Bank reconciliation is a summarized statement that reconciles the difference between bank balance as per the company’s accounts and the bank balance as per bank statements of the company in order to ensure that the company’s cash records are correct and are free from fraud and errors.
A bank reconciliation statement is prepared to find out the difference between the bank column of the cash book and the bank statement (passbook). The cash book is prepared by the bank account holders whereas the bank statement is prepared by the banks. The balance in both must be equal but opposite but most of the time the balance between the above two does not match so to eliminate the same all the facts and figures are matched and the reasons for the difference are found out which is known as reconciliation.
Causes of difference:
Various causes of difference in bank book and cash book are as follows:
- Timing difference:
Many times the transactions are recorded at the different times in both the books. Some of the examples of timing difference are:
- Cheques issued but not presented:
Suppose Mr. Paul issued a cheque of $500 to XYZ Incorporation on 15th April, 2020 but Mr Paul presented the cheque in bank on 18th April, 2020 therefore Mr. Paul recorded the cheque on 15th April but the bank recorded the same on 18th April when XYZ Incorporation presented it.
- Cheque paid into bank but not cleared:
Similarly in the above example XYZ Incorporation will make the entry in their cash book when they will receive the cheque but the bank account will record the entry when the money against such cheque will be collected by bank.
There are certain transactions that are automatically carried out by the banks without informing the customers such as the interest credited by bank directly into the customer’s bank account and then recording the same in their pass book but the customer knows about the same at some later stage and then only the customer records it. Similarly the bank charges are automatically deducted by the bank and debited in the pass book without informing customer. Other examples of such transactions are:
- Interest and dividends collected by bank
- Direct payments by bank
- Direct payment into the bank by customer
- Dishonor of a bill discounted by the bank
- Bills collected by bank on behalf of the customer
Errors and omissions are very normal which can occur while preparing the cash book by the bank account holder or while preparing the bank statement by the bank. Therefore, to detect and correct the error bank reconciliation is required to be made.
XYZ Inc. holds their account with U.S. Bank. On 31st June, 2020 XYZ closes their books. On that date the balance as per bank pass book reflects $200 and the balance as per company’s cash book is $180. The company wants to analyze the difference of $20 when they receive the pass book. Below is the company’s particular from which bank reconciliation statement is to be prepared
|Cheque issued but not presented||40|
|Cheque deposited in bank but not cleared||15|
|Bank Charges directly credited by bank||10|
|Interest credited by bank||5|
Bank Reconciliation statement
|Balance as per Company’s Cash book||180|
|Add: Cheque issued but not presented||40|
|Interest credited by bank||5|
|Less: Cheque deposited in bank but not |
|Bank Charges directly credited by bank||(10)|
|Balance as per Bank statement||200|
Advantages of BRS are as under:
- The reconciliation helps to find out the errors and that are made in either of the two books i.e. bank book prepared by the bank or cashbook prepared by the bank account holder. Also, the fraud by the management can be figured out with the bank reconciliation statement.
- Any undue delay while clearing the cheques can be known in the reconciliation.
- It also helps in finding out the actual position of the bank balance.
Disadvantages of BRS are as under:
- When the transactions are large then preparing the bank reconciliation statement is time consuming and cumbersome.
- The date of the transactions recorded by the banks is different from the date of the entry in the books which make is difficult to reconcile each and every item when there are multiple items with the different dates.
Thus, BRS is a statement that reconciles the bank balance of the business as per their cash book and as per their bank statement (passbook) to ensure that the figures in both the statements match with each other.