Bank Reconciliation

In this Part, we discuss about Bank Reconciliation & related topics.

• Bank Accounts
• Bank Book & Pass Book
• Causes of Bank Balance Difference
• Bank Reconciliation
• Bank Reconciliation Methods
• Bank Reconciliation Statement

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 maintains several types of accounts suiting customers specific needs :

• Savings : Amount can be deposited at any time or withdrawn for a limited number of times.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.
• Fixed Deposit :  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.
• Recurring Deposit: Amount is deposited at regular intervals. Interest paid on this type of account is higher than on Savings Account.
• Current  : Amount can be deposited or withdrawn at any time and no interest is normally paid on this type of account.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.

Bank Book and Pass Book

• Bank Book : The Bank customer (i.e the organization) maintains the account of Bank in his own books (Bank Book or Cash Bank Book) which shows all the transaction with Bank the and balance lying with Bank.
• Pass Book : In the same way, Bank also maintains the account of the Customer in their books (Customer Ledger Account in the books of the Bank), which shows all the transaction of the customer with the Bank and the balance lying in customers account.

So, Bank Book and Pass Book denote same set of transaction between the Bank & its Customer, in each other’s books.

Contents of Bank Statement

Bank Pass Book and Bank statement is same document, showing the transactions recorded by Bank in the customer ledger accounts of the Bank.

Bank Statement is a loose leaf statement, which is sent by Bank to Customer, periodically (normally Monthly), normally for Business Accounts (like Current Account).

Bank Pass Book is bound book, normally used for Personal Accounts (like savings, Recurring Deposit etc). Customer brings the Pass Book to bank for updation of the entries as and when needed. Bank enters the successive entries upto date.

The Bank Pass Book (or Bank statement) shows the following essential information.

• Date : This shows the Date of transaction on which the Bank has recorded the transaction. This date may differ from the Date recorded in the Cash Book by the organisation (Bank Customer), for the respective transaction. Bank records the entries in its own chronological order.
• Particulars : This column contains Bank reference of the transaction, like Cheque Number or other reference for identification, particulars of the entry.
• Withdrawals : Amount withdrawn (Debited by bank) from Bank customer Account. So the Withdrawal column may be referred as Debit by Bank in its Pass Book / Bank statement.
• Deposits : Amount deposited (Credited by bank) into Bank customer Account. So the Deposit column may be referred as Credit by Bank in its Pass Book / Bank statement.
• Balance : This column shows the balance held by Bank in customer account, after considering the current entry
• Balance Type : It shows type of Balance :
• Credit Balance : If the amount is deposit with Bank (like in Savings / Current Account), indicating the amount Bank owes to the customer, it is represented by Cr.
• Debit Balance : If the amount is loan or overdrawn from Bank (like Cash Credit / Overdraft / Loan Account), indicating the amount customer owes to the Bank, it is represented by Dr.

So, the Credit  Balance in Pass Book / Bank Statement represents the Debit Balance in the organisation’s (Bank Customer’s) Cash / Bank Book, and vice versa.

Matching the Bank Book & Pass Book

The transactions shown in the two sets of books, viz, Bank Book (maintained by the Bank Customer of the transaction with Bank) and Pass Book (maintained by the Bank of the transaction with Bank Customer) refer to same transactions occurred between the Bank and its Customer. So, they are mirror reflection of same transaction in the books of the Bank & Bank Customer.

So, the transactions recorded in Bank Book and Pass Book should match. Consequently, the Bank Book Balance and Pass Book Balance should ideally be equal and opposite on a particular date.

So, the debit side of the bank column of the cash book should be exactly equal to the credit side of the Bank Pass Book.

Similarly, Credit side of the bank column of the cash book should be exactly equal to the Debit side of the Bank Pass Book.

But in practice, these balances vary (i.e do no match) due to several reasons. To reconcile the differences between Bank Book and Pass Book, Bank Reconciliation Statement is prepared.

Bank Reconciliation Statement

When Bank Book and Pass Book do not match, the unmatched entries are compiled and Bank Reconciliation Statement is prepared to ensure that though the Balance of these two books do not match, the entries of the two books agree and the difference is explained (reconciled)

Bank Reconciliation Statement shows the itemized details of differences between Cash Book and Pass Book with suitable explanation.

Bank Reconciliation Statement enables to detect errors that have crept in the Bank Book or in Pass Book, omissions of entry in any of the books. It also points out the delays (floating period) of collection of cheques.

Bank Reconciliation Statement is not a part of 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.

Opening Bank Reconciliation

The Bank reconciliation statement at the end of the period would become the Opening Bank Reconciliation statement for the next reconciliation period. This statement would also be used to match the previous period unreconciled entries appearing in subsequent period, in the same way as the current year Bank pass Book / Bank statement.

Causes of Bank Book and Pass Book Difference

Causes of Bank Book and Pass Book Difference

Amount shown in Pass Book but not shown in Bank Book.

– Amount Paid

• 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.

– Amount Received

• 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.

Amount shown in Bank Book, but not shown in Pass Book.

• Amount Paid
• Cheque issued but not yet presented for payment.
• Cheque issued but / returned dishonoured.
• Amount Received
• Cheque deposited but not yet collected or credited by bank.
• Cheque deposited but returned/ dishonoured.

Errors and omission in Bank Book.

• Entries not made in respect of cheque or cash deposited and paid.
• Wrong carry forward of balances.

Bank Reconciliation Methods

Bank Reconciliation may be done either starting from Bank Book Balance to arrive Pass Book Balance, or vice versa. Starting from either way, the unmatched entries are adjusted to arrive to the Balance in the other books.

Type of Bank Balances

• Deposit Balance : It representsCustomer’s money is lying with Bank. This is also referred as Favourable Balance (or Positive Balance). In the books of the Bank Customer (Bank Book), this is shown as Debit Balance, while in the Books of Bank (Bank Pass Book), this is shown as Crdit Balance. Such Balance occurs in case of Current Account, Savings Account etc, where customer deposits money into Bank.
• Overdraft Balance : It representsBank’s money is lying with Customer. This is also referred as Negative Balance. In the books of the Bank Customer (Bank Book), this is shown as Credit Balance, while in the Books of Bank (Bank Pass Book), this is shown as Debit Balance. Such Balance occurs in case of Cash Credit / Overdraft Account, etc, where customer takes loan from Bank.  

Bank Reconciliation Starting from Bank Book Balance

Bank Book Favourable Balance

Starting from Bank 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 Bank 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 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 Cash Book.

Bank Book Overdraft Balance

Starting from Bank 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 (Favourable Balance)

Prepare a Bank Reconciliation Statement as on 31^st December, 2015 from the following information:

• Bank Balance as per Cash Book (Dr.) on 31.12.15 is Rs.5,000.
• Cheque deposited for on 30^th December, Rs.5,000, out of these, credited by Bank upto 31.12.15 Rs.1,000.
• Bank charges Rs.25.
• Cheque issued for Rs.3,000 but only Rs.1,500 presented before 31.12.15.
• 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 31.12.15. It was found that Rs.475 is related to mistakes in subsidiary book of the company.
• Transfer by Bank to another account without intimating the company Rs.1,750.
• A Cheque received from Vikash dishonoured but information received on 2^nd Jan.2016 Rs.200

Bank Reconcilation Statement as on 31st Dec 2015

Particulars	Rs
Bank Balance as per Cash Book	5,000
Add: Cheque issued but not presented for payment (3,000-1,500)	1,500
Less: [Cheque deposited but not collected by Bank within Dec.(5,000-1,000) = 4000] + Bank charges not entered in the Cash Book (25) + wrong debit entries in the subsidiary book (475) + Transfer by Bank to another account not entered in the Cash Book (1750) + Cheque dishonored not entered in the Cash Book (200) = 6450	6450
Bank Balance as per Pass Book	50

Example (Overdraft Balance)

The Bank Account of Mukesh was balanced on 31^st March, 2015. 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.

• Cheques issued but not presented for payment till 31.03.2015 Rs.12,000.
• Cheques deposited but not collected by bank till 31.03.2015 Rs.20,000.
• Interest on term loan : Rs.10,000 debited by bank on 31.03.2015 but not accounted in Mukesh’s books.
• Bank charges : Rs.250 was debited by bank during March, 2015 but accounted in the books of Mukesh on 04.04.2015.
• An amount of Rs.1,00,000  representing cheque was wrongly credited to the account of Mukesh by the bank in their bank account.

Bank Reconciliation Statement of Mukesh as on 31.03.2015

	Particulars.	Rs.	Rs.
Bank overdraft as per the Cash Book Add : Cheques deposited but not collected by bank (20,000)+ Interest on term loan not  recorded in the Cash Book but debited by the Bank (10,000) + Bank charges debited by Bank but not recorded in the Cash Book (250) = 30,250 Less : Cheques issued but not presented for payment (12,000) + Wrong credit to Mukesh Account by Bank (1,00,000) = 1,12,000 Bank Balance as per Pass Book (Cr.)		5,000   30,250   1,12,000   76,750

Note: The Pass Book has Favourable balance i.e. Cr. balance

Bank Reconciliation Starting from Pass Book Balance

Pass Book Favourable Balance

Starting 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 Bank Book Favourable balance. Accordingly the items would be added and deducted.

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.

Pass Book Overdraft Balance

Starting 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 (Favourable Balance)

On 31^st March, 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:

• Cheques issued to ‘X’ for Rs.600 and to ‘Y’ for Rs.384 were not yet presented for payment.
• Bank charged Rs.35 Bank charges and ‘Z’ directly deposited Rs.816 into the Bank Account, which were not entered in the Cash Book.
• Two cheques on from ‘A’ for 515 and another from ‘B’ for Rs.1,250 were collected subsequently in the first week of April, although they were Banked on 25th March.
• Interest allowed by Bank Rs.45.

Prepare bank Reconciliation Statement as on 31^st March.

Bank Reconciliation Statement as on 31^st March

Balance as per Pass book (Cr.) (Favourable) Add : Bank charge (35) + Cheque from A & B deposited in March but credited by Bank in April, (515+1,250 = 1765) = 1800 Less : Cheque issued to X & Y for payment but not yet presented (600 +384 = 984) + Cash directly deposited by Z (816) + Interest allowed by Bank (45) = 1845	1,565   1800   1845
Balance as per Cash Book	1,520

Example (Overdraft Balance)

From the following information, prepare a Bank Reconciliation Statement as at 31st March, of A & Co., who had an overdraft balance of Rs.5,700 as per the Pass Book as on that date:

• Cheque deposited into the Bank but not shown in the Pass Book Rs.3,500.
• Cheque drawn but not cashed at the Bank Rs.2,500.
• Dividend of Rs.1,000 collected by the Bank directly on 31st March under the advice of A & Co.
• Debit side of the Cash Book was wrongly overcast by Rs.400.
• Cheques amounting to Rs.350 were deposited into the Bank, but were recorded in the debit side of the Pass Book

Bank Reconciliation Statement as on 31st March

Bank Overdraft as per Pass book	5,700
Add: Cheque drawn but not collected by Bank (2500) + Dividend collected by the Bank directly not recorded in the Bank Book (1000) = 3500 Less : Cheque deposited into Bank but not shown in the Pass Book (3500) + Debit side of the Cash Book was wrongly overcast (400) + Cheque deposited into Bank but not recorded in the Pass Book correctly ( 350+350=700) = 4600	3,500         4,600
Bank Overdraft as per the Bank Book	4,600

Adjustment Entries in Bank Book for mistakes / omissions found on Bank Reconciliation

The Bank Reconciliation shows the reasonwise differences. The difference due to time lag, e.g Cheques deposited but not collected and cheques issued but not cleared, no entry need to be made in Bank Book. These are likely to be cleared in subsequent period reconciliation, when these cheques are cleared by bank and the entries appear in Bank Statement / Pass Book.

However, for any mistake in recording in Bank Book, or omissions in Bank Book due to direct debit  / credit in Bank Account, without being entered in bank Book, as reflected in BRS, additional entries are to be recorded in the Bank Book.

Error occurred in Pass Book / Bank statement, if any, are not to be entered in Bank Book, but should be brought to the notice of the Bank. On rectification of error in Bank Pass Book, the difference will get cleared in subsequent reconciliation statement.

After entering the omitted  entries / rectification entries in Bank Book, a fresh reconciliation (considering the revised Bank Book Balance) should be drawn up again to ensure that all other entries except the differences due to time lag are eliminated. This ensures that the Bank Account as maintained by bank and the Bank Book as maintained by the organisation are completely in sync.

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