Accountancy · Ch 5 — Bank Reconciliation Statement
Need for Reconciliation
Need for Reconciliation
Why Reconciliation Is Needed
When a firm compares the bank balance shown in its own cash book with the balance shown in the bank's passbook (or bank statement), the two figures almost never match on a given date. This is not unusual — it happens because the cash book and the passbook are maintained by two different parties (the business and the bank), and each records transactions at slightly different points in time. The process of identifying why these balances differ and systematically listing those reasons in a single statement is called preparing a Bank Reconciliation Statement.
The purpose of this statement is not to correct the cash book or the passbook — it is to explain the difference. Once the reasons are known, the two balances can be reconciled (made to agree). Without this reconciliation, a firm cannot be sure that its cash book balance is accurate or that the bank's records are complete.
What You Need to Begin
To prepare a bank reconciliation statement, you need three things:
- The bank balance as per the firm's cash book on a specific date.
- The bank statement (passbook) for the same date.
- Details of all entries in both books — so that every item that appears in one but not the other can be identified.
You compare the entries in the two books, note the items that cause the difference, and record each such item with its amount. These items are then arranged in a standard format to produce the reconciliation statement.
Proforma of the Bank Reconciliation Statement
The standard format (as given in the textbook) is shown below. It starts with the balance as per the cash book, then adds items that increase the passbook balance (but are not yet in the cash book), and subtracts items that decrease the passbook balance (but are not yet in the cash book). The result is the balance as per the passbook.
| Particulars | Amount (₹) |
|---|---|
| Balance as per cash book | ....... |
| Add: Cheques issued but not presented | ....... |
| Interest credited by the bank | ....... |
| Less: Cheques deposited but not credited by the bank | ....... |
| Bank charges not recorded in the cash book | ....... |
| Balance as per the passbook | xxxx |
This is the simplest proforma. However, the textbook also presents a two-column format that is more convenient for regular use. In this format, one column is for additions (+) and the other for deductions (–). The items are listed once, and each is placed in the appropriate column.
| Particulars | Amount (₹) (+) | Amount (₹) (–) |
|---|---|---|
| Balance as per cash book | ...... | |
| Cheques issued but not presented | ...... | |
| Interest credited by the bank | ...... | |
| Cheques deposited but not credited by the bank | ...... | |
| Bank charges not recorded in the cash book | ...... | |
| Balance as per the passbook | xxxx |
In the two-column format, the net effect of the (+) and (–) columns gives the passbook balance. This is the format most commonly adopted in practice.
Causes of Difference
The textbook identifies two broad categories of causes that create a difference between the cash book balance and the passbook balance:
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Timing differences — A transaction is recorded in one book earlier than in the other. For example, a cheque deposited by the firm is recorded immediately in the cash book, but the bank credits it only after the cheque is cleared (which may take a few days). Similarly, a cheque issued by the firm is recorded in the cash book on the date of issue, but the bank deducts it only when the cheque is presented for payment.
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Errors — Mistakes made either by the business (e.g., a wrong amount entered in the cash book) or by the bank (e.g., a deposit credited to the wrong account). These errors must be identified and corrected separately; the reconciliation statement only highlights them.