unit-9-bank-reconciliation-statement

Unit-9 Bank Reconciliation Statement

Learn about the causes of this difference and the method of reconciling the balances of these two books.

State various causes of disagreement between the balances shown by the cash book and the pass book.

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Learning Pundits Content Team

Written on Jun 25, 2019 3:20:40 PM

The causes that lead to the disagreement of the balances in the cash book and the pass book can be classified as follows:

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

 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.

a)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.

b)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. 

b)Cheques dishonoured 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 dishonoured. The bank returns such cheques to the firm. On receiving the dishonoured 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 dishonour 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.

c)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:

i.A transaction, whether on the debit side or on the credit side, recorded more than once.

ii.A transaction to be recorded on the debit side has been wrongly recorded on the credit side, or vice versa.

iii.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.

iv.Errors committed in balancing the cash book, or carrying forward the balance to another page.

2.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 Bank Reconciliation Statement 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.

a)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.

b)Amounts collected by the bank a s 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 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.

c)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.

d)Bank charges: The banks usually charge their customers for various services 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.

e)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.

f)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.

g)Discounted cheques/bills receivable dishonoured 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 dishonoured, the bank would immediately debit the firm's account. But, the firm would pass the entry for the dishonour only when it receives the intimation from the bank. Thus, the balance as per cash book 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 dishonoured.

h)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.

iv.Recording of transactions which belong to some other customer in the firm's account.



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