Reconciliation Of Bank Accounts

Introduction

In modern business world, the major part of the business transactions is settled by cheques. For the purpose of business transactions through cheques, every businessman maintains current accounts with banks. He keeps money in his account and deposits cheques, etc. received from customers and draws cheques in favour of his creditors for making the payments. Current account facilitates business transactions in a smoother way than cash. For instance, no substantial cash is to be kept in the business, payments of cheques are themselves records of payments made, the payee is also relieved of the risk of carrying cash.

When a businessman opens a current account in a bank, the bank issues him a cheque book and pass book. At the same time, the businessman also keeps its records relating to bank transactions either through the bank columns of the cash book or through a separate bank account in the books of accounts. When the cash is deposited or a cheque is deposited in the bank, the bank account is debited in the cash book. But when the businessman withdraws cash from the bank, the same account is credited. Similarly, when cash is deposited into bank it increases the liability of the bank and bank gives credit to the account of the client in the pass book. The bank maintains the businessman’s account in its ledgers and its copy is recorded in the pass book and given to the customers.

In other words, all entries appearing in the debit side of the bank column of the cash book will be appearing in the credit side of the businessman’s account in the ledger of the bank. Conversely, all entries appearing in the credit side of the bank column of the cash book will be appearing in the debit side of the businessman’s account in the ledger of the bank. Sometimes it happens that balance of the bank column of the cash book does not show the same balance as that shown by the pass book. Both there balances may be correct, yet may show a difference. In order to reconcile the balance of the bank column of the cash book with that of the pass book, this statement is prepared.

The statement that is prepared for reconciling the balances of cash book and pass book is called a Bank Reconciliation Statement. Bank Reconciliation Statement is a statement which contains a complete and satisfactory explanation of the differences in the balances as per the cash book and the pass book. So, bank reconciliation is a periodical statement prepared by a trader on a particular date with the object of reconciling the two balances shown by cash book and pass book and locating the causes which are responsible for the disagreement of two balances on a particular date.

Features or characteristics of bank reconciliation statement

From the above, the following features of the statement emerge:

a) It is merely a statement not an account.

b) This is a periodical statement.

c) It is prepared on a particular day or this statement is valid for the day it is prepared.

d) The preparation of bank reconciliation statement is not a part of the double entry book-keeping.

e) The causes which are responsible for the disagreement of the two balances can easily be found out.

Causes/Reasons For Difference In Two Balances

The relationship between the customer and the banker is that of a creditor and a debtor. So, if the bank column of the cash book shows a debit balance as on a specified date, the pass book should show an equal amount of credit balance as on that date and vice-versa. However, the balances shown by the two independent records may not agree due to the following:

Cheques issued but not yet presented for payment: When a cheque is issued to a third party, it is entered in the cash book by crediting the bank account resulting in reducing the bank balance in the depositor’s books. But bank debits the customer’s account when the cheque is presented by that third party to the bank for payment. This means that if the cheque is not presented for payment upto the date of preparation of the bank reconciliation statement, the balance as per pass book will be higher than the balance shown by the cash book by the amount of cheque not presented for payment.

Cheques paid into bank but not yet collected by the bank: Whereas a cheque is received by a businessman from a third party and he deposits it in a bank, he will debit bank account and credit the account of third party in his own books. His bank balance in cash book is therefore increased. But bank will credit that cheque not when it is deposited but only when that amount has been realised. Until the cheque has been collected, the balance appearing in the pass book would be less than the balance in the bank column of cash book.

Bank Charges: The bank usually debits the account of the customer with interest on bank overdraft, collection charges, incidental charges for the various services rendered by the bank. These adjustments are shown in the pass book as and when they occur and hence the balance in the pass book decreases. Customer comes to know about it when he collects his pass book and verifies it. Until then, the bank balance as per the pass book would be less than the bank balance as per the cash book.

Interest credited by bank but not entered in cash book: Some scheduled banks give interest on current accounts to their customers if they maintain certain minimum credit balance in their current accounts. When a bank allows interest to a customer it will credit his account and his bank balance will be increased. But the customer will know about when he will receive the pass book or bank statement and then he would pass an appropriate entry in the cash book. Until then, the bank balance as per pass book would be more than the bank balance as per cash book.

Interest or dividend on investments etc. collected by the bank: The businessman may entrust the task of collection of interest or dividend on investments, rent on property etc. to the banker. After the collection of this income, the bank will give credit to the account of the businessman and will increase his balance whereas there may be no entry for this income in the cash book of the businessman for want of information. The relevant entry in the cash book is made only when communicated and hence cash and pass book balances vary in the meantime.

Amount directly deposited into the bank by customers: When any amount is directly deposited into the bank account of a businessman by customers then the bank gives credit to the account of that businessman immediately. This results in an increase in the bank balance by that amount. The businessman would come to know about the deposit on receiving advice from the bank or intimation from the customer. Until then the bank balance would show more balance as compared to the balance as per cash book.

Payments made by the bank on behalf of clients: The businessman may give standing instructions to his bank to make the payment of insurance, rent, licence fee and other payments on his behalf when they fall due. On the instructions of the customers, the bank makes the payment on due dates and debits the client’s account. But the businessman enters the same in his books only when he receives the intimation from the bank. Till it is done, the two balances show a difference.

Bills Collected by the bank on behalf of Customers: The customers may authorise his banker to collect the amount against certain bills receivable from the acceptor or a drawee as and when they become due. If the acceptor of a bill receivables honours the bill on its due date, the bank will give a credit to the customer’s account for the amount so collected. As a result, the bank balance will be higher by that amount than the balance as per cash book until the necessary entry in this respect is recorded in cash book. ·

Dishonour of Bills or cheques: When the businessman sends the bills or cheques to the bank for realisation, he enters them on the debit side of his cash book and thus increases the bank balance. But the bank does not make any entry in the customer’s account if these are dishonoured. This is another cause of difference between the two balances.

Rebate on retiring of Bills: When the businessman makes payment of his bills payable through bank or to bank before maturity he is allowed a rebate on such payments by the bank. The bank credits the businessman’s account with this rebate. Thus, there will be a difference in the balances of cash book and pass book to the extent of amount of rebate.

Cheques paid into bank but omitted to be entered in cash book: Sometimes the businessman deposits a cheque into the bank but forgets to enter the same in cash book. This also causes a difference between the two balances.

Wrong debit or credit given by the banks: If there is a wrong debit or credit in the books of account of the bank then it also causes a difference in the balances of books of the customer and the bank. A wrong debit or credit may be given by the bank in the following ways: a) Other account holders’ cheque wrongly debited or credited in the customer account by the bank. b) Recording of entry on the wrong side of the pass book by the bank.