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
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.
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
· 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
· 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
· 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 mean time.
· 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.
PROCEDURE FOR PREPARATION OF BANK
The bank reconciliation statement is prepared usually at the end of
period, i.e. a month, a quarter, a half year or year as may be found
convenient and necessary by the businessman taking into account the
number of transactions involved. The following are the steps to be taken
for preparing a bank reconciliation statement:
a) Tick off all the items in the pass book with the entries in the
bank column of the cash book and make a list of the entries
as are found not ticked either in the cash book or the pass
book. The unticked items are responsible for the difference in
the balances shown by the cash book and the pass book.
b) The balance shown by any book (i.e. cash book or pass book)
should be taken as the base . This is as a matter of fact the
starting point for determining the balance as shown by the
other book after making suitable adjustments taking into
account the causes of difference.
c) The effect of the particular cause of difference should be
studied on the balance shown by the other book.
d) In case, the cause has resulted in an increase in the balance
shown by the other book, the amount of such increase
should be added to the balance as per the former book which
has been taken as the base.
e) In case, the cause has resulted in decrease in the balance
shown by the other book, the amount of such decrease
should be subtracted from the balance as per the former
book which has been taken as the base.
f) In case, the books show an adverse balance (i.e. an overdraft)
the amount of the overdraft should be put in the minus
column. Bank Reconciliation Statement should then be
prepared on the same pattern as if there is a favorable
balance instead of their being an overdraft.