With the increase in scale and volume of trade, commerce and business, entities faced difficulties in handling all the transactions in cash. Due to increasing use of bank in the modern society, business entities started dealing through bank on a regular basis, for both receipts and payments. Transactions done via bank account are better in terms of transparency and safety as well. Nowadays, it has rather become legally necessary to operate the transactions through bank after a certain limit.
Money put in a bank also helps the economy because the deposits made in various forms are used by the bank to lend funds to those who need it. Thus money which would have been otherwise idle is put to use. Those who deposit the money are able to withdraw it anytime, as per the agreed terms and conditions.
Apart from the above function, the bank also renders the following useful services:
1) The bank discounts the promissory notes of the customers; it helps them receive the amount before the due date in return of a small charge called ‘discount’.
2) Overdraft facility is made available to the good and credible customers of the bank so that if they need to make an urgent payment, they can make it even if they don’t sufficient fund in their account at the time.
3) The bank provides loans to its customers at an interest rate usually lesser than any other lender in the market.
4) The bank collects dividends or interests on securities on behalf of its customers.
5) The bank make payment of the insurance premium, rent, etc. on due dates on behalf of its customers.
6) Transfer of money to another person or place is facilitated by the bank for its customers.
7) The bank sales or purchases shares, debentures or other government securities on behalf of its customers.
8) The bank sometimes act as a guarantor for its customer whose credit is good.
9)The bank also issues letter of credit or travellers’ cheque to facilitate commerce and trade.
A bank passbook is a reflection of the customer’s bank account. Bank issues passbook to all its account holders on which they can the statement of their receipts and payments during a particular period. A passbook represents almost a copy of the ledger account of the customer in the books of the bank. Thus, it’s a way through which the bank keep its customers informed about the entries made in their account deposits and withdrawals.
|Date||Particulars||Withdrawals (Dr.)||Deposits (Cr.)||Dr. / Cr.||Balance|
The bank balance shown in the passbook is called ‘passbook balance’ for reconciliation purposes.
The credit balance shows the excess of deposit over the withdrawals (positive balance). The debit balance shows the overdraft balance taken by the customer (negative balance).
Note: The nature of balance shown as per passbook is opposite of that of the cash ledger or cash book prepared by the entity itself, i.e. a debit balance is passbook represents a credit balance in the cash book and vice-versa.
Bank reconciliation statement is prepared to reconcile the balance as per the cash book with the balance as per pass book by showing all causes of differences between the two. Ideally, there should be no difference between these two balances but it is very much possible to that the balances on both the books don’t tally because of various reasons like missing out on recording an entry in any of the books. We’ll discuss about the causes in detail later. After finding out the reasons for non-agreement, reconciliation is done. This reconciliation is presented in a form of a statement commonly known as the Bank Reconciliation Statement.
Bank Reconciliation Statement acts as a very important tool for internal control of cash flows. It also helps in detecting errors, frauds or irregularities occurred while passing entries in the cash book or the passbook, if any.
Following are the features or importance of a bank reconciliation statement:
(i)It brings out errors that may have been committed either in the cash book or the passbook, both intentionally or unintentionally;
(ii)Any undue delay in the clearance of cheques is shown up, which was otherwise unknown to the entity.
(iii)A regular reconciliation process discourages the accountants from embezzlement.
The difference in the balances between both the books can be because of the following reasons:
1. Timing differences,
2. Differences arising due to errors in recording the entries
When an entry is recorded in either of the book earlier and later in another, it is termed as timing difference. The timing may arise on account of the following reasons:
1) Cheques issued but not presented: The entry in the cash book is made immediately on issue of cheque but the entry will be made by the bank only when the cheque is presented for payment. Therefore there is a gap of some days between the entry in the cash book and the pass book.
E.g. The balance as per Cash book and pass book are $10,000. Cheque of $2,000 is issued but not presented for payment. On issues of cheque, the bank account in cash book is credited by $2,000 and so the balance is reduced to $8,000. Whereas balance in the passbook remains $10,000 until the cheque is presented for payment.
2) Cheque paid into the bank but not cleared: An accountant debits the bank account in the books of accounts once the cheque is sent to the bank, but the bank credits the amount in the passbook only when the cheque is cleared.
E.g. The balance as per cash book and pass book are $15,000. Cheque of $2,000 is deposited but not cleared. When cheque is deposited into the bank, the bank account in the books of the entity is increased to $17,000. Whereas balance in the passbook remains $15,000 until the cheque is cleared.
3) Interest allowed by the bank: Whenever interest is allowed by the banks to the customer, the passbook is immediately credited/ increased with that amount. But the customer gets to know about the interest received when he gets the statement, then only he makes the enty in the cash book.
4) Interest or expenses charged by the bank: Like (c), the interest or expenses charged by the bank in lieu of the services provided are debited/ deducted in the passbook immediately. Whereas, it is entered in the cash book later when the accountant gets to know about the same.
5) Interest and dividends collected by the bank on behalf of the customer: It has the same effect as (c).
6) Direct payments made by the bank like insurance premium: It has the same effect as (d).
7) Direct payment by a customer/ debtor in the bank or Bills collected by the bank on behalf of the customer: Same treatment as (c).
8) Dishonour of the bill discounted with the bank earlier: If the bank is not able to receive the payment of the bill discounted by it, it will debit customers’ account with the amount of the bill plus the discounting charges due. The customer will naturally make the entry in his books when he receives the passbook.
All the above mentioned reasons causes timing differences in the entries being recorded in the passbook and cashbook.
Errors in entries can occur in both the passbook and the cashbook. A bank rarely commits a mistake in recording its entries in the passbook, so the errors are generally found in the cashbook entries.
Errors include omission of entry, wrong amount recorded, entry recorded on the wrong side of the book, wrong totaling or balancing of the book and recording third party transactions.
Reconciliation process begins with picking up on the following balances:
(i)Dr. balance as per cash book (Favourable balance)
(ii)Cr. balance as per cash book (Unfavourable balance)
(iii)Dr. balance as per pass book (Unfavourable balance)
(iv)Cr. balance as per pass book (Favourable balance)
Note: Both favourable balances and both unfavourable balances are interchangeable, i.e. “Dr. balance as per cash book” means the same thing as “Cr. Balance as passbook” which is deposits.
After starting with the beginning balance, we need to add the amounts which are missing in our books but recorded in another and reduce the amounts which are recorded in our books but missing in another, to arrive at the balance as per the another book.
Traditionally there are two methods of reconciling cashbook with the passbook, which are-
1. Without preparation of adjusted cashbook
2.After preparation of adjusted cashbook
The second method suggests preparation of an adjusted cashbook which is completely optional and generally not required. This is the reason that the first method is usually followed, so we are going to be discussing the first method in detail.
This method involves steps which we discussed earlier under “Reconciliation Procedure”. Based on that discussion, following is the summarized table showing the treatment of various items if we start from different balances as the beginning point-
|Causes of Differences ||Dr. balance as per cash book||Cr. balance as per cash book||Dr. balance as per pass book||Cr. balance as per pass book|
|Cheque deposited but not cleared||Subtract||Add||Add||Subtract|
|Cheque issued but not presented||Add||Subtract||Subtract||Add|
|Cheque directly deposited by a customer in the bank||Add||Subtract||Subtract||Add|
|Interest, dividends, etc. directly received in the bank account||Add||Subtract||Subtract||Add|
|Expenses directly paid by the bank||Subtract||Add||Add||Subtract|
|Bank charged levied by the bank||Subtract||Add||Add||Subtract|
|Wrong Debit in the cashbook||Subtract||Add||Add||Subtract|
|Wrong credit in the cashbook||Add||Subtract||Subtract||Add|
|Wrong Debit in the passbook||Subtract||Add||Add||Subtract|
|Dr. side of the bank account undercasted in the cash book||Add||Subtract||Subtract||Add|
|Dr. side of the bank account overcasted in the cash book||Subtract||Add||Add||Subtract|
|Cr. side of the bank account undercasted in the cash book||Subtract||Add||Add||Subtract|
|Cr. side of the bank account overcasted in the cash book||Add||Subtract||Subtract||Add|
|Bills receivable collected directly by the bank||Add||Subtract||Subtract||Add|
|Bills previously discounted by the bank dishonoured||Subtract||Add||Add||Subtract|
|Final Balance||If the answer is positive (favourable) then Cr. Balance as per the passbook. If negative (unfavourable), then Dr. balance as per the passbook||If the answer is positive (unfavourable) then Dr. Balance as per the passbook. If negative (favourable), then Cr. balance as per the passbook||If the answer is positive (favourable) then Dr. Balance as per the cashbook. If negative (unfavourable), then Cr. balance as per the cashbook||If the answer is positive (unfavourable) then Cr. Balance as per the cashbook. If negative (favourable), then Dr. balance as per the cashbook|
E.g. The cash book of Mr. Ross shows $8,600 (dr.) as the bank balance on 31st December, 2017. The accountant found out that the balance doesn’t agree to the balance as per the passbook. On scrutiny, the following discrepancies were found:
1) On 15th December the payment side of cashbook was undercast by $500
2) A cheque issued for $630 was missed out from getting recorded
3) On 21st December, a cr. balance of $150 was carried forward as a debit balance
4) Of the total cheques received and sent to bank for $6,600, only the cheques worth $5,100 were cleared in December.
5) Dividends of $200 collected directly by the bank
6) An out-going cheque was recorded twice in the cash book for $350
7) Insurance premium paid by the bank $170
|Bank Reconciliation Statement for Mr. Ross as on 31st December, 2017|
|Particulars||Details (in $)||Amount (in $)|
Balance as per cashbook (Dr.)
Subtract: Mistake in carrying forward the credit balance
Add: Dividends directly collected by the bank
|Balance as per passbook (Cr.)|| ||$6,050|