BANK RECONCILIATION

The word “reconciliation” means to make two sets of amounts correspond with each other (i.e.

make them equal to each other) by explaining why the two sets of amounts differ.

Bank reconciliation is the process of matching and comparing figures from accounting records

against those presented on a bank statement.  Less any items which have no relation to the bank

statement, the balance of the accounting ledger should reconcile (match) to the balance of the bank

statement.

Bank reconciliation allows companies or individuals to compare their account records to the

bank's records of their account balance in order to uncover any possible discrepancies.

Since there are timing differences between when data is entered in the banks systems and when

data is entered in the individual's system, there is sometimes a normal discrepancy between account

balances.  The goal of reconciliation is to determine if the discrepancy is due to error rather than

timing.

A bank reconciliation statement is a statement which indicates on a specific date why there is a

difference between the bank account balance in the general ledger and the current account balance

on the bank statement. Entries that appear on the bank statement, but are not recorded in the cash

receipts journal or cash payments journal, are recorded in the relevant journal. The journals are

therefore adjusted by the missing entries. Items recorded in the cash receipts journal or cash

payments journal, but not appearing on the bank statement, are recorded in the bank reconciliation

statement.

A Bank reconciliation is a process that explains the difference between the bank balance shown in

an organization’s bank statement, as supplied by the bank, and the corresponding amount shown in

the organization’s own accounting records at a particular point in time.

Such differences may occur, for example, because

a cheque issued by the organization has not been presented to the bank,

a banking transaction, such as a credit received, or a charge made by the bank, has not yet

been recorded in the organization’s books

either the bank or the organization itself has made an error

BANK RECONCILIATION

It may be easy to reconcile the difference by looking at very recent transactions in either the bank

statement or the organization’s own accounting records (cash book) and seeing if some

combination of them tallies with the difference to be explained.

If not, it may be necessary to go through and match every single transaction in both sets of records

since the last reconciliation, and see what transactions remain unmatched. The necessary

adjustments should then be made in the cash book, or any timing differences recorded to assist with

future reconciliations.

For this reason, and to minimize the amount of work involved, it is good practice to carry out such

reconciliations at reasonably frequent intervals.

Reconciliations are generally performed by specialized accounting software though the

understanding of what occurs is important for a successful reconciliation.

‘Reconciliation’ between the cash book and the bank statement final balance simply means an

explanation of the differences. This explanation takes the form

of a written calculation (see page xx for an example). The process

can be seen as follows:

Cash book (bank columns)

Bank reconciliation statement

bankstatement

Differences between the cash book and the bank statement can arise from:

• Timing of the recording of the transactions

• Errors made by the business, or by the bank We will explain each of these in turn.

Timing difference –recorded in the cash book

When a business compares the balance according to its cash book with the balance as shown by the

bank statement there is often a difference. This difference can be caused by the timing of

payments. For example:

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BANK RECONCILIATION

• A cashier may send cheques out to suppliers, some of whom may pay in the cheque at the bank

immediately while others may keep the cheque for several days before paying it in. When this

happens the cashier will have recorded all the payments in the cash book. However, the bank

records

will only show the cheques that have actually been paid in by the suppliers and deducted from the

business bank account. These cheques are known as unpresented cheques.

• With another type of timing difference – known as outstanding lodgments – the firm's cashier

records a receipt in the cash book as he or she prepares the bank paying-in slip. However, the

receipt may not be recorded by the bank on the bank statement for a day or so, particularly

if it is paid in late in the day (when the bank will put it into the next day's work), or if it is paid in at

a bank branch other than the one at which the account is maintained.

Definition and Explanation:

From time to time the balance shown by the bank and cash column of the cash book requiredto

be checked. The balance shown by the cash column of the cash book must agree with amount of

cash in hand on that date. Thus reconciliation of the cash column is simple matter. If it does not

agree it means that either some cash transactions have been omitted from thecash book or an

amount of cash has been stolen or lost. The reason for the difference is ascertained and cash

book can be corrected. So for as bank balance is concerned, its reconciliation is not so simple. The

balance shown by the bank column of the cash book should always agree with the balance shown

by the bank statement, because the bank statement is a copy of the customer's account in the banks

ledger. But the bank balance as shown by thecash book and bank balance as shown by the

bank statement seldom agrees. Periodically, therefore, a statement is prepared called bank

reconciliation statement to find out the reasons for disagreement between the bank statement

balance and the cash book balance of the bank, and to test whether the apparently conflicting

balance do really agree

Why bank reconciliation is important for business?

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BANK RECONCILIATION

Bank reconciliation is a very complex and very tedious process. Bank reconciliation is the method

of comparing and matching figures from company’s books against those shown on a bank

statement. Reconciling your bank account statement is an absolute essential even if it is a costly

and time consuming task.

Bank reconciliation is an important part of the monthly cash flow related to your business and

should be done as soon as the statement appears from your financial institution. Bank reconciliation

statement helps businesses to reduce the amount of unutilized cash in accounts. By adding deposits

in transit, deducting outstanding business checks and adding or deducting bank errors, you will

control business cash flow thus managing successful business operations.

Advantages of Bank Reconciliation

It makes important updates to general ledger and receives timely entries from the other

applications.

Provides the ability to reduce bank statement errors

Enables to control cash flow with the invalid checks and stop payments function

Verifies the amount of cash in your account

It helps to found uncover irregularities

Whether you want to outsource all your bookkeeping services and financial accounting requirement

or need any help in a specific area like bank reconciliation, Accounting Bank Reconciliation and

preparation of bank reconciliation statement outsourcing such tasks is a wise idea. By outsourcing

your bank reconciliation and other financial accounting and bookkeeping tasks you will save time

and money.

Bank reconciliation statement helps businesses to reduce the amount of unutilized cash in suspense

accounts. By adding deposits in transit, deducting outstanding business checks and adding or

deducting bank errors

Causes of Disagreement Between Bank statement and Cash book:

Usually the reasons for the disagreement are:

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BANK RECONCILIATION

1. That our banker might have allowed interests which have not yet been entered in our cash

book.

2. That our banker might have debited our account for any such item as interest on overdraft,

commission for collecting cheque, incidental charges etc., which we have not entered in the

cash book.

3. That some of the cheque which we drew and for which we credited our bank account prior

to the date of closing, were not presented at the bank and therefore, not debited in the bank

statement.

4. That some cheques or drafts which we have paid into bank for collection and for which we

debited our bank account, were not realised within the due date of closing and therefore, not

credited by the bank.

5. The banker might have credited our account with amount of a bill of exchange or any other

direct payment into bank and the same may not have been entered in the cash book.

6. That cheques dishonored might have been debited in the bank statement but have not been

given effect to in our books.

NEED AND IMPORTANCE OF BANK RECONCILIATION STATEMENT

The need and importance of the bank reconciliation statement may be given as follows:

1. The reconciliation process helps in bringing out the errors committed either in cash Book or Pass

Book.

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BANK RECONCILIATION

2. Bank reconciliation statement may also show any undue delay in the clearance of cheques.

3. Sometimes the cashier may have the tendency of cheating like he may made entries in the Cash

Book only but never deposit the cash into bank. These types of frauds by the entrepreneur’s staff or

bank staff may be detected only through bank reconciliation statement. So this way bank

reconciliation statement acts as a control technique too.

BANK RECONCILIATION PROCESS

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BANK RECONCILIATION

The bank reconciliation process starts with adjusting the balance as per bank. This is done by

taking the actual balance given, adding the deposits in transit and the balance increasing bank

errors, and deducting any outstanding checks and balance reducing bank errors. Then come the

adjustment of balance as per the books of accounts. This is done by deducting the bank charges and

fees (plus any other deductions) and any balance increasing accounting errors, and adding the

interest earned, the bills receivables collected by bank and the balance reducing accounting errors.

After the balances are individually adjusted, they are compared and expected to tally. Then the

process shifts to journal entries. These are necessary to incorporate the necessary corrections in the

books of account

PURPOSE OF BANK RECONCILIATION PROCESS:

Identify and rectify divergences:

The purpose of bank reconciliation process is to identify and rectify divergences between the two

bank balances.

Prevent overspending by keeping strict accounts of cash outflows:

Bank reconciliations prevent overspending by keeping strict accounts of cash outflows. They also

check for any overcharging of fees, done on the bank's side.

Correction of bank errors:

Bank reconciliations aid in the timely correction of bank errors. They also check duplication of

transactions.

Help in tracking and correcting employee errors:

Bank reconciliations help in tracking and correcting employee errors. Regular bank reconciliations

help in avoiding payment problems and delays due to insufficient balances.

Active check on the embezzlement of money:

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BANK RECONCILIATION

Bank reconciliation processes put an active check on the embezzlement of money and ensures

responsible accounting.

Help in reaching the correct account balance

Bank reconciliations help in reaching the correct account balance figures and this provides

external auditors with easily verifiable documentation. ‘

Reduce accounting errors:

If a bank reconciliation process is done regularly, it can reduce accounting errors drastically and

makes the finding of missing purchase and sales invoices, easy in the accounting system.

i)Bank reconciliations make it easy to identify whether the accounting errors are actual errors or

errors of a timing mismatch.

ii)Bank reconciliations make it possible to keep track of checks that are cashed, separate from

those that are outstanding or in transit.

Basically, the purpose of bank reconciliations is to introduce efficiency and transparency into the

business accounting systems. It is highly worthwhile to take time and do them, as it helps in

avoiding situations like the one mentioned in the description. Nowadays, the bank reconciliation

process can also be outsourced to specialist companies.

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BANK RECONCILIATION

Adjusting the Balance per Bank

We will demonstrate the bank reconciliation process in several steps. The first step is to adjust

the balance on the bank statement to the true, adjusted, or corrected balance. The items necessary

for this step are listed in the following schedule:

Step 1.  Balance per Bank Statement on Aug. 31, 2010

 Adjustments:

     Add: Deposits in transit

     Deduct: Outstanding checks

     Add or Deduct: Bank errors

 Adjusted/Corrected Balance per Bank

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BANK RECONCILIATION

Deposits in transit are amounts already received and recorded by the company, but are not yet

recorded by the bank. For example, a retail store deposits its cash receipts of August 31 into the

bank's night depository at 10:00 p.m. on August 31. The bank will process this deposit on the

morning of September 1. As of August 31 (the bank statement date) this is a deposit in transit.

Because deposits in transit are already included in the company's Cash account, there is no need to

adjust the company's records. However, deposits in transit are not yet on the bank statement.

Therefore, they need to be listed on the bank reconciliation as an increase to the balance per

bank in order to report the true amount of cash.

A helpful rule of thumb is "put it where it isn't." A deposit in transit is on the company's

books, but it isn't on the bank statement. Put it where it isn't: as an adjustment to the balance

on the bank statement.

Outstanding checks are checks that have been written and recorded in the company's Cash account,

but have not yet cleared the bank account. Checks written during the last few days of the month

plus a few older checks are likely to be among the outstanding checks.

Because all checks that have been written are immediately recorded in the company's Cash account,

there is no need to adjust the company's records for the outstanding checks. However, the

outstanding checks have not yet reached the bank and the bank statement. Therefore, outstanding

checks are listed on the bank reconciliation as a decrease in the balance per bank.

Recall the helpful tip "put it where it isn't." An outstanding check is on the company's

books, but it isn't on the bank statement. Put it where it isn't: as an adjustment to the balance

on the bank statement.

Bank errors are mistakes made by the bank. Bank errors could include the bank recording an

incorrect amount, entering an amount that does not belong on a company's bank statement, or

omitting an amount from a company's bank statement. The company should notify the bank of its

errors. Depending on the error, the correction could increase or decrease the balance shown on the

bank statement. (Since the company did not make the error, the company's records are not

changed.)

Step 2. Adjusting the Balance per Books

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BANK RECONCILIATION

The second step of the bank reconciliation is to adjust the

balance in the company's Cash account so that it is the true,

adjusted, or corrected balance. Examples of the items involved

are shown in the following schedule:Step 2.

 Balance per Books on Aug. 31, 2010

 Adjustments:

     Deduct: Bank service charges

     Deduct: NSF checks & fees

     Deduct: Check printing charges

     Add: Interest earned

     Add: Notes Receivable collected by bank

     Add or Deduct: Errors in company's Cash account

 Adjusted/Corrected Balance per Books

Bank service charges are fees deducted from the bank statement for the bank's processing of the

checking account activity (accepting deposits, posting checks, mailing the bank statement, etc.)

Other types of bank service charges include the fee charged when a company overdraws its

checking account and the bank fee for processing a stop payment order on a company's check. The

bank might deduct these charges or fees on the bank statement without notifying the company.

When that occurs the company usually learns of the amounts only after receiving its bank

statement.

Because the bank service charges have already been deducted on the bank statement, there is no

adjustment to the balance per bank. However, the service charges will have to be entered as an

adjustment to the company's books. The company's Cash account will need to be decreased by the

amount of the service charges.

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BANK RECONCILIATION

Recall the helpful tip "put it where it isn't." A bank service charge is already listed on the

bank statement, but it isn't on the company's books. Put it where it isn't: as an adjustment to

the Cash account on the company's books.

An NSF check is a check that was not honored by the bank of the person or company writing the

check because that account did not have a sufficient balance. As a result, the check is returned

without being honored or paid. (NSF is the acronym for not sufficient funds. Often the bank

describes the checks a return item. Others refer to the NSF check as a "rubber check" because the

check "bounced" back from the bank on which it was written.) When the NSF check comes back to

the bank in which it was deposited, the bank will decrease the checking account of the company

that had deposited the check. The amount charged will be the amount of the check plus a bank fee.

Because the NSF check and the related bank fee have already been deducted on the bank statement,

there is no need to adjust the balance per the bank. However, if the company has not yet decreased

its Cash account balance for the returned check and the bank fee, the company must decrease

the balance per books in order to reconcile.

Check printing charges occur when a company arranges for its bank to handle the reordering of its

checks. The cost of the printed checks will automatically be deducted from the company's checking

account.

Because the check printing charges have already been deducted on the bank statement, there is no

adjustment to the balance per bank. However, the check printing charges need to be an adjustment

on the company's books. They will be a deduction to the company's Cash account.

Recall the general rule, "put it where it isn't." A check printing charge is on the bank

statement, but it isn't on the company's books. Put it where it isn't: as an adjustment to the

Cash account on the company's books.

Interest earned will appear on the bank statement when a bank gives a company interest on its

account balances. The amount is added to the checking account balance and is automatically on the

bank statement. Hence there is no need to adjust the balance per the bank statement. However, the

amount of interest earned will increase the balance in the company's Cash account on its books.

Recall "put it where it isn't." Interest received from the bank is on the bank statement, but it

isn't on the company's books. Put it where it isn't: as an adjustment to the Cash account on

the company's books.

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BANK RECONCILIATION

Notes Receivable are assets of a company. When notes come due, the company might ask its bank

to collect the notes receivable. For this service the bank will charge a fee. The bank will increase

the company's checking account for the amount it collected (principal and interest) and will

decrease the account by the collection fee it charges. Since these amounts are already on the bank

statement, the company must be certain that the amounts appear on the company's books in its Cash

account.

Recall the tip "put it where it isn't." The amounts collected by the bank and the bank's fees

are on the bank statement, but they are not on the company's books. Put them where they

aren't: as adjustments to the Cash account on the company's books.

Errors in the company's Cash account result from the company entering an incorrect amount,

entering a transaction that does not belong in the account, or omitting a transaction that should be in

the account. Since the company made these errors, the correction of the error will be either an

increase or a decrease to the balance in the Cash account on the company's books.

Step 3. Comparing the Adjusted Balances

After adjusting the balance per bank (Step 1) and after adjusting the balance per books (Step 2),

the two adjusted amounts should be equal. If they are not equal, you must repeat the process until

the balances are identical. The balances should be the true, correct amount of cash as of the date of

the bank reconciliation.

Step 4. Preparing Journal Entries

Journal entries must be prepared for the adjustments to the balance per books (Step 2). Adjustments

to increase the cash balance will require a journal entry that debits Cash and credits another

account. Adjustments to decrease the cash balance will require a credit to Cash and a debit to

another account.

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BANK RECONCILIATION

COMPREHENSIVE ILLUSTRATION OF BANK RECONCILIATION: 

The following illustration provides a detailed example of a bank statement, additional data, the

reconciliation process, and the corresponding journal entries.  Conducting a bank reconciliation

requires careful attention to the slightest of details.  Even the smallest error will lead to frustration

in trying to bring closure to the reconciliation effort.

BANK STATEMENT

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BANK RECONCILIATION

ADDITIONAL DATA

The above bank statement is for The Tackle Shop for July of 20X3.  The following additional data is needed

to reconcile the account:

The first check listed above, #5454, was written in June but did not clear the bank until July 2.

There were no other outstanding checks, and no deposits in transit at the end of June. 

The EFT (electronic funds transfer) on July 11 relates to the monthly utility bill; The Tackle Shop

has authorized the utility to draft their account directly each month.

The Tackle Shop is optimistic that they will recover the full amount, including the service charge,

on the NSF check ("hot check") that was given to them by a customer during the month.

The bank collected a $5,000 note for The Tackle Shop, plus 9% interest ($5,450).

The Tackle Shop's credit card clearing company remitted funds on July 25; the Tackle Shop

received an email notification of this posting and simultaneously journalized this cash receipt in the

accounting records.

The Tackle Shop made the 2 deposits listed above, and an additional deposit of $3,565.93 late in the

afternoon on July 31, 20X3.

The ending cash balance, per the company general ledger, was $47,535.30.

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BANK RECONCILIATION

The following check register is maintained by The Tackle Shop, and it corresponds to the amounts

within the Cash account in the general ledger:

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BANK RECONCILIATION

Journal Entries required only for Cash Book.

Begins with the balance in the company's Cash account found in its general ledger. The bank

reconciliation process includes listing the items that will adjust the Cash account balance to become

the true cash balance. We will review each item appearing in Step 2 and the related journal entry

that is required. Remember that any adjustment to the company's Cash account requires a journal

entry. Generally, the adjustments to the books are the result of items found on the bank statement

but have not yet been entered in the company's Cash account.

Item # Bank service charges. Since the bank deducted $35 from the company's checking account,

but the company has not yet deducted this from its Cash account, the following journal entry needs

to be made.

Date Account Name Debit Credit

August 31, 2010 Bank Service Charge Expense 35

Cash 35

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BANK RECONCILIATION

(If the annual amount of service charges is small, debit Miscellaneous Expense.)

Item # NSF checks and fees. Since the bank deducted these legitimate amounts from the

company's bank account, the company will need to deduct these amounts from its Cash account. As

mentioned, the NSF check of $100 was from a customer. Therefore, the company will likely undo

the reduction to Accounts Receivable that took place when the company originally processed the

$100 check. If the company wishes to recover the bank fee of $10 from the customer, it should add

the $10 fee to the amount that the customer owes the company. The journal entry might look like

this:

Date Account Name Debit Credit

August 28, 2010 Accounts Receivable 110

Cash 110

(If the amount cannot be recovered from the customer, charge an expense.)

Item #Check printing charges. Because this expense is not yet entered on the company's books,

but the amount has been deducted from its bank account, the company will make the following

journal entry.

Date Account Name Debit Credit

August 20, 2010 Supplies 80

Cash 80

Item # Interest earned. The bank increased the checking account balance by $8 on August 31.

Since the bank did not notify the company previously, the company must now increase the balance

in its Cash account.

Date Account Name Debit Credit

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BANK RECONCILIATION

August 31, 2010 Cash 8

Interest Revenue 8

Item # Notes receivable collected. The bank increased the company's checking account when it

collected a note for the company on August 29. It was determined that the company had not yet

made an entry to its Cash account for this transaction. As a result the following journal entry is

needed.

Date Account Name Debit Credit

August 29, 2010 Cash 960

Bank Service Charge Expense 40

Notes Receivable 1,000

Item #Company error. The company had entered $145 in its Cash account on August 29, but the

bank statement showed the correct amount: $154. The transaction involved the cash sales for the

day. As a result the company's Cash account will have to be increased by $9 as follows:

Date Account Name Debit Credit

August 29, 2010 Cash 9

Sales 9

We can do Bank Reconciliation Statement under two systems which are as below:

1. Single Balance

2. Double Balance

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BANK RECONCILIATION

Single Balance :

Under this method we should start balance as per any book and figure out another balance as

per other book. Sample as below:

Others rules:

If did not (+) that means did (-) --------- Do it (+)

If did not (-) that means did (+) ---------- Do it (-)

Double Balance :

Under this method we should find out only corrected balance of both book (Cash & Bank).

Sample as below:

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Balance as per Cash book ******

Add:

Less:

Balance as per Bank book ******

Add:

Less:

Cash to Bank Bank to

Rules Rules

Do same what Bank did. Do reverse what Bank did.

Balance as per Cash book ******

Add:

Less:

Balance as per Bank book ******

Add:

Less:

Cash Book Bank Book

Rules

BANK RECONCILIATION

We may have four different situations while preparing the bank reconciliation statement.

These are:

1. When debit balance (favorable balance) as per cash book is given and the balance as per

passbook is to be ascertained.

2. When credit balance (favorable balance) as per passbook is given and the balance as per cash

book is to be ascertained.

3. When credit balance as per cash book (unfavorable balance/overdraft balance) is given and the

balance as per passbook is to ascertained.

4. When debit balance as per passbook (unfavorable balance/overdraft balance) is given and the

cash book balance as per is to ascertained.

.Causes of Disagreement Between Bank statement and Cash book:

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Do what you should

do.

If need (+) do (+)

BANK RECONCILIATION

Usually the reasons for the disagreement are:

1. That our banker might have allowed interest which have not yet been entered in ourcash

book.

2. That our banker might have debited our account for any such item as interest on overdraft,

commission for collecting cheque, incidental charges etc., which we have not entered in

the cash book.

3. That some of the cheque which we drew and for which we credited our bank account prior

to the date of closing, were not presented at the bank and therefore, not debited in the

bank statement.

4. That some cheques or drafts which we have paid into bank for collection and for which we

debited our bank account, were not realized within the due date of closing and therefore, not

credited by the bank.

5. The banker might have credited our account with amount of a bill of exchange or any other

direct payment into bank and the same may not have been entered in the cash book.

6. That cheques dishonored might have been debited in the bank statement but have not been

given effect to in our books.

CAUSES OF DIFFERENCE:

Differences between the cash book and the bank statement can arise from:

• Timing of the recording of the transactions

• Errors made by the business, or by the bank

Also we can explain another way that the causes that lead to the disagreement of the balances in the

cash book and the Pass book can be classified as follows:

Transactions that usually appear in the cash book, but not in the pass book.

Transactions that usually appear in the pass book, but not in the cash book.

Let us, now discuss in detail the nature of these transactions and show how they cause the

difference in the balances of these two books.

Transactions that Usually Appear in the Cash Book, but not in the Pass Book

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BANK RECONCILIATION

When you compare the cash book entries with their corresponding entries in the pass book,

you will find a number of transactions which appear in the cash book but not in the pass book. Such

transactions have been discussed below.

1. Cheques deposited into bank but not yet collected: When a payment is received by

cheque, the firm sends it to the bank for collection and records it immediately on the debit

side of the cash book. This increases the bank balance as per cash book. But the bank will

not credit the firm's account till the cheque is actually collected. So, the balance in the pass

book remains unaffected till the proceeds of the cheque are collected and credited. Thus, on

a particular date, it is possible that certain cheques which were sent for collection might not

have been collected by the bank and so not shown in the pass book. All such cheques

pending collection would make the cash book balance different from the pass book balance.

For example, the firm sends a cheque of Rs. 2,000 on December 28, to the bank for

collection. The cheque is collected on January 6. Now, if the balances as on December 31

are compared, they will be different because the credit of Rs. 2,000 will not appear in the

pass book by December 31.

2. Cheques issued but not yet presented for payment: Whenever a payment is made by

cheque, the cash book is immediately credited. This reduces the balance in the cash book.

But, it would always take some time before those cheques are actually presented for

payment. The bank would debit the firm's account only when it actually pays the cheques.

Hence, on a particular date, if there are some cheques still to be presented for payment, the

pass book will not show their entries. Consequently, the balance in the pass book will be

higher than the balance as per cash book on that date.

3. Cheques dishonored but no entry made in the cash book: When cheques are sent to the

bank for collection, they are entered in the cash book immediately. But, no entry appears in

the pass book till such cheques are actually collected by the bank. Sometimes, for one

reason or the other, the cheques deposited for collection get dishonored. The bank returns

such cheques to the firm. On receiving the dishonored cheques from the bank, a reverse

entry must be passed in the cash book. But, quite often, the firm fails to pass an entry for the

dishonor of the cheque, or does so much later. In such a situation, the cash book will be

showing a higher balance because no corresponding entry will appear in the pass book.

4. Errors in the cash book: It is quite possible that while recording transactions in the cash

book some errors have been committed. These errors can be a source of a disagreement

between the balances in the two books. Examples of such errors are:

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BANK RECONCILIATION

o A transaction, whether on the debit side or on the credit side, recorded more than

once.

o A transaction to be recorded on the debit side has been wrongly recorded on the

credit side, or vice versa.

o Sometimes the firm maintains more than one bank account. It is possible that a

cheque issued on one account has been wrongly recorded to the debit of another

account. This would affect both the bank accounts.

o Errors committed in balancing the cash book, or carrying forward the balance to

another page.

Transactions that Usually Appear in the Pass Book, but not in the Cash Book:

There are many transactions which are initially recorded by the bank in its ledger. The firm records

them in the cash book only when it receives the intimation from the bank or when it notices them

while going through the pass book. Thus, it is possible when the pass book and the cash book are

compared upto a particular date, there may be some entries which appear in the pass book but not

in the cash book. Such transactions have been discussed below.

Interest allowed by the bank, if any: The banks normally do not allow any interest on the

current account balances. Some banks may however allow nominal interest. When interest

is allowed, the bank credits it to the customer's account. This increases the balance in the

pass book. The firm would pass the corresponding entry in the cash book only when it

receives the intimation from the bank or notices it in the pass book. Hence, the cash book

balance will be lower till such entry is made.

Amounts collected by the bank as per the standing instructions: The businessman often

issues standing instructions authorizing his banker to collect on his behalf certain amounts

due to him, such as interest, dividends, etc. The bank credits the customer's account as and

when it collects such\ amounts and sends the necessary intimation to him. The firm will

pass the\ corresponding entry in the cash book when it receives such intimation. Sometimes

23

BANK RECONCILIATION

the intimation may be misplaced and no entry is passed in cash book. Thus, as on the date of

reconciliation, the balances as per the cash book will be lower than the balance as per the

pass book.

Direct payments into the bank made by firm's customers: Sometimes, a customer may

directly deposit an amount into a firm's bank account. Firm shall record it in the cash book

only when it learns about such deposit. But the pass book would show the entry on the date

of deposit itself. If by the date of reconciliation, such entry has not been passed in the cash

book, the balance shown by pass book will be higher than the balance as per cash book.

Bank charges: The banks usually charge their customers for various service provided by

them. They may charge for collection of outstation cheques, for making or collecting

payments on standing instructions, and so on. The bank debits the customer's account for

such charges from time to time. However, the firm will know about these charges only

when it goes through the pass book. So, on the date of reconciliation the pass book balance

may differ from the balance as per cash book.

Interest on overdraft: When a firm avails of an overdraft facility, the bank charges some

interest which it debits to the firm's account periodically. This would reduce the balance or

add to the overdraft depending upon the nature of balance in the bank. However, the

corresponding entry for interest on overdraft would be passed in the cash book only when

the pass book is received. So, there may be a disagreement of the two balances on the date

of reconciliation.

Payments made by the bank as per the standing instructions: The businessman issues

standing instructions to his banker to make certain payments on his behalf such as insurance

premium, rent, etc. When the banker makes such payments, he would immediately debit the

customer's account. So, the balance in the pass book would get reduced. If the

corresponding entries for such payments have not been recorded in the cash book, the

balance as per cash book would remain unchanged.

Discounted cheques/bills receivable dishonored subsequently: Sometimes, when the

businessman deposits some outstation cheques and wants payment immediately, he may

request the bank to credit his account immediately without waiting for the actual collection.

The bank usually obliges him by discounting the cheque. This means the bank deducts

certain amount towards interest (called discount) and credits the remaining amount to his

account. Subsequently, if for some reason, such a cheque is dishonored, the bank would

immediately debit the firm's account. But, the firm would pass the entry for the dishonor

only when it receives the intimation from the bank. Thus, the balance as per cash book

24

BANK RECONCILIATION

would differ from the balance as per pass book till such entry has been passed. The same

thing may happen when a discounted bill receivable is dishonored.

Errors in the pass book: The bank may also commit errors while recording the

transactions in customer’s accounts which may lead to disagreement of the two balances.

Examples of such errors are:

i) Omitting to record certain transactions in customer's account.

ii) Recording of a transaction on the wrong side of firm's account.

iii) Recording of a transaction in the wrong account where the firm has more than

one account in the bank.

Preparation of Bank Reconciliation Statement:

After identifying the causes of difference, the reconciliation may be done in the following two

ways:

• Preparation of bank reconciliation statement without adjusting cash book balance.

• Preparation of bank reconciliation statement after adjusting cash book balance.

(a) Preparation of Bank Reconciliation Statement without adjusting Cash Book Balance:

To prepare bank reconciliation statement, under this approach, the balance as per cash book or as

per passbook is the starting item. The debit balance as per the cash book means the balance of

deposits held at the bank. Such a balance will be a credit balance as per the passbook. Such a

balance exists when the deposits made by the firm are more than its withdrawals. It indicates the

favorable balance as per cash book or favorable balance as per the passbook. On the other hand, the

credit balance as per the cash book indicates bank overdraft. In other words, the excess amount

withdrawn over the amount deposited in the bank. It is also known as unfavorable balance as per

cash book or unfavorable balance as per passbook.

We may have four different situations while preparing the bank reconciliation statement.

These are:

1. When debit balance (favorable balance) as per cash book is given and the balance as per

passbook is to be ascertained.

25

BANK RECONCILIATION

2. When credit balance (favorable balance) as per passbook is given and the balance as per cash

book is to be ascertained.

3. When credit balance as per cash book (unfavorable balance/overdraft balance) is given and the

balance as per passbook is to ascertained.

4. When debit balance as per passbook (unfavorable balance/overdraft balance) is given and the

cash book balance as per is to ascertained.

26

BANK RECONCILIATION

27

BANK RECONCILIATION

Dealing with favorable balances

Dealing with overdrafts

28

BANK RECONCILIATION

BANK RECONCILIATION PROCEDURE

Procedure:

Gather or print reports for current month. The following is a list of reports you will need:

Cash Receipts Journal- list by fund

Check Register- list by fund or ck # if only 1 bank acct

Expenditure and Liquidation Journal- for that period

Detail General Ledger

Inquiry of Cash Acct- xxx-xx-1110-xx-xxx-xxxxxx

Bank Statement- make copy to use so you preserve the original document for the auditors and can

recopy if you have to start over.

Bank Reconciliation spreadsheet- from last month

Open last month’s reconciliation spreadsheet and save as the new month.

Change the date to the current month and year.

Change the ‘Balance per Bank Statement’ amount to the Ending Account Balance on the

bank statement.

Change the ‘Balance per General Ledger’ amount to the ending cash balance on the general

ledger. Be sure to include all funds for this bank account. You can list each fund cash

balance and have the total populate this amount.

From the bank side of the last months bank recon spreadsheet, check off all deposit in

transit items that cleared the bank and check those items off on the bank statement. Delete

these deposits and amounts from your current bank rec. spreadsheet.

From the bank side of the last months bank rec. spreadsheet, check off all outstanding

checks that cleared the bank and check those items off on the bank statement. Delete these

checks and amounts from your current bank rec. spreadsheet.

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BANK RECONCILIATION

From the book side of the last months bank rec. spreadsheet, check off all deposits not

posted that are on your cash receipts journal. Check these deposits on the cash receipts

journal and delete these deposits and amounts from your current bank rec. spreadsheet.

From the book side of the last months bank rec. spreadsheet, check off all checks not posted

that are on your check register. Check these deposits on the cash receipts journal and delete

these items and amounts from your current bank rec.Spreadsheet. Examine the cash

disbursements journal and the inquiry for any journal entry adjustments that were made to

the books. Delete these items from your current bank rec. spreadsheet.

Now you are ready to begin working with the current month’s data.

Compare the bank stmt to the cash receipts journal. Check off deposits that have cleared on

the cash receipts journal. On your current bank rec. spreadsheet on the bank side, list all

deposits that are on the cash receipts journal that did not clear the bank under the ‘Deposits

in Transit’ section. On the book side, list all deposits that cleared the bank but were not on

your cash receipts journal. Also list deposits that cleared the bank for a different amount and

need to be corrected on the books.

Compare the bank stmt list of checks to the check register. Check off checks that have

cleared on the check register. On your current bank rec. spreadsheet on the bank side, list all

checks that are on the check register that did not clear the bank under the ‘Outstanding

checks’ section. On the book side, list all checks that cleared the bank but were not on your

check register. Also list checks that cleared for a different amount and need to be corrected

on the books.

Look at the ‘Reconciled Cash Balance’ for the bank side and compare to the ‘Reconciled

General Ledger Balance’ on the book side. If they are equal, jump for joy because you

balance and are done. If they are not equal, look at the ‘difference’ and see if you can find

that amount.

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BANK RECONCILIATION

SALIENT POINTS ON BANK RECONCILIATION STATEMENT:

Salient points On Bank Reconciliation Statement are as following:

1. Understand the objective of Bank Reconciliation Statement which is simply to reconcile the

bank balance of the Cash Book with the balance in the Bank Statement

2. Remember that in the Bank Statement which has the records of the firm. Normally the firm is a

creditor to the bank hence the bank records deposits of the firm on the credit side and payments

or withdrawals on the debit side.

3. Terms for us to be familiar with when preparing a bank reconciliation statement

Unpresented cheques:

Cheques issued to creditors, but not presented for payment to the firm’s bank, till the date of

reconciliation.

Bank lodgments :

Not yet credited-cheques received from debtors but not deposited in the bank account.

Credit transfer-money :

Directly deposited in the bank by a debtor/customer.

Direct debit:

Instructions given to bank to pay an organization directly from the firm’s account.

Standing order:

Bank pays directly from the firm’s accounts, payment like insurance premium, rent, others

STEPS TO ACCOUNT RECONCILIATION

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BANK RECONCILIATION

Step 1: First, gather all the relevant accounting information; this includes, updating your

checkbook, getting a bank statement, gathering together all your ATM withdrawal and deposit

slips. 

Step 2: Jot down the last balancing figure from the bank statement, on the top of a paper. Deduct

the bank charges from the balance of your bank account. Compare the deposit slips with your bank

statement. If there are any checks (deposits) that have not been cleared or approved in the statement

before the ending day of the month, add the amounts to the balancing figure. You can also add any

kind of interest that is due, but not received in the balancing figure. This final balancing figure is

also termed as the 'running' balance. 

Step 3: In this step, start comparing your payment receipts with that of the bank statement.

Compare the ATM withdrawal slips, the checks paid and the due payments that have not been

passed by the bank. Total all the amounts of the payments and withdrawals and subtract it from the

running total. Note down any monthly bills that are deducted directly from your bank account.

Deduct the same from your running figure. For example, if your electricity bill is directly deducted

from your bank account, then deduct it from your running balance.

Once you are done with the deductions, the balance amount that you have should tally with the total

balance in your bank statement. 

Step 3: If the balance of the bank statement and running figure does not tally, then there is some

error. Use a calculator and find out the error in the ending balance of the checkbook register,

beginning from the end of the last month's statement. Next, confirm all the payments and

withdrawals (those that have been cleared or not cleared). Use your payment and withdrawal slips,

while doing so. You will come to know whether the transactions on your slips tally with the bank

statement or not. 

The most important thing that people tend to forget to include is deposits that have been made but

not cleared, at the end of the month. 

If your calculations do not tally with the bank statement, inform the bank about the mistake, so that

the bank can prepare a reconciliation statement of its own. It is recommended that you prepare an

account reconciliation statement every month. You will find it difficult to prepare one initially.

Here are some useful tips to master it:

Whenever you visit the ATM collect the printed form of the transaction and put it aside

safely. Keep on collecting a printed slip for every transaction, till the end of the month.

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BANK RECONCILIATION

Collect the deposits slips of checks and sequentially stack them.

Whenever you hand out a check, make it a point to record it in the checkbook register (the

one that is attached at the back of your checkbook).

The preparation of the account reconciliation will assist you in keeping a tab on your

transactions and also help in money management.

Match the deposits (credits) on the bank statement with the deposits recorded in the cash

receipts journal – tick them.

Match the payments (debits) on the bank statement with the payments recorded in the cash

payments journal – tick them.

Check for any unticked items on the bank statement. These are items which have been

initiated by the bank and we have yet to record them in our books These unticked items need

to be entered in the appropriate cash journal

Check the cash payment journal for unticked items. These are unpresented cheques. They

will appear on our bank reconciliation as reconciling items.

Check the cash receipts journal for unticked items. These are outstanding deposits. They

will also appear on our bank reconciliation as reconciling items.

Information on the bank statement

In order to do bank reconciliation properly, you need to understand what information can be

seen on the bank statement. Usually bank statements are issued on a monthly basis and

indicate the following:

Balance on the bank account at the beginning of month

Debits (or inflows) during the month

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BANK RECONCILIATION

Credits (or payments) during the month

Balance on the bank account at the end of month

Remember that cash balance on the cash book will be on the debit side, as it is the asset

owned by the business. However on the bank statement it will be shown as credit

balance, indicating the bank owes this amount to the business.

Prepare the bank reconciliation in the format:-

Part A $

Opening Balance of bank account per our records XXXX

Add: Total of Cash Receipts during month + XXX

Less: Total of Cash Payments during month - XXX

Closing Balance of bank account per our records = XXXX a)

Part B

Closing Balance per Bank Statement XXXX

Add: Outstanding deposits + XXX

Less: Unpresented Cheques - XXX

= XXXX b)

a) and b) should be equal

Additional Steps for more Advance Reconciliation

If there is a prior bank reconciliation from last month, check the bank statement to see if any

outstanding deposits or unpresented cheques on last month’s bank reconciliation have

34

BANK RECONCILIATION

appeared. If so tick the items on both documents. (Any left unticked on last month’s bank

reconciliation are still outstanding and must be recorded on this month’s bank

reconciliation)

During the process if any discrepancies are discovered, determine who made the error - us

or the bank. If we made the error then we need to fix up our journals. If the bank made the

error then they need to be notified and the error will appear on this month’s bank

reconciliation as an outstanding item.

If the bank statements closing balance is in overdraft put a negative sign next to the balance

per bank statement in the bank reconciliation.

Advantages of bank reconciliation statement:

Error Detection:

It helps in detection of errors of omission of transactions or wrong recording of transactions either

by the bank or the business enterprises. Errors identified in the books by preparing BRS can be

rectified.

Delay in Collection Revealed:

The delay in the collection of cheques, bills, etc., if any, is revealed, when BRS is prepared. The

matter can be pursued to avoid unnecessary delays in collection. It also helps the management to

keep track of the cheques and bills sent for collection.

Completion of Cashbook:

Business enterprises get information about bank charges, cheques dishonored, direct payments,

direct deposits, etc. from the bank statement only. Entries of the same are made in the Cashbook on

the basis of bank statement. Thus to complete the Cashbook, comparison and reconciliation of

Cashbook and bank book is essential.

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BANK RECONCILIATION

Chances of Embezzlements are Reduced:

Periodical comparison of Cashbook and passbook keeps a check on the office staff. For example,

entry for cash deposit is appearing in the Cashbook but not in the passbook, indicates fraud being

committed by the staff. This type of frauds come to light when Bank Reconciliation Statement is

prepared.

• Requirement of less manpower:

It requires less man power.

• Easy identification of errors:

It provides the ability to reduce bank statement and cash book errors.

• Help in finding uncover irregularities:

It helps to find uncover irregularities and eliminate them.

Errors:-

The differences between the two balances are due to the following reasons.

 1. Un presented cheques:

Cheques issued but not presented for payment. When cheques are issued, the entry in the cash book

is made immediately. In the books of the bank, the entry is made only when the cheque is presented

for payment. It is possible that at the time when the balance of the two books are being compared,

some of the cheques might have been issued but might not have been presented for payment thus

causing a disagreement between the two balances.

 2. Un collected cheques:

Cheques paid into the bank but not yet cleared. As soon as the cheques arc deposited into the bank,

the entry is passed on the debit side of the bank column in the cash book. The customer's account is

credited by the bank only when the Cash book is compared with pass book some of the cheques

deposited by the concern may remain uncollected.

For example, Pakistan Company Limited deposited a cheque on

March 28, 2003 for a sum of Rs.3,000. The cheque was collected on

36

BANK RECONCILIATION

April 4, 2003. In case the bank sends a statement of account up to

March 31, 2003, there will be a difference of Rs 3,000 between the

Balance shown by the cash book and the pass book.

3. Interest allowed:

Interest allowed by the bank. Bank might have credited the account of the customer with the

interest and may have made the entry in the pass book. It is possible that the entry 10 respect of

such interest may not have been made by the customer in the bank column of the cash book thus

causing a disagreement between the two balances.

4. Interest received:

Interest and bank charges debited by bank. The bank debits the account of the customer by way of

interest on overdraft. It also debits the account of the customers by way of incidental charges and

collection charges. As soon as these charges are made the bank debits the customer's account. But

the entries in the cash book are made by the customer .only when he receives the bank statement or

the pass book.

 5. Interest collected by the bank:

Interest, dividend etc. collected by the bank. Sometimes interest on government securities or

dividend on shares is collected by the bank and is credited to customer's account. If the entry for

these does not appear in the cash book, the balance will differ.

 6. Direct payment by the bank:

Direct payment by the bank Sometimes under standing instructions from the client, certain

payments like insurance premium, club fees etc. are made by the bank. The entry in the bank

column of the cash book is only made when the necessary intimation to that effect is received from

the bank by the client. The entries in the cash book and pass book may be on different dates.

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BANK RECONCILIATION

 7. Direct payment into the bank

Direct payment into the bank by a customer. Sometimes our customers deposit money direct into

the account in the bank, the corresponding entry for which may not appear in the cash book, due to

delay in necessary instructions by the customers.

 8. Dishonor of bill:

Dishonor of bill discounted with the bank. Sometimes customers get their bills discounted with the

bank. If the bank is not able to get payment of these bills on the due date, it will debit the customers

accounts with the amount of the bills together with the noting charges, if any. The customer will

pass the entry in his books on receipt of the information from the bank.

 9. Errors on the part of Customer:

Besides the reasons stated above, there may be certain errors from customer's side, e.g,, posting in

the wrong column, calculation error, unrecorded transaction, etc. In such cases also there would be

a difference between the balances of Pass Book and cash book

10. Errors committed by bank:

Bank may also commit certain errors causing difference in the Pass Book id Cash Book by giving

wrong. Debit or credit to customers account. In such cases the balance of Cash Book and Pass

Book will not agree.

A reconciliation statement is, therefore, prepared at periodical intervals with a view to indicate the

items which cause such disagreement between the balance as shown by the bank column of the

cash book and the bank pass book on any given date.

Reconciling the bank account:

Reconcile is to

i. To bring (something) into a state of agreement or accord.

ii. Getting two things to correspond make compatible with.

38

BANK RECONCILIATION

Reconciling a bank account implies ensuring that the bank account balance as per the Cash Book

and the Bank book is agreeing after taking into consideration all the reasons for the difference in

the balance.

In reconciling the bank balance, we consider the balance either as per the Cash Book or the Bank

Pass Book and make adjustments to the same to account for the difference in the books and thereby

check whether we get the balance as per the other book or not.

If after taking into consideration all the reasons for the difference in balances as shown by both the

books and making adjustments to the balance as shown by one of the books, we arrive at the

balance as per the other book, then we assure ourselves that the balance as revealed by both the

books is correct.

WHEN IS BRS PREPARED?

Bank Reconciliation Statement (BRS) is prepared as and when needed. The need for preparation of

BRS arises only when there is a difference in the bank a/c balance as revealed by the Cash Book

and the Bank Pass Book. In simple terms BRS can be taken to be a statement that explains the

difference.

Generally we prepare a BRS at the end of the accounting period, to explain the difference between

the Bank a/c balance as shown in the Balance Sheet and the balance as revealed by the pass book.

The process is as follows

39

Cash Book (Bank Column)

Bank Reconciliation Statement

Bank Statement

BANK RECONCILIATION

Bank Reconciliation Sample

Before exploring bank reconciliation sample, it is worth to remind yourselves bank reconciliation

process, which has the following main steps:

1st step: we identify and calculate the difference between bank statement and cash book

2nd step: we compare cash book and bank statement and see any differences which are on

the bank statement, but not in the cash book. These items will represent informational

differences, by which we will be adjusting cash book

3rd step: we adjust cash book recording information differences there

4th step: we identify any items which are on the cash book, but not yet in the bank

statement, which will be timing differences, i.e. payments received or made, but not yet

cleared by the bank. These items will be included into the bank reconciliation.

No we are ready to explore bank reconciliation sample. Below you can find cash book and bank

statement of company ABC for January.

Cash Book

40

BANK RECONCILIATION

On the cash book you see opening cash balance at the beginning of January. On the left side you

have cash inflows, i.e. cash received by the company in January, on the left side you can see cash

payments made by ABC in January. Final cash book closing balance is $2348.

On the bank statement you can see details of each transaction. In the Outflow column you can see

payments from ABC bank account cleared by the bank, each such payment if supported by cheque

has a reference number. In the column Inflow you can see payments received into the bank account

of ABC based on the cheques received. Some payments could be received directly to the bank

account.

Adjust Cash Book By Informational Differences

So our first task to solve this bank reconciliation sample is to compare bank statement and cash

book and identify items on the bank statement which are not in the cash book. In the picture below

you can see those items, i.e. circled in red: payment made to British way directly from bank

41

BANK RECONCILIATION

account and payment received from BC Way directly to the bank account. These items are included

into the adjusted cash book, which is presented below.

So how we adjust cash book? We take non-adjusted cash book balance at the end of month, add

payments received directly to the bank account (from BC Way amounting to $1000) and deduct

payments made directly from bank account (to British way amounting to $100) and get adjusted

cash book balance amounting to $3338.

Identify Timing Differences

42

BANK RECONCILIATION

Next what we do is to find items on the cash book which are not on the bank statement. These will

be timing differences, i.e. items paid or received by not yet cleared by the bank and they will be

included into the bank reconciliation sample. Picture below shows such items on the cash book

circled in red.

On January 31 $1566 was received from Koala, but not yet cleared by the bank and included into

the bank statement. On January 28 and 31 accordingly ABC company paid to Logypol and Dizzy

amounting accordingly to $234 and $540, which were also not included into the bank statement.

These items will be included into the bank reconciliation.

Bank Reconciliation Sample

Below based on the above data you can see bank reconciliation sample, which reconciles balance in

the adjusted cash book with the bank statement and explains differences.

To make such reconciliation we start from adjusted cash book balance of $3338. Add to this

amount cheques not yet presented to the bank, i.e. payments to Logypol and Dizzy amounting

accordingly to $234 and $540. Intermediate amount is $4112.

Afterwards we deduct from the intermediate amount payments accepted by the bank after the end

of January, i.e. payment from Koala amounting to $1566. By making these calculations we get the

final amount of $2546 which is the same as per bank statement at the end of January.

43

BANK RECONCILIATION

So finally in this bank reconciliation sample we have adjusted cash book and reconciles adjusted

cash book balance with the bank statement explaining differences which are due to different timing

of payments recorded on the cash book and bank statement.

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BANK RECONCILIATION

Preparation of Reconciliation Statement:: Problem Solving

In solving problems involving preparation of a Bank Reconciliation Statement, you can make it

look simple, if you can follow the following simple steps.

Identify the Reasons for Difference

The reasons for the difference in the bank account balance as revealed by the Cash Book and the

Pass Book may be given straightaway in the problem. If they are not given, you are required to

idenfity the reasons from the data given in the problem.

Decide on the book you have to start with

In most of the problems, you may be given the balance as per one of the books i.e. either the Cash

Book or the Pass Book. Consider the book and the balance and note the nature of the balance you

are starting with.

The nature of the balance you are starting with need not be considered (should be ignored), if you

are using negative sign to represent overdraft balance.

Identify Whether to Add or Deduct

For each aspect forming the reason for the difference in balance as revealed by the Cash Book and

the Pass Book, you need to decide whether you have to add the value invovled to the amount

considered or to deduct it from the amount considered.

1. Draw two ledger accounts in "T" form and name them (a) Cash Book and (b) Pass

Book

Cash Book

 

and

Pass Book

   

2. Cash Book representing the Bank a/c as shown in the Cash book and the Pass Book

representing the Customer a/c in the Bank books.

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BANK RECONCILIATION

3. Identify the amount involved in the explanation that forms the reason for the

difference in the balance.

Say, there is a cheque issued but not presented for payment, Rs. 12,000

4. Consider an amount greater than that amount.

Considering the above example, since the amount involved is Rs. 12,000 consider any amount

higher than that, say Rs. 15,000.

5. Enter the amount so considered in the ledger accounts

Balance in the book you started with is Normal or favorable

1. If your BRS starts with the bank a/c balance as per cash book

Cash Book

To Balance 15,000  

→

Pass Book

    By Balance 15,000

2. If your BRS starts with the bank a/c balance as per pass book

Pass Book

    By Balance 15,000

→

Cash Book

To Balance 15,000  

Balance in the book you started with is overdraft or unfavorable

3. If your BRS starts with the bank a/c balance as per cash book

Cash Book

    By Balance 15,000

→

Pass Book

To Balance 15,000    

4. If your BRS starts with the bank a/c balance as per pass book

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BANK RECONCILIATION

Pass Book

To Balance 15,000    

→

Cash Book

    By Balance 15,000

Record the effect of the transaction in the books based on what has actually happened and

based on the balance decide whether to ADD or DEDUCT.

Cheques issued but not yet presented for payment, Rs. 12,000. This implies that the transaction has

been recorded in the organizations account books but has not been recorded in the bank books.

Journal Entries in their Respective Books

Organisation Books

Party a/c Dr – 12,000

To Bank a/c – 12,000

Bank Books

Cash/Bank a/c Dr – 0

To Customer a/c – 0

Balance in the book you started with is Normal or favorable

1. If your BRS starts with the bank a/c balance as per cash book

Cash Book [Bank a/c]

To Bal

b/d

15,000 By Party.

By Bal

c/d

12,000

3,000

15,000   15,000

→ Pass Book [Customer a/c]

To Bal

c/d

15,000

 

By Bal

b/d

15,000

15,000   15,000

    By Bal 15,000

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BANK RECONCILIATION

To Bal

b/d3,000     b/d

2.

From Cash Book » Rs. 3,000 → To Pass Book » Rs. Rs. 15,000       ADD

3. If your BRS starts with the bank a/c balance as per pass book

Pass Book [Customer a/c]

To Bal

c/d

15,000 By bal

b/d.

15,000

 

15,000   15,000

   By Bal

b/d15,000

→

Cash Book [Bank a/c]

To Bal

b/d

15,000

 

By Party.

By Bal

c/d

12,000

3,000

15,000   15,000

To Bal

b/d3,000    

4.

From Pass Book » Rs. 15,000 → To Cash Book » Rs. Rs. 3,000       DEDUCT

Balance in the book you started with is Overdraft or unfavorable

5. If your BRS starts with the bank a/c balance as per cash book

Cash Book [Bank a/c]

To Bal

c/d

27,000 By Bal

b/d

15,000

→ Pass Book [Customer a/c]

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BANK RECONCILIATION

By Party. 12,000

27,000   27,000

   By Bal

b/d27,000

To Bal

b/d

15,000

 

By Bal

c/d

15,000

15,000   15,000

To Bal

b/d15,000    

6.

From Cash Book » Rs. 27,000 → To Pass Book » Rs. Rs. 15,000       DEDUCT

7. If your BRS starts with the bank a/c balance as per cash book

Pass Book [Customer a/c]

To Bal

b/d

15,000 By Bal

c/d

15,000

 

15,000   15,000

To Bal

b/d15,000    

→

Cash Book [Bank a/c]

To Bal

c/d

27,000

 

By Bal

b/d

By Party

15,000

12,000

27,000   27,000

   By Bal

b/d27,000

8.

From Pass Book » Rs. 15,000 → To Pass Book » Rs. Rs. 27,000       ADD

49

BANK RECONCILIATION

What you need to know?

The procedure explained above is to enable you to decide whether to add or deduct the amount

involved in the reason for the difference.

What you really need to understand is the influence of the various bank transactions on the bank

account balance and how and when they are recorded in the cash book and the pass book. In all the

above situations the journal entry that you would have to recollect is the same.

If you apply the logical steps above and are thorough with the knowledge of recording the bank

transactions in both the books, then preparing BRS is very simple.

Supplementary Exercise A – Family Fashions (with Bank Reconciliation)

50

BANK RECONCILIATION

FEDERATION BANK OF AUSTRALIAABN 81 311 422 533

Statement No: 001Voltas co. From: 01 May 20XXFamily Fashions603 Hume Highway To: 31 May 20XXALBURY NSW 2460

Enquiries 13 2001

Business Cheque Account

Name: Voltas co. Account No: 772-456

Branch: ALBURY NSW 2460 STATEMENTBSB 172 164 OF ACCOUNT

Account Summary:Opening Balance – Total DR + Total CR = Closing Balance$5 000.00 CR 2 207.40 3 910.04 $6 702.64 CR

Date Transaction detail Debit Credit Balance

1-May Statement opening balance 5 000.00 CR2-May 0286 Cheque 300.00 4 700.00 CR7-May 0288 Cheque 420.00 4 280.00 CR

10-May DEPOSIT 918.17 5 198.17 CR0287 Cheque 319.60 4 878.57 CR

13-May DEPOSIT 1 000.00 5 878.57 CR14-May DEPOSIT 474.37 6 352.94 CR20-May DEPOSIT 248.60 6 601.54 CR22-May DEPOSIT 385.00 6 986.54 CR27-May 0290 Cheque 267.30 6 719.24 CR28-May DEPOSIT 500.00 7 219.24 CR29-May 0291 Cheque 379.50 6 839.74 CR29-May DEPOSIT 383.90 7 223.64 CR31-May D/Cheque - Chez Lillian 500.00 6 723.64 CR

D/CHEQUE FEE 15.00 6 708.64 CRACCT KEEP FEE 6.00 6 702.64 CR20XX CLOSING BALANCE 6 702.64 CR***End of Statement***

***Please advise the Bank of any error or unauthorized entries promptly***Proceeds of cheques etc included in deposits must not be drawn against until cleared.

Please refer overleaf for key to abbreviation used.

Supplementary Exercise B – Baby World (with Bank Reconciliation)

51

BANK RECONCILIATION

FEDERATION BANK OF AUSTRALIAABN 81 311 422 533

Statement No: 001Voltas co. From: 01 November 20XXBaby World82 Alfred Street To: 30 November 20XXSOUTH MELBOURNE VIC 3205

Enquiries 13 2001

Business Cheque Account

Name: Voltas co. Account No: 562-419

Branch: SOUTH MELBOURNE VIC 3205 STATEMENTBSB 173 226 OF ACCOUNT

Account Summary:Opening Balance – Total DR + Total CR = Closing Balance$10 000.00 CR 2 361.81 11 562.93 $19 201.12 CR

Date Transaction detail Debit Credit Balance

1-Nov Statement opening balance 10 000.00 CR4-Nov 0061 Cheque 149.60 9 850.40 CR8-Nov 0062 Cheque 565.21 9 285.19 CR

11-Nov DEPOSIT 985.60 10 270.79 CR0063 Cheque 624.80 9 645.99 CRACCT KEEP FEE 9.00 9 636.99 CR

12-Nov DEPOSIT 1 451.09 11 088.08 CR13-Nov 0064 Cheque 655.30 10 432.78 CR14-Nov DEPOSIT 642.40 11 075.18 CR15-Nov DEPOSIT 1 528.45 12 603.63 CR20-Nov DEPOSIT 6 000.00 18 603.63 CR22-Nov Deposit - Cuddleware 641.89 19 245.52 CR26-Nov DEPOSIT 313.50 19 559.02 CR29-Nov 0066 Cheque 345.40 19 213.62 CR30-Nov GOVT. DEBITS TAX (BAD) 12.50 19 201.12 CR

20XX CLOSING BALANCE 19 201.12 CR***End of Statement***

***Please advise the Bank of any error or unauthorised entries promptly***Proceeds of cheques etc included in deposits must not be drawn against until cleared.

Please refer overleaf for key to abbreviation used.

Remittance details for direct deposits/transfers:Nov. 22 Cuddleware Discount allowed $16.46

Supplementary Exercise C – The Linen Locker (with Bank Reconciliation)

52

BANK RECONCILIATION

FEDERATION BANK OF AUSTRALIAABN 81 311 422 533

Statement No: 001Voltas co. From: 01 February 20XXThe Linen Locker184 Old Pittwater Road To: 30 February 20XXBROOKVALE NSW 2100

Enquiries 13 2001

Business Cheque Account

Name: Voltas co.Trading as The Linen Locker

Account No: 623-994

Branch: BROOKVALE NSW 2100 STATEMENTBSB 172 445 OF ACCOUNT

Account Summary:Opening Balance – Total DR + Total CR = Closing Balance$5 000.00 CR 4 222.87 6 355.34 $7 132.47 CR

Date Transaction detail Debit Credit Balance

1-Feb Statement opening balance 5 000.00 CR4-Feb 0881 Cheque 446.60 4 553.40 CR5-Feb DEPOSIT 840.84 5 394.24 CR7-Feb DEPOSIT 825.00 6 219.24 CR

0882 Cheque 718.57 5 500.67 CR0883 Cheque 809.60 4 691.07 CR

8-Feb DEPOSIT 621.50 5 312.57 CR11-Feb DEPOSIT 1 272.04 6 584.61 CR12-Feb 0884 Cheque 815.10 5 769.51 CR13-Feb ACCT. KEEP FEE 9.00 5 760.51 CR14-Feb DEPOSIT 1 500.00 7 260.51 CR18-Feb DEPOSIT 275.00 7 535.51 CR19-Feb DEPOSIT 520.96 8 056.47 CR20-Feb 0886 Cheque 114.40 7 942.07 CR21-Feb 0887 Cheque 809.60 7 132.47 CR25-Feb 0888 Cheque 500.00 6 632.47 CR26-Feb DEPOSIT 500.00 7 132.47 CR

20XX CLOSING BALANCE 7 132.47 CR***End of Statement***

***Please advise the Bank of any error or unauthorised entries promptly***Proceeds of cheques etc included in deposits must not be drawn against until cleared.

Please refer overleaf for key to abbreviation used.

53