Preparation of Bank Reconciliation Statement

Preparation of Bank Reconciliation Statement

Once you have identified all the causes that create a difference between the Cash Book balance and the Pass Book balance, the actual reconciliation can be carried out. The textbook presents two distinct methods for doing this.

Two Methods of Reconciliation

The first method is preparation of the Bank Reconciliation Statement without adjusting the Cash Book balance. Under this approach, you take the balance as shown by one book (say, the Cash Book) and then list all the items that cause a difference, adding or subtracting them to arrive at the balance shown by the other book (the Pass Book). The Cash Book balance itself is not changed or corrected in the process — you simply work out the arithmetic to prove that the two balances agree.

The second method is preparation of the Bank Reconciliation Statement after adjusting the Cash Book balance. Here, you first update the Cash Book by recording those transactions that the bank has already entered but the business has not yet recorded in its own books (such as bank charges, interest credited by the bank, direct deposits, or dishonoured cheques). Once the Cash Book balance is corrected to reflect the true bank balance, the reconciliation becomes straightforward — the adjusted Cash Book balance should directly equal the Pass Book balance.

Why Adjust the Cash Book First?

The logic is simple. The Cash Book is the business's own record of its bank account. If the bank has recorded certain transactions (like a service charge or an interest payment) that the business has not yet entered, the Cash Book balance is technically incorrect. Before you can reconcile, you must bring the Cash Book up to date by recording those missing entries. Only then does the Cash Book show the true bank balance, and the reconciliation becomes a matter of confirming that the two records now match.

Accounting Treatment for Adjustments

When you adjust the Cash Book, each adjustment requires a journal entry in the books of the business. The rule is straightforward:

• If the bank has credited the business's account (e.g., interest earned, direct deposit from a customer), the business must debit the Bank Account in its Cash Book and credit the corresponding income or liability account.
• If the bank has debited the business's account (e.g., bank charges, cheque dishonour fee), the business must credit the Bank Account in its Cash Book and debit the corresponding expense or asset account.

For example, if the bank credits ₹500 as interest:

If the bank debits ₹200 as bank charges:

Summary of the Two Approaches

| Method | What You Do | When It Is Used |

|--------|-------------|-----------------| …