Bank

 Reconciliation  Statement  

Part  -­‐  I  

Meaning and Concept

Hello viewers, today we are going to talk about bank reconciliation statement, a
statement that is used to reconcile the differences in balances of cash as shown by
the records of the trader, and as shown by the records maintained by the banker of
the trader. Let us try to understand it practically.

You have understood that a trader maintain the accounting records in the form of
journal and ledger. During our initial lectures, you have understood about the
functioning of journal and ledger. Recall that cash book is a type of journal which
works as cash account as well. I hope you understand that either a firm can maintain
a single column cash book or a double column cash book or a triple column cash
book. I hope you also remember that when a firm maintains a single column cash
book, it is required to maintain a separate bank account in Ledger, where as when a
firm maintains two column cash book or a three column cash book, there is no need
to maintain a separate bank account as the cash books contains a bank column as
well. Now, understand that whenever a firm enters into transactions with bank two
parallel records are maintained, one maintained by the firm, and the other
maintained by the bank. I hope you remember the rules of journalising. Based on
these rules the bank column maintained in cash book of the firm is either debited or
credited Let us try to understand it with the help of an example, let’s say when the
firm deposits money in its bank account, it will debit the bank column in the cash
book following “debit the receiver” rule for personal accounts as bank is receiver of
money. Now, let us see the account maintained by the bank for this transaction. For
bank it is account of the trader opened in its accounts. The bank is going to credit the
account of trader following the rule “credit the giver” for personal accounts. To
summarise this example, let us understand that what is debited by merchant in bank
column of cash book, is credited by bank in the account of the customer. Similarly,
all the transactions entered by a firm with his banker are recorded by merchant in
bank column of his cash book, and by bank in the account of the merchant
maintained by it, though on the opposite sides, i.e. if the transactions are debited in
bank column of cash book, they are credited in account maintained by banker, and
vice versa. Logically, the balance shown by the bank column of cash book
maintained by the merchant shall match with the balance shown in the customer
account maintained by the bank, though the nature of to balance shall be opposite.
But practically, it does not happen so. The balance shown in bank column of cash
book maintained by the merchant does not match with the balance shown by the
banker.

There are various reasons why these two balances do not match. We will look into
the reasons for this situation in later part of this lecture. Right now, let us understand
that to reconcile the differences in the two balances shown by two different books, a
statement is prepared. This statement identifies the reasons for differences in balance
shown by bank column cash book maintained by the merchant and balance as
reported by the banker on a given date. This statement is known as bank
reconciliation statement. So, to sum up a bank reconciliation statement is a statement
that reconciles the difference in the balance as shown by bank column of cash book
maintained by the merchant and balance shown by passbook bank statement
provided by the banker on a given point of time.

One more thing that is important to be understood here is that a bank reconciliation
statement is not an account but is a statement. You know that accounts are prepared
on the basis of certain defined rules and they carry a specified format. But in case of
a bank reconciliation statement neither there is particular format, nor there are rules
of debit and credit as in the case of accounts. Nor the preparation of a bank
reconciliation statement is compulsory at all. What is important is that we need to
understand that bank reconciliation statement is prepared by accountants and
managers in order to meet their accounting and analysis needs.

As we have discussed that the transactions entered by a merchant with the bank are
recorded in two simultaneous books, that is, cash book maintained by the
businessman and the account of trader maintained by the bank, as represented by
passbook or the bank statement provided by bank to the merchant. Logically both of
these statements should show the same balance, except for the case that one book
shall show debit balance, and the other book shall show the same balance as credit
balance, as both the books have got opposite nature. But practically this does not
happen because of various reasons. On a particular date, when the merchant tries to
tally the balance shown by its cash book along with the balance shown by the
passbook/bank statement, he find certain differences in their balances. This is
because of the difference of time factor on which transactions are recorded in the
books. For example, when merchant sends cheques in the bank account for deposit
purpose, he immediately records that deposit in his cash book because he assumed
that he has sent the cheques to the bank and bank will credit the same in his account.
On the other hand, the bank records that credit in the account of the trader only when
the cheques are encashed from the party on which it was drawn. So there will be a
time lag difference between the two books and balances shown by the two books
differs for this basic reason. There is one secondary reason also which may cause
this difference, and that secondary reason is errors that may occur in accounting
process. It may happen that the accountant of the merchant may commit some
mistakes in accounting process while recording transactions entered with bank, or
there may be mistakes on the part of banker, where the staff of bank may commit
some mistake while recording trader’s transactions. But errors and mistakes are
secondary reasons. It implies that even if there are no errors in the books of the
accounts at both the places, the balances still may not tally as the balances are
basically different for the reason of time difference. So both the books show
different balances at a given point of time for the basic reason of difference in time
of recording the transactions. Bank reconciliation statement tries to identify the
differences in the two balances at a given point of time so that these can be
reconciled and balances shown by both the books can be matched. This is required
basically for the reason to match the final bank balance on quarterly, half yearly or
financial year ending. Considering this in mind the accountants prepare this
statement so as to reconcile the difference in balance shown by cash book and
balance reported by bank, as represented by passbook or bank statement. This
statement is referred as a bank reconciliation statement.

Definition of Bank Reconciliation Statement

Once you are conceptually clear about a bank reconciliation statement, let us have a
look into the definition of a bank reconciliation statement:
According to R.N. Carter, “a bank reconciliation statement is a statement drawn up
in order to agree with bank balance as shown in bank pass book with bank balance
as shown by the bank column of cash book”.

Necessity of Preparing a Bank Reconciliation Statement

The need and necessity of a reconciliation statement lies in the fact that business
firms close their books of accounts regularly, i.e. annually, semi-annually and
quarterly, and at the time of the closing the books, the balances of various accounts
shown by ledger needs to be cross-verified. When the balance shown by bank
column of cash book is cross verified with balance reported by bank statement or
pass book, it may not tally. The same can be cross-verified by locating and
reconciling the differences in the two balances shown by two different books by
preparing a bank reconciliation statement.

Benefits of Preparing a Bank Reconciliation Statement

Though the basic reason for preparing a bank reconciliation statement is to reconcile
the difference in the balance of bank reported by bank column of cash book prepared
by trader and balance of trader’s bank account reported by bank, there are some
ancillary advantages of preparing the same. Let’s have a summarized look of the
same:

1. If some error(s) is committed in accounting course of process while recording

bank related transactions, either by trader or by bank, the same would be
easily identified and rectified in course of preparing a bank reconciliation
statement.
2. Likewise, if there are imbibed frauds in bank related transactions, the forgery
can be easily found. We all know that banking transactions are highly exposed
to forgery at various levels.
3. Preparation of bank reconciliation statement makes the accountants/book
writers more sincere and cautious, as this statement highlights the
mistakes/frauds committed by them.
 4. Regular preparation of a bank reconciliation statement facilitates a much
easier control on bank related transactions. This indirectly improves the
goodwill of the firm.
5. Preparation of a bank reconciliation statement highlights the cheques
deposited and not yet encashed, and cheques issued and not yet presented.
This will facilitate the trader for required follow-up with bank, creditors, etc.
6. An insight of cheques deposited and not yet encashed saves the trader from
dishonour of cheques issued by him, as he becomes aware of the exact balance
in bank account and amount to be deposited in bank so as to rescue dishonour
of cheques issued by him in favour of other parties. This will again enhance
the goodwill of the firm.
7. For the reason discussed in point no. 6, as the goodwill and creditworthiness
of trader is maintained in the eyes of the bank, it is easy for the trader to
arrange Loans/finances from the bank, as and when required.
8. Many a times, the bank deducts the amount of charges like interest, service
charges, etc. from the trader’s account. Also, the bank directly makes certain
payments like insurance premium, school fee, loan instalments, etc. on the
standing instructions of the trader. Preparation of bank reconciliation
statement gives the trader knowledge of all such transactions to trader as the
bank may not send a separate intimation of these transactions to the trader.
This facilitates the preparation of accurate accounting records by trader.
9. Similarly, the bank may also add the amount of direct receipts like interest
received on fixed deposits, dividends received on shares, etc. in trader’s
account, which trader may not be aware of. Preparation of bank reconciliation
statement facilitates knowledge of all such transactions to trader, thereby
facilitates the preparation of accurate accounting records by trader.

Reasons for difference in balance shown by a BRS and Bank Statement

Once you have understood what a BRS is, it is time to understand what causes
difference in balances shown by the two books, i.e. bank column of cash book/bank
account maintained by trader, and bank account of trader maintained by banker. Let
us understand the various reasons for difference in these two balances:
1. Cheques deposited in bank but not yet posted: One of the key reasons for
difference in two balances is the gap in the point of time of recording the
deposit of cheques received by merchant and deposited into bank. Let us
understand it in broader details. We all know that a trader receives cheques
from its various customers and others against the amount due. These cheques
are sent by the trader to his bank for being deposited in his account. As soon
as the trader sends the cheques to the bank, he makes a debit posting in bank
column of his cash book assuming amount is received and credited in his bank
account. On the other hand, the banker sends the cheque to clearing house for
the purpose of clearance. Only after clearance is received and receipt of
money is confirmed by the clearing house, the banker will make a credit
posting in the account of the customer maintained by him. Now, if we check
the balances as per two books during intervening period, the two books are
sure to show different balances as the amount of cheques is already posted by
trader in the cash book (bank column), whereas the same has not been posted
by banker the the account of the trader maintained by him.

2. Cheques issued by merchant but yet presented to bank: Another key reason for
difference in two balances is the gap in the point of time of recording the
withdrawal of cheques issued by merchant to other parties. This is just
opposite to the reason discussed in point no. 1. Let us understand it in broader
details. We all know that as a trader receives cheques from its various
customers and other parties, similarly he gives/issues cheques to the creditors
and other parties. As soon as the trader issues cheques to the creditors etc., he
makes a credit posting in bank column of his cash book assuming amount is
paid against those cheques by his bank. On the other hand, the banker post the
payments of the cheques in customer’s account (debit side) only after cheques
are presented to him through clearing house. Now, if we check the balances as
per two books during intervening period, the two books are sure to show
different balances as the amount of cheques is already posted by trader in the
cash book (bank column), whereas the same has not been posted by banker the
account of the trader maintained by him.
3. Dishonour of Cheques deposited in bank: Sometimes, the cheques deposited
by trader in the bank for the purpose of deposit get dishonoured. As soon as a
cheque gets dishonoured, the banker makes a debit posting in the account of
the trader maintained by him. But the same is not the case with trader as he
might not know about the dishonour. Only when the banker intimates the
trader about the dishonour of cheque, the trader makes a credit posting in the
bank column of cash book. So, during intervening period there will be a
difference in the balances shown by two books.

4. Direct Deduction from Trader’s Account by Bank: Many a times, it so

happens that the bank directly deducts the amount from the trader’s account.
Such instances are; charging interest on overdraft, charging for expense,
service charges, etc. Similarly, the bank also deducts the amount from trader’s
account on the basis of standing instructions given by the trader. Examples of
such transactions are; payment of insurance premium, payment of school fee,
payment of loan instalments, etc. In such cases, the trader may not come to
know about the amount deducted from the account as the bank may not sent
separate intimation of the same. Until and unless the trader comes to know
about such deductions, the two books, that is, the bank column of cash book
maintained by trader and the passbook/bank statement provided by the banker
will reflect different balances.

5. Direct Deposit/Collection in Trader’s account. As there can be direct

deductions from the account of the trader, likewise there can be direct deposit
or addition to the trader’s account, which the trader may not be aware about.
Examples of such transactions are; direct deposit by a customer in trader’s
bank account, addition of fixed deposit interest or dividend on shares in the
trader’s account. In such cases also, the trader may not come to know about
the amount added in his account. Until and unless the trader comes to know
about such additions in his account, the two books, that is, the bank column of
cash book maintained by trader and the passbook/bank statement provided by
the banker will reflect different balances.

6. Errors Committed by Trader’s Account: It may so happen that the accountant

performing accounting function at trader’s place commits some mistake while
 recording or posting the bank transactions. For example, wrong amount may
be written, or correct account may be written on wrong side of cash or in
wrong column, etc. In such cases, i hope you understand that logically the
balance shown by bank column of cash book maintained by trader shall not
match with the passbook/bank statement provided to the trader by bank.

7. Errors Committed by Bank: Like the accountant performing accounting

function at trader’s place may commit some mistake while recording or
posting the bank transactions, similarly the clerk at the bank maintaining
trader’s account can also commit some mistakes in course of recording or
posting the trader’s transactions in his account. For example, Trader’s
transactions may be recorded in some other accounts as there are some firms
with similar names and such errors are very obvious, some other firm’s
transactions may be recorded in trader’s account for similar reason, wrong
totalling, carry forward etc. In such cases also, logically the balance shown by
bank column of cash book maintained by trader shall not match with the
passbook/bank statement provided to the trader by bank.

8. Miscellaneous Reasons: Apart from the important reasons for difference in

balance reported by bank column of cash book maintained by trader and
balance reported by passbook/bank statement provided to the trader by bank,
there can be various other reasons causing a difference in the two reported
balances. We will understand those differences in course of our next lecture
covering the numerical aspect of this topic.

By now, we have been talking about the conceptual aspect of a bank reconciliation
statement. In our next lecture, we will have an insight into the numerical aspect of
this topic, that is, how the identified differences are reconciled and bank
reconciliation statement is prepared. Till then, have a great learning. Thank you.

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