Bank
Reconciliation
By
Asok Nadhani
13.1 Bank Accounts
Bank, an institution, acts as a custodian of money. It
receives deposits from public, lends to public and invests them into different
funds. Bank mainly maintains four types of deposit accounts with its customers:
i.
Savings Account- Amount can be deposited at any time or withdrawn for
a limited number of times. Interest is paid by the bank to the customer on this
type of account is comparatively low.
ii.
Fixed Deposit Account- Amount is deposited once for a fixed
period. Interest is paid periodically or on maturity. Highest rate of interest is
paid on this type of account.
iii.
Recurring Deposit Account- Amount is deposited at regular intervals.
Interest paid on this type of account is higher than on Savings Account.
iv.
Current Account-Amount can be deposited or withdrawn at any time and
no interest is paid on this type of account. Bank even charges a certain amount
on this type of account. Generally business concerns open this type of account
for their day to day transactions.
13.2 Bank Pass
The bank provides a Bank Statement to its
customer (or updates a Pass book) at
regular intervals that gives itemized details of payments, deposits and other charges
for the period. Infact Bank Statement is a copy of the customer’s account in
the Bank’s ledger.
13.3 Cash Book and Pass Book
Balance
Cash Book balance and Pass Book Balance
should be equal and opposite on a particular date (i.e. the debit side of the
bank column of the cash book must be exactly equal to the credit side of the
Bank Pass Book). But they vary due to several reasons. To reconcile the
differences between Cash Book and Pass Book, Bank Reconciliation Statement is
prepared.
13.4
Bank Reconciliation Statement
i)
Bank
Reconciliation Statement shows the itemized details of differences between Cash Book and Pass Book with suitable explanation.
ii)
This
statement is not a part of double entry book keeping system. It is just an
internal control system to establish accuracy of Cash Book balance. It can be
prepared when Bank Statement is received from Bank.
13.5
Causes of Difference between Cash Book and Pass Book
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1. Amount shown in
the Pass Book but not shown in the Bank column of the Cash Book.
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i. Amount Paid:
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- Bank charges
and interest on overdraft not recorded.
- Direct Payment
made by Bank as per as standing order.
- Dishonour of
Bill discounted with the bank.
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ii. Amount
Received:
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- Interest and
Dividend collected by the Bank.
- Amount directly
deposited into Bank by Debtors.
- Bill collected
by Bank on Behalf of Debtors.
- Interest credited
by Bank.
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2. Amount shown in
the Bank column of the Cash Book, but not shown in Pass Book.
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i. Amount Paid:
- Cheque issued
but not yet presented for payment.
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ii. Amount
Received:
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- Cheque
deposited but not yet collected or credited by bank.
- Cheque deposited
but dishonoured.
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3. Errors and omission
in Bank column of Cash Book.
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- Entries not
made in respect of cheque or cash deposited and paid.
- Wrong carry
forward of balances.
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13.6
Importance of Bank Reconciliation Statement
1. The statement is
prepared to reconcile and explain the causes of differences between Cash Book and Pass Book.
2. It helps to
detect any mistake and errors that have crept in the Cash Book or in Pass Book.
3. It also expresses
the reasons for delay while collecting cheques.
13.7
Preparation of Bank Reconciliation Statement
The Bank
Reconciliation Statement is to be prepared on mere common sense in the
following way-
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Reconciliation
Method
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Balance Type
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a.
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Starting from Cash Book Balance,
arriving to Pass Book Balance.
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i)
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Cash Book Favourable
(Positive Balance)
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ii)
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Cash Book overdraft
(Negative Balance)
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b.
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Starting from Pass Book
balance, arriving to Cash Book Balance
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i)
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Pass Book Favourable
(Positive Balance)
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ii)
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Pass Book Favourable
(Negative Balance)
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13.7.1
Starting from Cash Book Balance
The Bank Balances may be favorable (in Cash
or Current A/c etc.) or may be withdrawn (in Cash or Cash credit or OD A/c).
The adjustments in Cash or Overdrawn balance (unfavorable) would be just
opposite to the adjustments required for favorable Balance.
13.7.1.1
Cash Book Favourable Balance
If we start
reconciliation with Cash Book Favourable Balance, we have to ascertain the
impact of each item on the Pass Book Favourable balance i.e. whether the item
increases or decreases the Pass Book Favourable balance. Accordingly the Items
would be added or deducted.
Balance as per
Cash Book:
Add:
- Cheque issued but
not yet presented for payment.
- Interest credited
by Bank but not recorded in the Cash Book.
- Amount directly
deposited into Bank by Debtors but not recorded in the Cash Book.
Less:
- Cheque deposited
but not yet collected or credited by bank.
- Deposited cheque
dishonoured but not entered in the Cash Book.
- Bank charges and
interest on overdraft charged by bank not recorded in the Cash Book.
- Direct Payment
made by Bank as per as standing order, unrecorded in ash Book.
13.7.2 Cash Book Overdraft
Balance
If we start
reconciliation with Cash Book Overdraft Balance we have to ascertain the impact
of each item on the Pass Book Overdraft balance i.e. whether the item increases
or decreases the Pass Book Overdraft balance. In this case the adjustments ‘Add’
and ‘Less’ will just be reverse of the above Cash or Favourable balance, as
discussed above.
Example:
1
Prepare a Bank Reconciliation Statement
as on 31st December,
2009 from the following information:
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i. Bank Balance as
per Cash Book (Dr.) on 31.12.09 is Rs.5,000.
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ii. Cheque deposited
for collection on 30th December, Rs.5,000, out of these cheques
credited by Bank upto 31.12.09 Rs.1,000.
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iii. Bank charges
Rs.25.
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iv. Cheque issued
for Rs.3,000 but only Rs.1,500 presented before 31.12.09.
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v. There were two
debit entries in the Pass Book of
Rs.295 and Rs.475. Rs.295 wrongly debited by Bank has been reversed by Bank
before 31.12.09. It was found that Rs.475 is related to mistakes in
subsidiary book of the company.
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vi. Transfer by Bank
to another account without intimating the company Rs.1,750.
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vii. A Cheque
received from Vikash dishonoured but information received on 2nd
Jan.2010 Rs.200
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Solution:
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Bank
Reconciliation Statement as on
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Particulars
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Rs.
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Rs.
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Bank Balance as per Cash Book
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5,000
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Add:
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(iv) Cheque issued but not presented for
payment(3,000-1,500)
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1,500
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1,500
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6,500
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Less:
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(ii) Cheque deposited but not collected by
Bank within Dec.(5,000-1,000)
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4,000
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(iii) Bank charges not entered in the Cash Book
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25
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(v) wrong debit entries in the subsidiary book
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475
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(vi) Transfer by Bank to another account
not entered in the Cash Book
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1,750
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(vii) Cheque dishonored not entered in the
Cash Book.
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200
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6,450
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Bank Balance as per Pass Book
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50
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Example: 2 (Overdraft Balance) [Hanif Pg- 6.9, Ills 7]
The
Bank Account of Mukesh was balanced on 31st March, 1992 . It showed an overdraft of
Rs.5,000. The Bank statement of Mukesh showed a credit balance of Rs.76,750.
Prepare a Bank Reconciliation Statement taking the following into account.
(1)
Cheques issued but not
presented for payment till 31.03.1992 Rs.12,000.
(2)
Cheques deposited but not
collected by bank till 31.03.1992 Rs.20,000.
(3)
Interest on term loan –
Rs.10,000 debited by bank on 31.03.1992 but not accounted in Mukesh’s books.
(4)
Bank charges – Rs.250 was
debited by bank during March, 1992 but accounted in the books of Mukesh on
04.04.1992.
(5)
An amount of Rs.1,00,000 representing
cheque was wrongly credited to the account of Mukesh by the bank in their bank
account.
[C.A.
Solution:
Bank Reconciliation Statement of Mukesh as on
31.03.1992
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Particulars.
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Rs.
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Rs.
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Bank overdraft as per the
Cash Book
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5,000
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Add:
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(2)
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Cheques deposited but not
collected by bank till 31.03.1992
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20,000
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(3)
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Interest on term loan has
not been recorded in the Cash Book but debited by the Bank on 31.03.1992
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10,000
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(4)
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Bank charges debited by
Bank but not recorded in the Cash Book
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250
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30,250
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35,250
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Less:
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(1)
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Cheques issued but not
presented for payment
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12,000
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(5)
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Wrong credit to Mukesh
Account by Bank
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1,00,000
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1,12,000
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Bank Balance as per Pass
Book (Cr.)
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76,750
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Note: The Pass Book has Favourable balance
i.e. Cr. balance
13.7.2.
Starting from Pass Book Balance
The Pass Book Balances may be favorable (in
Cash or Current A/c etc.) or may be withdrawn (in Cash or Cash credit or OD
A/c). The adjustments in Cash or Overdrawn balance (unfavorable) would be just
opposite to the adjustments required for favorable Balance.
13.7.2.1 Pass Book Favourable
Balance
If we start
reconciliation with Pass Book Favourable Balance we have to ascertain the
impact of each item on the Cash Book Favourable balance i.e. whether the item
increases or decreases the Cash Book Favourable balance. Accordingly the items
would be added and deducted, as explained below:
Balance as per
Pass Book:
Add:
- Cheque deposited
but not yet collected or credited by bank.
- Deposited cheque
dishonoured but not entered in the Cash Book.
- Bank charges and
interest on overdraft charged by Bank not recorded in the Cash Book.
- Direct Payment
made by Bank as per as standing order, not recorded in Cash Book.
Less:
- Cheque issued but
not yet presented for payment.
- Interest credited
by Bank but not recorded in the Cash Book.
- Amount directly
deposited into Bank by Debtors but not recorded in the Cash Book.
Example: 3 On 31st
March, 2003 Pass-Book of a trader showed a Credit Balance of Rs.1,565, but the
Pass-Book Balance was different for the following reasons from the Cash Book
Balance:
(i)
Cheques issued to ‘X’ for Rs.600 and to ‘Y’ for
Rs.384 were not yet presented for payment.
(ii)
Bank charged Rs.35 Bank charges and ‘Z’ directly deposited
Rs.816 into the Bank Account, which were not entered in the Cash Book.
(iii)
Two cheques on from ‘A’ for 515 and another from
‘B’ for Rs.1,250 were collected in the first week of April, 2003 although they
were Banked 25-03-2003 .
(iv)
Interest allowed by Bank Rs.45.
Prepare bank Reconciliation
Statement as on 31st
March, 2003 .
[CA
– PE- I, 2003 – Nov]
Solution:
Bank
Reconciliation Statement as on 31st
March, 2003
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Particulars
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Rs.
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Rs.
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Balance as per Pass book
(Cr.) (Favourable)
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1,565
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Add:
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(ii) Bank charge
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35
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(iii)
Cheque from A & B deposited on
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1,765
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1,800
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3,365
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Less:
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(i) Cheque issued to X & Y for payment but not yet presented (600 +384)
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984
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(ii) Cash directly
deposited by Z
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816
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(iv) Interest allowed by
Bank
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45
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1,845
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Balance as per Cash Book
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1,520
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13.7.2.2 Pass Book Overdraft
Balance
If we start
reconciliation with Pass Book Overdraft Balance, we have to ascertain the
impact of each item on the Cash Book Overdraft balance i.e. whether the item
increases or decreases the Cash Book Overdraft balance. In this case the above
mentioned ‘Add’ and ‘Less’ item will be reverse of the above.
Example 4 From the following information, prepare a Bank Reconciliation Statement
as at 31.03.2009 of A & Co., who had an overdraft balance of Rs.5,700 as
per the Pass Book as on that date:
(i)
Cheque
deposited into the Bank but not shown in the Pass Book Rs.3,500.
(ii)
Cheque
drawn but not cashed at the Bank Rs.2,500.
(iii)
Dividend
of Rs.1,000 collected by the Bank directly on 31.03.2009 under the advice of A
& Co.
(iv)
Debit
side of the Cash Book was wrongly overcast by Rs.400.
(v)
Cheques
amounting to Rs.350 were deposited into the Bank, but were recorded in the
debit side of the Pass Book
Solution:
A
& Co
Bank Reconciliation Statement
as on 31.03.2009
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Particulars
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Rs.
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Rs.
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Bank Overdraft as per Pass book
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5,700
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Add:
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(ii) Cheque drawn but not cashed at the Bank
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2,500
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(iii) Dividend collected by the Bank directly not
recorded in the Cash Book
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1,000
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3,500
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9,200
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Less:
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(i) Cheque deposited into
Bank but not shown in the Pass Book
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3,500
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(iv) Debit side of the Cash Book was wrongly overcast
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400
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(v) Cheque
deposited into Bank but not recorded in the debit side of the Pass Book
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700
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4,600
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Bank Overdraft as per the
Cash Book
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4,600
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