Bank Reconciliation Statement
Purpose and causes of difference
A bank reconciliation statement explains why the balance shown by the cash book (bank column) differs from the balance shown by the pass book on a given date, and adjusts one figure into the other. Causes: cheques issued but not yet presented; cheques paid in but not yet collected; bank charges, interest on overdraft and direct payments debited by the bank but not yet entered in the cash book; interest and dividends collected by the bank and recorded only in the pass book; direct deposits by customers; standing instructions; and errors on either side.
Method
Start with the balance as per cash book. To reach the pass book balance:
- Add: cheques issued but not presented; interest, dividends and direct credits allowed by the bank; wrong credit in the pass book.
- Less: cheques deposited but not collected; bank charges, interest on overdraft and direct debits; wrong debit in the pass book.
Reverse the treatment if you start with the pass book balance. For an overdraft the same rules apply, but you must keep the debit or credit nature of the balance straight.
Worked example
The cash book shows a debit balance of ₹18,000. Cheques of ₹5,000 were issued but not presented, cheques of ₹3,000 were deposited but not yet credited, and bank charges of ₹200 are not recorded. Pass book balance = 18,000 + 5,000 − 3,000 − 200 = ₹19,800. Reasoning: the bank has not yet paid the ₹5,000, so it still stands to the firm's credit there; the ₹3,000 is not yet with the bank; the ₹200 has already been taken by the bank but not by the cash book.
Traps
Adding cheques deposited instead of deducting them; confusing the direction when starting from the pass book; ignoring whether the balance is an overdraft; treating a cash book error as a timing difference.