Bank reconciliation statement
The bank passbook shows the amount deposited in the bank and the amount withdrawn from it. The cash book balance on any given date must be the same as the balance shown in the bank column of the cash book on the same date. But in actual practice the bank book balance rarely matches the balance shown in the bank column of the cash book. This happens when some of the transactions appear in the cash book but not in the cash book or in the cash book but not in the cash book. The difference between the two balances is due to the following reasons.
1. Checks issued but not presented for payment. When checks are issued, the entry in the cash book is made immediately. In the bank’s accounting books, the entry is made only when the check is presented for payment. It is possible that at the time the balances of the two books are compared, some of the checks may have been issued but not presented for payment, resulting in a discrepancy between the two balances.
2. Checks paid into the bank but not yet cleared. As soon as the checks are deposited in 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 checks have cleared. It is possible that when comparing the cash book with the book some of the checks deposited by the concern remain uncashed.
3. Interest allowed by the bank. The bank may have credited the customer’s account with the interest and made a liability entry. It is possible that the entry 10 of such interest was not made by the customer in the bank column of the cash book, resulting in a discrepancy between the two balances.
4. Interest and bank charges debited by the bank. The bank debits the customer’s account through overdraft interest. It also debits the customers account through contingency fees and collection fees. Immediately after making these charges, the bank debits the customer’s account. But entries in the cash book are made by the customer only when he receives the bank statement or bill.
5. Interest, dividends, etc. collected by the bank. Sometimes interest on government securities or stock dividends is collected by the bank and credited to the customer’s account. If the entry for them does not appear in the cash book, the balance will differ.
6. Direct payment from the bank Sometimes, with standing instructions from the client, certain payments such as insurance premium, club fees, etc. are carried out by the bank. The entry in the bank column of the cash book is made only when the necessary notification for this has been received by the bank from the customer. Entries in the cash book and pass book may be on different dates.
7. Direct payment to the bank by a customer. Sometimes our customers deposit money directly into the bank account, the corresponding entry for which may not appear in the cash book due to delay in the necessary instructions from the customers.
8. Dishonoring of an account discounted by the bank. Sometimes customers get their bills at a discount from the bank. If the bank is unable to receive payment of these bills on the due date, it will debit the customer’s accounts with the amount of the bills along with marking charges, if any. The customer will pass the entry in their books after receiving the information from the bank.
9. Any mistake made by the bank Apart from the above reasons, if any mistake is made either by the bank or by the customer himself in recording the transactions in their respective books, it will lead to a discrepancy between the two balances.
A reconciliation statement is therefore prepared at periodic intervals with a view to pointing out the items which cause such discrepancy between the balance as shown in the bank column of the cash book and the bank book on a given date. Other benefits of preparing a statement of reconciliation are:
(1) The errors that may have been made in the cash book or in the output book are revealed.
(2) The reconciliation statement will also indicate any undue delay in the clearing of out-of-station cheques.
(3) The declaration of reconciliation prepared at regular intervals will discourage the staff of one or the bank from committing the acts of abuse. It is possible that the cashier made an entry in the cash book but did not deposit the amount in the bank.
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