliation statement on December 31st, 2006.
(a) Bank charges debited as per pass book Rs.1,000
(b) Received a payment directly from customer Rs.7,000
(c) Cheques wrongly recorded in debit side of cash book Rs.4,000
(d) Cheques issued but not presented for payment Rs.9,800
(e) Cheques deposited with the bank but not collected Rs.12,500
(f) Insurance premium paid by the bank Rs.3,500
7. On 31st December 2008, the cash book of Mr. Bhargav showed a
balance of Rs.12,000 at bank.
1) He has sent cheque amounting to Rs.8,000 to the bank before 31st
December 2008. But it appears from the pass book that cheque
worth Rs.4,000 only had been credited till the date.
2) Similarly out of cheque for Rs. 5,000 issued during the month of
December, cheques worth Rs. 2,000 were presented and paid in
January 2009.
3) The pass book also showed the following payments: Rs.1,320 on life
insurance policy as per instructions and Rs.2,000 against a
promissory note as per instructions.
4) The pass book showed that the bank had collected Rs.6,000 interest
on Government Securities.
5) The bank had charged interest Rs.150 and bank charges Rs.120.
6) There was no entry in the cash book for the payments, interest
collected etc.
8. Prepare a reconciliation statement as on 31st December 2008 and
indicate what balances the bank pass book show on that date.

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8.8 Answers
Self Assessment Questions:
1. Bank Statement/Pass book
2. Debit side
3. Reconcile
4. Credit
5. Debit, Credit
6. False
7. True
8. True
9. False
10. True
11. A
12. D
13. A
14. D
15. D
16. A
17. Negative
18. Negative
19. Increase
20. Decrease
21. Added to
Terminal Questions:
1. It is a statement which is prepared to identify the reasons which cause
the disagreement of cash and pass book balances. Please refer 8.2 for
more details.
2. In order to locate the differences and to know the unrecorded
transactions either from firm side or bank side, bank reconciliation
statement will be prepared. Please refer 8.3 for more details.
3. Cheques deposited but not yet collected, cheques issued but not yet
presented for payment, bank charges etc. are the reasons for difference.
Please refer 8.4 for more details.
4. Balance as per Pass Book is Rs.2,950
5. Balance as per Cash Book is Rs.9,500

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6. Overdraft as per pass Book is Rs.23,200

7. Overdraft as per cash book is Rs.40,800
8. Balance as per pass book is Rs.12,410

References:
 Ashok Banerjee (2009) Financial Accounting, Excel Books.
 P. C. Tulsian (2009) Financial Accounting, Pearson Education.
 R. L. Gupta, Radhaswamy (2010), Financial Accounting. S. Chand and
Company.
 Maheshwari S. N. and S. K. Maheshwari (2009), Advanced Accountancy,
Vikas Publishing House.

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