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Principles and Practice of Accounting

CA FOUNDATION - PAPER 1 - Principles and Practice of Accounting
Accounting plays a vital role of core competence for Chartered Accountants. It accelerates and develops the strong basics
to understand the financials of business world in a better way. Considering this objective, it has been decided to bring forth
a crisp and concise capsule on Bank Reconciliation Statement covered in the syllabus of Paper 1: Principles and Practice
of Accounting. The concepts involved in this chapter has been gathered and presented through pictorial presentations
which will help the students in grasping the intricate practical aspects for quick revision. Under no circumstances, such
revision can substitute the detailed study of the material provided by the Board of Studies. Students are advised to refer
the Study Material for comprehensive study.

CHAPTER 3: BANK RECONCILIATION STATEMENT

Introduction
The objective of Bank Reconciliation statement is to understand
passbook and cash book and reconciliation between the two. The
reconciliation brings out any errors that may have been committed
either in the cash book or in the passbook . A regular reconciliation
discourages the accountant of the bank from embezzlement.
Bank Passbook
Bank passbook is a copy of the customer’s
account in the book of a bank where all deposits
and withdrawals made by the customer during
the particular period is recorded.

The bank balance shown in the passbook is

Banks are A Bank accepts Thus, money known as pass book balance for reconciliation
essential deposits from which would purpose. The credit balance as per passbook is the
institutions in a people, in various have been deposit made by the customer while debit balance
is the overdraft balance for the customer.
modern society. forms, and lends otherwise idle is
Now-a-days, funds to those put to use and is
most of the who need; made available
transactions of it also invests to those who
the business are some funds need it. Bank Reconciliation Statement
done through in profitable To reconcile means to find out the difference between two and
bank whether it investments. eliminating that difference.
is a receipt or a Whenever we deposit or withdraw money from banks, it is always
payment. recorded at two places:-

Bank column of the cash

book (in customer books); Bank statement (pass book i.e.
in the banks books)

The cash book is

But most of the
maintained by the The statement which
times these two balances
person having the bank reconciles the bank balance
do not match. The
account whereas the bank as per cash book with the
process of eliminating this
statement is prepared by balance as per the pass book
difference and bringing the
the bank. Therefore, the by showing all the causes
two statements in line with
balance in both should be of difference is known as
each other is known as
equal and opposite “BANK RECONCILIATION
“Reconciliation”.
in nature. STATEMENT”.

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Principles and Practice of Accounting

Salient features of Bank If the bank has allowed interest to the customer,
Reconciliation Statement the entry will normally be made in the customer’s
account and later shown in the pass book. The
Interest customer usually comes to know about the interest
allowed by
bank amount by pursuing the pass book and only then he
makes relevant entry in the cash book.
The Any undue A regular It helps in
reconciliation delay in the reconciliation finding out the
will bring out clearance of discourages actual position
any errors that cheques will the accountant of the bank Like (iii) above, the interest charged by the bank
may have been be shown of the balance. and the bank charges are entered in the customer
committed up by the bank from account and later in the pass book. The customer
Interest and makes the required entries only after he sees the
either in the reconciliation. embezzlement. expenses
cash book or in charged by pass book. These are debited to customer account
the passbook. the bank by bank therefore, bank balance as per pass book is
less than bank balance as per cash book.

Sometimes investments are left with the bank in

Importance of Bank Reconciliation Statement Interest and the safe custody; the bank itself sees to it that the
dividends interest or the dividend is collected on the due
collected by dates.
the bank
It is a very important tool for
internal control of cash flows. The bank may be given standing instructions for
certain payments for eg. insurance premium. In
Direct
payments by this case also, the customer may come to know of
It helps in detecting errors, frauds the bank the payment only on seeing the pass book.
and irregularities occurred, if any, at
the time of passing entries in the cash
book or in the pass book, whether If such a payment is received by the bank, it will be
intentionally or unintentionally. entered in the customer’s account and also in the
Direct
payment into pass book; the account holder may come to know
the bank by a of the amount only when he sees the pass book.
customer
Causes of Difference
The difference in bank balance as per cash book and passbook may If the bank is not able to receive payment on
arise because of the following reasons:- promissory notes discounted by it, it will debit
Dishonour
of a bill the customer’s account together with the charges
TIMING TRANSACTIONS ERRORS discounted it may have incurred. The customer will make the
Sometimes a There are Mistakes or errors made in with the bank entry only when he sees the pass book.
transaction is v a r i o u s preparing the accounts either
recorded at transactions by the bank or the customer If goods are sold, the documents may be sent
two different which the bank can also result in disagreement through the bank. If the bank is able to collect the
times in cash carries out by of the two statements. For Bills collected
book and the itself without this reason rectification by the bank amount, it will credit the customer’s account. The
passbook. intimating the of errors is required to be on behalf of customer may make the entry only on receiving
the customer the pass book.
customer. done in both the statements
before preparing any Bank
Reconciliation Statement. While recording the entries, error can occur
in both cash book and pass book. A bank rarely
Errors makes any error but if does, the balance in the pass
Some of the items that frequently cause a difference book will naturally differ from cash book.
are as follows :-
The entry in the cash book is made immediately on
Cheques issue of cheque but entry will be made by the bank Following is the table summarising in brief the
issued but not only when the cheque is presented for payment. timings of different transactions:
presented for There will thus be a gap of some days between the
payment entry in the cash book and in the pass book. Sl. Transaction Time of recording Time of recording
No. in cash book in pass book
1. Payment done At the time At the time of
As soon as cheques are sent to the bank, entries are by the account of issuing the presenting the
made on the debit side of the bank column of the holder through cheque. cheque to the bank
Cheques cash book. But usually banks credit the customer’s issuing a cheque. for payment.
paid into the account only when they have received the payment 2. Receipt by the At the time of At the time of
bank but not from the bank concerned due to which there will be
cleared account holder depositing the collection of amount
gap between the entry in both books. through a cheque. cheque into the from the account of
bank. the issuing party.

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Principles and Practice of Accounting

Sl. Transaction Time of recording Time of recording
No. in cash book in pass book TYPES OF PRACTICAL
3. Collection of bills/ When the entry is When the amount PROBLEMS
cheque directly posted in the pass is collected by the
on behalf of the book. bank.
account holder.
4. Direct payment When the entry is When the amount is When causes of When causes of
to the third party posted in the pass paid by the bank. difference are given difference are not given
on behalf of the book.
account holder.
5. Dishonour of When the entry is When the cheque is When causes of differences are given
cheque/ bills posted in the pass dishonoured.
receivable. book. Given the causes of disagreement, the balance of the other
book can be either more or less. If the balance of the other
6. Bank charges When the entry is When charges are book is more then add the amount and if the balance of the
levied by the posted in the pass levied by the bank. other book is less then subtract the amount.
bank. book.
7. Interest and When the entry is When interest or
dividend credited posted in the pass dividend is allowed or
by the bank. book. collected by the bank. If a reconciliation starts from debit balance of cash book and
8. Interest debited When the entry is When interest is after all adjustments the balance arrived is positive then it is
by the bank. posted in the pass charged by the bank. known as Cr. balance as per the pass book and if the balance
book. is negative then it is said to be Dr. balance as per the pass
book and vice-versa.
Procedure for Reconciling the Cash Book Balance
with the Pass Book Balance
But if causes of differences are not given
Similarly ‘Cr. balance as
‘Dr. balance as per cash per cash book’ means Compare the debit entries of cash book with the
book’ means deposits in excess amount over credit entries of the pass-book and vice-versa.
the bank or cash at bank deposits withdrawn by The entries, which do not tally, are the causes of
or Cr. balance as per the account holder or difference in the balances of both the books. Once
pass book. overdraft balance or Dr. the causes are located, their effects on both the books
balance as per pass book. are analysed and then reconciliation statement is
prepared to arrive at the actual bank balance.

It means that you can start bank reconciliation from any of the
following four balances i.e. One should also take into care that whether opening
balance of both the books at particular point of time
Cr. balance from where the books are compared, tallies or not. If
as per pass opening balances are not same then unticked items
Dr. balance book
as per pass are divided into two categories i.e., one relating to
Cr. balance book reconciliation of opening balance and other relating
as per cash to reconciliation of closing balance.
Dr. balance book
as per cash
book

Methods of Bank Reconciliation

Bank Reconciliation Statement without the preparation of Adjusted Cashbook
Causes of differences Favourable balance Unfavourable balance Favourable balance Unfavourable balance
(Dr.) as per cash- book (Cr.) as per cash- book (Cr.) as per pass- book (Dr.) as per pass- book
Cheque deposited but not cleared Subtract Add Add Subtract
Cheque issued but not presented Add Subtract Subtract Add
to bank
Cheque directly deposited in bank Add Subtract Subtract Add
by a customer
Income (e.g., interest from UTI) Add Subtract Subtract Add
directly received by bank
Expenses (e.g., telephone bills, Subtract Add Add Subtract
Insurance charges) directly paid by
bank on standing instructions
Bank charges levied by bank Subtract Add Add Subtract
Locker rent levied by bank Subtract Add Add Subtract
Wrong debit in the cash book Subtract Add Add Subtract

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Principles and Practice of Accounting

Causes of differences Favourable balance Unfavourable balance Favourable balance Unfavourable balance
(Dr.) as per cash- book (Cr.) as per cash- book (Cr.) as per pass- book (Dr.) as per pass- book
Wrong credit in the cash book Add Subtract Subtract Add
Wrong debit in the pass book Subtract Add Add Subtract
Wrong credit in pass book Add Subtract Subtract Add
Undercasting of Dr. side of bank Add Subtract Subtract Add
account in the cash book
Overcasting of Dr. side of bank Subtract Add Add Subtract
account in cash book
Undercasting of Cr. side of bank Subtract Add Add Subtract
account in cash book
Overcasting of Cr. side of bank Add Subtract Subtract Add
account in cash book
Bill receivable collected directly by Add Subtract Subtract Add
bank
Interest on bank overdraft charged Subtract Add Add Subtract
Final Balance If answer is If answer is positive If answer is positive If answer is positive
positive then then unfavourable then favourable then unfavourable
favourable balance balance(Dr.) as balance (Dr.) as balance (Cr.) as
(Cr.) as per pass-book per pass-book and per cash-book and per cash book and
and if negative then if negative then if negative then if negative then
unfavourable balance favourable balance unfavourable balance favourable balance (Dr.)
(Dr.) as per pass-book. (Cr.) as per pass-book. (Cr.) as per cash-book as per cash-book.

Bank Reconciliation Statement after the preparation of Adjusted Cashbook

Adjusted Cash Book While adjusting cash-book, the following adjustments

are considered:-
But if reconciliation When the balance in the
is done at the end of cash book is first adjusted
the accounting year or for certain adjustments Omissions
financial year, the cash- before taking it to the All the errors (like (like bank charges
book must be adjusted bank reconciliation wrong amount recorded in the
so as to reflect the statement, then it is recorded in the pass-book only, interest
correct bank balance in known as adjusted cash cash-book, entry debited by the bank,
the balance sheet. book balance. posted twice in the direct receiptor payment
cash-book, over/ by the bank, dishonour
undercasting of the of cheques/bills etc.)
Adjusting the cash-book before balance etc.) and by the cash-book are
preparing the bank reconciliation taken into care
statement is completely optional,
if reconciliation is done during
different months.

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