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Bank Reconciliation Statement

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• It is a statement prepared at the end of every month or so to explain the causes for differences between the balance of pass book and bank column of the cash book, as on a particular date and to reconcile between both the balances for the purpose of cross-verification.

The meaning of Bank Reconciliation Statement

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It helps to know the actual bank balanceIt discloses the errors in cash book and pass

book so that they can be correctedIt prevents frauds in recording banking

transactionsIt ensures that the cash book is being kept up-

to-date and accurate

The need of Bank Reconciliation Statement

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1. Unpresented cheques: A trader issues cheques to others and enters the same in the cash book on the same date. If those cheques are not presented for payment to the bank, there cannot be any entry in the pass book until they are presented.

2. Uncredited Cheques: A trader deposits cheques received from others and enters the same in cash book on the same date. Banker requires time to collect them, specially the outside cheques. But the banker will not enter those cheques in the pass book until he collects them.

3. Cheques omitted to be deposited into bank: A trader after receiving the cheques enters them in the cash book on the same date but he omits to deposit the same into bank. In this case there cannot be any entry in the pass book.

4. Any charges or commission and interest debited by the banker: The banker charges commission for the services rendered. He also charges interest on loans. The banker debits these charges in the pass book on the certain date. But a trader will make the corresponding entries in the cash book only after he receives intimation from the banker or when he actually verifies the pass book.

Reasons for the differences between

the cash book balance and the bank statement

balance

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5. Interest on deposits credited by the banker: On deposits of a trader the banker allows some interest. The banker credits this amount in the pass book on a certain date. Trader cannot enter the same in the cash book until he receives intimation from the bank or he actually verifies the pass book.

6. Dividend, interest, etc., collected by the bank: The banker collects dividend on shares and interest on securities belonging to a trader. He credits these amounts in the pass book on a certain date. But the trader cannot enter the same in the cash book until he receives intimation from the bank or he actually verifies the pass book.

7. Amounts paid by bank as per standing instructions: The banker makes payments on trader’s behalf, for insurance premium, loan instalments, etc., and debits in the pass book on a certain date. But the trader cannot enter the same in the cash book until he receives intimation from the bank or he actually verifies the pass book.

8. Cheques or cash paid direct into bank by other parties: The banker receives the amounts on behalf of trader and credits the same in the pass book on a certain date. But the trader cannot enter the same in the cash book until he receives intimation

from the bank or he actually verifies the pass book.

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9. Cheques issued and subsequently dishonoured: The trader has already issued cheques to his creditors, etc., and has entered in the cash book on that date. But subsequently the cheque is dishonoured by him for some reasons. Hence the banker does not make any entry in the pass book.

10. Cheques paid into bank subsequently dishonoured: The trader has already deposited cheques, bills, etc., and has made the entry in the cash book on that date. But subsequently they are dishonoured when the banker sends them for collection. Hence the banker does not make any entry in the pass book.

11. Cheques, etc., paid in and credited in pass book but subsequently dishonoured: The trader has paid cheques, etc., into bank after making the entry in the cash book. The banker has also credited the same in the pass book. But subsequently when sent for collection, they are dischonoured. So the banker debits it in the pass book. The trader cannot make any entry for dishonour until he receives an intimation from the banker or he actually verifies the pass book.

12. Mistakes in cash book or pass book: Mistakes or errors might have been committed either in the cash book or in the pass book. So there will be difference between the two balances upto the date such mistakes are corrected.

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NATURE OF THE CASH BOOK AND THE BANK STATEMENT.

The balance in ash book is an asset to the

Cash book (bank column only)

Debit represents an increase Credit represents an decrease

Bank StatementDr Cr Balance

(representsdecrease)

(representsincrease)

(representsthe amountowned to the clients)

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Drawing up a Bank Reconciliation Statement

1. To reconcile the Bank statement with the Corrected Cash Books

2. To reconcile the Bank statement with Unadjusted Cash Book

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5. DRAWING UP A BANK RECONCILIATION STATEMENT

Three steps:

1. Check the bank statement and the cash book to identify the items which have been omitted.

2. Update the cash book with any omissions and errors made by the firm itself.

e.g. Credit transfers (debit cash book) Bank interest (debit cash book) Standing orders / direct debits (credit cash book) Bank charges (credit cash book) Dishonoured cheques (credit cash book)

3. Prepare the bank reconciliation statementTo reconcile the bank statement with the corrected cash book

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Bank Reconciliation Statement as at XXXXRs. Rs. Corrected balance in hand as per Cash Book

x

Add Unpresented cheques x

Wrong credits by the bank x x

x Less Bank deposits not yet entered

on Bank Statement x

Wrong debits by the bank x x

x

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Overdraft

• But sometimes the cash book may show credit balance. It means, bank overdraft for which the pass book shows debit balance.

Over draft

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Easy to calculate

In case of favourable balance

Dr. Cash Book Cr.Receipts Payments (+) (-)

Dr. Pass Book Cr.Payments Receipts (-) (+)

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Easy to calculate

In case of Unfavourable or Overdraft balance

Dr. Cash Book Cr.Receipts Payments (-) (+)

Dr. Pass Book Cr.Payments Receipts (+) (-)

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Easy to rememberCauses of difference Effect on

balanceCash Book Pass Book

1. Debits in Cash Book only (unrealised cheques)2. Credits in Cash Book only (unpresented cheques)3. Credits in Pass Book only (interest, collections etc.,)4. Debits in Pass Book only (Charges, direct payments,

etc.)

Note: In case of Bank Overdraft the effect of the causes would be opposite.

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N. BALA MURALI KRISHNA