CHAPTER 3: BANK RECONCILIATION STATEMENT

Introduction Bank Passbook

The objective of Bank Reconciliation statement is to understand
passbook and cash book and reconciliation between the two. The
reconciliation brings out any errors that may have been committed Bank passbook is a copy of the customer's
account in the book of a bank where all deposits
either in the cash book or in the passbook . A regular reconciliation
and withdrawals made by the customer during
discourages the accountant of the bank from embezzlement. the particular period is recorded.

The bank balance shown in the passbook is

Banks are Thus, money known as pass book balance for reconciliation
essential which would purpose. The credit balance as per passbook is the
institutions in a have been deposit made by the customer while debit balance
is the overdraft balance for the customer.
modern society. otherwise idle is
Now-a-days, put to use and is
most of the made available
transactions of to those who
the business are need it. Bank Reconciliation Statement
done through To reconcile means to find out the difference between two and
bank whether it eliminating that difference.
is a receipt or a Whenever we deposit or withdraw money from banks, it is always
payment. recorded at two places:-

column of the cash

(in customer books); Bank statement (pass book i.e.
in the banks books)
 The cash book is
But most of the
maintained by the The statement which
times these two balances
person having the bank reconciles the bank balance
do not match. The
account whereas the bank as per cash book with the
process of eliminating this
statement is prepared by balance as per the pass book
difference and bringing the
the bank. Therefore, the by showing all the causes
two statements in line with
balance in both should be of difference is known as
each other is known as
equal and opposite "BANK RECONCILIATION
"Reconciliation'~
in nature. STATEMENT'!
8 of 37
Salient features of Bank
Reconciliation Statetnent

The Any undue A regular It helps in

reconciliation delay in the reconciliation finding out the
will bring out clearance of discourages actual position
any errors that cheques will the accountant of the bank
may have been be shown of the balance.
committed up by the bank from
either in the reconciliation. embezzlement.
cash book or in
the passbook.
Importance of Bank Reconciliation Statement
••••
••
•

It helps in detecting errors, frauds

and irregularities occurred, if any, at
the time of passing entries in the cash
book or in the pass book, whether
intentionally or unintentionally.
Causes of Difference
The difference in bank balance as per cash book and passbook may
arise because of the following reasons:-

Sometimes a There are Mistakes or errors made in

•
transaction is various preparing the accounts either
recorded at transactions by the bank or the customer
two different which the bank can also result in disagreement
times in cash carries out by of the two statements. For
book and the itself without this reason rectification
passbook. intimating the of errors is required to be
customer. done in both the statements
before preparing any Bank
Reconciliation Statement.
Some of the items that frequently cause a difference
are as follows :-
The entry in the cash bool< is made immediately on
Cheques issue of cheque but entry will be made by the bank
issued but not only when the cheque is presented for payment.
presented for There will thus be a gap of some days between the
payment entry in the cash book and in the pass book.

As soon as cheques are sent to the bank, entries are

made on the debit side of the bani< column of the
Cheques cash book. But usually banks credit the customer's
paid into the account only when they have received the payment
bani, but not from the bank concerned due to which there will be
cleared gap between the entry in both bool<s.
 If the bank has allowed interest to the customer,
the entry will normally be made in the customer's
account and later shown in the pass book. The
Interest customer usually comes to know about the interest
allowed by
bani{ amount by pursuing the pass book and only then he
makes relevant entry in the cash book.

Like (iii) above, the interest charged by the bank

and the bank charges are entered in the customer
account and later in the pass book. The customer
makes the required entries only after he sees the
pass book. These are debited to customer account
by bank the refore, bank balance as per pass book is
less than bank balance as per cash book.
 Sometimes investments are left with the bank in
Interest and the safe custody; the bank itself sees to it that the
dividends interest or the dividend is collected on the due
collected by dates.
the bani(

The bank may be given standing instructions for

certain payments for eg. insurance premium. In
Direct
payments by this case also, the customer may come to l<now of
the bani( the payment only on seeing the pass book.

If such a payment is received by the bank, it will be

Direct entered in the customer's account and also in the
payment into pass book; the account holder may come to know
the bani( by a of the amount only when he sees the pass book.
customer
 If the bank is not able to receive payment on
promissory notes discounted by it, it will debit
Dishonour
the customer's account together with the charges
of a bill
discounted it may have incurred. The customer will make the
with the bani, entry only when he sees the pass bool<.
' ,c__,

II ' ~
IIi
.L •·

If goods are sold, the documents may be sent

through the banl<. If the bank is able to collect the
l1Ulls·,cql1e~te~r amount, it will credit the customer's account. The
by the bani(
on behalf of customer may mal<e the entry only on receiving
the customer the pass book.

While recording the entries, error can occur

in both cash bool< and pass bool<. A bank rarely
Errors makes any error but if does, the balance in the pass
bool< will naturally differ from cash bool<.
Following is the table summarising in brief the
timings of different transactions:
SI. Transaction Time of recording Time of recording
No. in cash book in pass book
1. Payment done At the time At the time of
by the account of issuing the presenting the
holder through cheque. cheque to the bank
issuing a cheque. for payment.
2. Receipt by the At the time of At the time of
account holder depositing the collection of amount
through a cheque. cheque into the from the account of
bank. the issuing party.
 SI. Transaction Time of recording Time of recording
No. in cash book in pass book
3. Collection of bills/ When the entry is When the amount
cheque directly posted in the pass is collected by the
on behalf of the bool<. bani<.
account holder.
4. Direct payment When the entry is When the amount is
to the third party posted in the pass paid by the bani<.
on behalf of the bool<.
account holder.
5. Dishonour of When the entry is When the cheque is
cheque/ bills posted in the pass dishonoured.
receivable. bool<.
6. Bank charges When the entry is When charges are
levied by the posted in the pass levied by the bani<.
bani<. book.
7. Interest and When the entry is When interest or
dividend credited posted in the pass dividend is allowed or
by the bani<. bool<. collected by the bank.
•
8. Interest debited When the entry is When interest IS
by the bani<. posted in the pass charged by the bank.
book.
 Methods of Bank Reconciliation
Bank Reconciliation Statement without the preparation of Adjusted Cashbook
Causes of differences Favourable balance Unfavourable balance Favourable balance Unfavourable balance
(Dr.) as per cash- book (Cr.) as per cash- book (Cr.) as per pass- book (Dr.) as per pass- book
Cheque deposited but not cleared Subtract Add Add Subtract
Cheque issued but not presented Add Subtract Subtract Add
to bank
Cheque directly deposited in bank Add Subtract Subtract Add
by a customer
Income (e.g., interest from UTI) Add Subtract Subtract Add
directly received by bank
Expenses (e.g., telephone bills, Subtract Add Add Subtract
Insurance charges) directly paid by
bank on standing instructions
Bank charges levied by bank Subtract Add Add Subtract
Locker rent levied by bank Subtract Add Add Subtract
Wrong debit in the cash book Subtract Add Add Subtract
Causes of differences Favourable balance Unfavourable balance Favourable balance Unfavourable balance
(Dr.) as per cash- book (Cr.) as per cash- book (Cr.) as per pass- book (Dr.) as per pass- book
Wrong credit in the cash book Add Subtract Subtract Add
Wrong debit in the pass book Subtract Add Add Subtract
Wrong credit in pass book Add Subtract Subtract Add
Undercasting of Dr. side of bank Add Subtract Subtract Add
account in the cash book
Overcasting of Dr. side of bank Subtract Add Add Subtract
account in cash book
Undercasting of Cr. side of bank Subtract Add Add Subtract
account in cash book
Overcasting of Cr. side of bank Add Subtract Subtract Add
account in cash book
Bill receivable collected directly by Add Subtract Subtract Add
bank
Interest on bank overdraft charged Subtract Add Add Subtract
Final Balance If answer is If answer is positive If answer is positive If answer is positive
positive then then unfavourable then favourable then unfavourable
favourable balance balance(Dr.) as balance (Dr.) as balance (Cr.) as
(Cr.) as per pass-book per pass-book and per cash-book and per cash book and
and if negative then if negative then if negative then if negative then
unfavourable balance favourable balance unfavourable balance favourable balance (Dr.)
(Dr.) as per pass-book. (Cr.) as per pass-book. (Cr.) as per cash-book as per cash-book.
Bank Reconciliation Statement after the preparation of Adjusted Cashbook

Adjusted Cash Book While adjusting cash-book, the following adjustments

are considered:-
But if reconciliation When the balance in the
is done at the end of cash book is first adjusted
the accounting year or for certain adj ustments Omissions
financial year, the cash- before taking it to the (like bank charges
book must be adjusted bank reconciliation recorded in the
so as to reflect the statem ent, then it is pass-book only, interest
correct bank balance in known as adjusted cash debited by the bank,
the balance sheet. book balance. direct receiptor payment
by the bank, dishonour
of cheques/bills etc.)
Adjusting the cash-book before by the cash-book are
preparing the bank reconciliation taken into care
statement is completely optional,
if reconciliation is done during
different months.
(b) Prepare the Bank Reconciliation Statement of M/s. Singh Brothers on 30 th June 2022 from the
particulars given below:
(i) The Bank Pass Book had a debit balance of ~ 75,000 on 30th June, 2022.
(ii) A cheque worth ~ 1,200 directly deposited into Bank by customer but no entry was made in
the Cash Book.
(iii) Out of cheques issued worth ~ 1,02,000, cheques amounting to ~ 60,000 only were presented
for payment till 30 th June, 2022.
(iv) A cheque for~ 12,000 received and entered in the Cash Book but it was not sent to the Bank.
(v) Cheques worth ~ 60,000 had been sent to Bank for collection but the collection was reported
by the Bank as under.
(1) Cheques collected before 30th June, 2022, ~ 42,000
(2) Cheques collected on 10th July, 2022, ~ 12,000
(3) Cheques collected on 12th July, 2022, ~ 6,000.
(vi) The Bank made a direct payment of ~ 1,800 which was not recorded in the Cash Book.
(vii) Interest on Overdraft charged by the bank ~ 4,800 was not recorded in the Cash Book.
(viii) Bank charges worth ~ 240 have been entered twice in the cash book whereas Insurance
charges for~ 210 directly paid by Bank was not at all entered in the Cash Book.
(ix) The credit side of bank column of Cash Book was under cast by ~ 6,000.
(x) A bill for~ 3000(discounted with bank in May, 2022) dishonored on 30 th June ,2022 and noting
charges of Rs 100 paid by bank. (10 + 10 = 20 Marks)
(b) Bank Reconciliation Statement as on 30 th June 2022
Particulars Amount Amount
Overdraft as per Pass Book (Dr. Balance) 75,000
Add: Cheques deposited into the Bank by Customer but not 1,200
entered in Cash Book
Cheques issued but not presented ~ (1,02,000-60,000) 42,000
Bank charges written twice in Cash Book 240
Discounted bill dishonored & noting charges Paid (WN) 3,100 461540
1,21,540
Less: Cheques received, recorded in cash Book but not sent to the 12,000
Bank
Cheques sent to the Bank but not collected 18,000
Direct payment made by the bank not recorded in the Cash 1,800
book
Interest on Overdraft charged by Bank 4,800
Insurance charges not entered in Cash Book 210
Credit side of bank column of Cash Book was undercast 61000 421810
Balance as per Cash Book 78,730
Working Note: Bill amount of Rs 3,100 were debited by bank. However, it is not been recorded in
the Cash Book. So to arrive at the cash balance, Rs 3,100 was added.
5. The Cash-book of M/s Rajat shows t 1, 10,280 as the balance at Bank as on 31 st March,
2022. But this does not agree with balance as per the Bank Statement. On scrutiny
following discrepancies were found:
(i) Subsidy t 41,000 received from the government directly by the bank, but not
advised to the company.
(ii) On 15th March,2022 the payments side of the Cash-book was under cast by t 1400.
(iii) On 20 th March,2022 the debit balance of t 8624 as on the previous day, was
brought forward as credit balance in Cash-book.
(iv) A customer of the M/s Rajat, who received a cash discount of 5% on his account of
t 80,000, paid to M/s Rajat a cheque on 24 th March,2022. The cashier erroneously
entered the gross amount in the Cash-Book.
(v) On 10th March,2022 a bill for t 22,800 was discounted from the bank, entered in
Cash-book, but proceeds credited in Bank Statement amounted to t 22,000 only.
(vi) A cheque issued amounting to t 6,900 returned marked 'out of date'. No entry made
in Cash-book.
(vii) Insurance premium t 3,024 paid directly by bank under a standing order. No entry
made in cash-book.
(viii) A bill receivable for t6, 120 discounted for t 6,000 with the bank had been
dishonoured on 30 th March,2022, but advice was received on 1st April,2022.
(ix) Bank recorded a Cash deposit oft 6,550 as t 6,505.
Prepare Bank Reconciliation Statement on 31 st March,2022.
5. Bank Reconciliation Statement on 31 st March,2022
Bank Balance as per Cash Book 1,10,280
Add: (i) Subsidy from government received directly by the 41,000
bank not recorded in the Cash Book
(iii) Debit balance of ~8624 brought forward as credit
balance on 20 th March, 2022 in the Cash Book 17,248
(vi) Cheque issued returned marked 'out of date' 6,900 65,148
1,75,428
Less: (ii) Cash Book under cast on 15th March, 2022 1,400
(iv) Discount allowed to a customer, however entry made
at gross amount in the Cash Book 400
(v) Commission charged by bank on discounting of bill,
not considered in Cash Book 800
(vii) Insurance Premium paid directly by bank under
standing instructions 3,024
(viii) Discounted B/R dishonoured; not entered in Cash 6,120
Book
(ix) Bank recorded short cash deposit -45 11,789
Balance as per Bank Statement 1,63,639