Bank Reconciliation Statement.

Bank Reconciliation Statement Meaning, Definition and Characteristics.

Bank Reconciliation Statement : Meaning

Bank Reconciliation Statement is a statement prepared by the account holder on a particular date to reconcile the bank balance as per Cash Book with the balance as per Bank Statement or Bank Pass Book showing entries causing differences between the two balances. 

Amount deposited (both cash and cheque) into bank is recorded in the Bank Column of Two-column Cash Book on the debit side (i.e., Receipts Side) while withdrawals and Issue of cheques are recorded on the credit side (i.e., Payments side).

Bank also maintains an account of the account holder in its books of account. Deposits by the account holder are recorded on the credit side of the account holder's account and withdrawals on the debit side. A copy of it is given to the account holder in the form of Statement or Pass Book for its records and reconciliation.

Thus, debit entries in the Cash Book are reflected (shown) on the credit side of the Bank Statement or Bank Pass Book, while credit entries in the Cash Book are reflected (shown) on the debit side of the Bank Statement or Bank Pass Book.

Transactions relating to deposits and withdrawals made during the period being recorded in both Cash Book and Bank Statement or Pass Book, balances shown by the two records at the end of the period should normally agree, i.e., should be same. But, sometimes the two balances differ. If the two balances differ, it is necessary to know the reasons for the difference as it may require entry to be passed in the books d account. The difference may be because of an error in Cash Book or Bank Statement/Pass Book or cheque issued not having been presented for payment or cheque having been recorded in the Cash Book but not deposited in bank or vice versa for any other reason. A statement showing the reasons or causes of differences is prepared. This statement is known as Bank Reconciliation Statement.

Preparing Bank Reconciliation Statement is not a part of Book Keeping. It is a Bank Statement or Bank Pass Book to ensure that there are no errors or omissions in method or technique to reconcile bank balance in Cash Book with the balance as per recording the bank transactions in the Cash Book.

Bank Reconciliation Statement: Need or Importance

Bank Reconciliation Statement is prepared because of the following :-

1. It brings out the errors if any, committed either in the Cash Book or in the Bank Statement or Pass Book. 

2. Undue delay in the clearance of cheques deposited is known from the reconciliation

3. Regular reconciliation discourages embezzlements. 

4. Reconciliation helps in verifying the accuracy of entries recorded in the Cash Book 

5. It Shows actual bank balance.

What is Bank statement or Bank Pass Book ?

BANK STATEMENT OR BANK PASS BOOK Bank Statement or Bank Pass Book is a copy of account of the account holder in the books of the bank. It is issued by the bank to the account holder for comparing the entries in the Bank Statement or Bank Pass Book with the entries in the Cash Book and differences are determined. A debit balance in the Bank Statement or Bank Pass Book means that the Bank is to recover that much amount from the account holder It is an asset for the bank and liability for the account holder, whereas a Credit balance means that the Bank is to pay that much amount to the account holder. It i a liability for the bank and an asset for the account holder.

REASONS OF DIFFERENCE BETWEEN BALANCES AS PER CASH BOOK AND BANK STATEMENT OR BANK PASS BOOK

Balances as per Cash Book and Bank Statement or Bank Pass Book may differ under some situations. We can broadly classify these situations into three categories: 

1. Difference Due to Timing: There is always a time gap between recording a transaction in the books of account and it being recorded by the bank. For example, a cheque issued is recorded in the Cash Book immediately but the bank records it on being presented for payment which is on a later date. Similarly, a cheque deposited is recorded in the Cash Book immediately whereas the bank credits it on it being cleared, i.e., when bank has collected the amount. Thus, there is always a time gap in recording entries in the two books, i.e., Cash Book and Bank Statement or Bank Pass Book. If Bank Reconciliation Statement is prepared in between the two dates, differences will exist. So reconcile these difference Bank Reconciliation Statement.

2. Transactions Recorded by the Bank: Sometimes transactions are recorded by bank, which become known to the account holder on receiving of Bank Statement of Bank Pass Book. For example, interest charged or bank charges, etc., are known to the account holder after receiving the Bank Statement or Bank Pass Book. Such transactions in the Bank Statement lead to a difference between the balance as per Cash Book and balance as per Bank Statement or Bank Pass Book.

3. Errors: Errors may be committed by the bank or the account holder and these errors result in difference in the balances of Cash Book and Bank Statement or Pass Book. For example, wrong balance may be carried forward, a transaction may not have been recorded in the Cash Book or amount of a transaction may have been wrongly recorded in an account.