The record book or transactions of a bank account is known as a bank reconciliation statement. This statement allows the bank holders to keep a track of their funds and update transaction records they have made. In other words, the bank reconciliation statement is the bank's passbook. The balance given in the bank passbook statement should tally with the balance given in the cash book. In the statement, all the deposits shown in the credit column should be shown in a deposit column as well.
However, if the withdrawal is more than the deposits, it will show a debit balance (overdraft). Generally, saving’s bank account holder is given a passbook whereas current account business is given a Bank Statement.
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In most of the comparisons between the bank balance and the company’s cash book, the balance figure doesn’t tally. Therefore, it is important to know the reason for the difference and show it in the bank reconciliation statement and then tally the two balances. This statement reveals the cause of differences in funds in the bank balance and the company’s cash book. This also helps to understand the characteristics of bank reconciliation statements.
A business entity or firm records the deposits of a bank on the debit side of the bank column in the cash book and withdrawals on the credit side of the bank column in the cash book. Likewise, all these transaction details are registered by the bank in their books. It is a little different as the bank records deposits on the customer’s credit side and withdrawals on the customer’s debit side.
The features of the bank reconciliation statement are given below:
The bank reconciliation statement (as the name suggests) is a statement.
It is not any type of account and doesn’t include in the part of the account’s process.
A firm can prepare it any time of the financial year when they require it.
The bank reconciliation statement is prepared on a particular day.
An individual or firm may prepare it to reconcile the reasons for the differences between the bank balance according to the passbook or bank balance according to the cash book.
The main reason for the differences between the cash book and the bank’s passbook is the time in recording the transactions. There are many things that cause a difference in timing.
The cheque was paid in the bank but is not yet cleared.
The cheque is bank-issued but not yet deposited for payment.
Direct debit made by the bank from the customer’s side.
Interest and Dividends collected by the bank.
Direct deposition of an amount/ cheque in a bank account.
Bills discounted/ cheques deposited dishonoured.
Errors made by the bank or by the company.
In a few instances, the error in two balances can be made on the company’s cash book or from the bank side. The errors are as follows:
Errors made at recording the transaction by the company.
Errors made at recording the transaction by the bank.
There are two processes in which a bank reconciliation statement can be prepared:
Making documentation of bank reconciliation statements without modifying the cash book balance.
Filing for a bank reconciliation statement after making changes in the cash book balance.
At first, the statement’s record date is noted.
After this, the balance mentioned in the cash book is recorded in the statement. Sometimes, the balance mentioned in the bank’s passbook is recorded.
The deposited cheques that are not collected are removed.
Then the cheque is issued but deposited for payment, and the amount directly deposited in the bank account is noted.
It deducts all the transactions like amounts debited by the bank and overdraft interests not recorded in cash books, bills discounted, and cheques.
All the profits and credits collected by the firm and deposited in the bank directly gets added.
Adjustments related to errors and mistakes are made.
After implementing these steps, the balance between the cash book and bank statement should be the same.
When the total debit column of the cash book exceeds the total credit column of the cash book, it is called a debit balance. This debit balance is also termed as a favourable balance. For an account holder, a favourable balance is an asset. Favourable balance explains a situation when an account holder has an abundance of deposits over withdrawals.
Q1: What is the Need for a Bank Reconciliation Statement?
Ans: This is a solved example on features of BRS will help to answer the question. We also get to know the characteristics of a bank reconciliation statement. The need to prepare a bank reconciliation statement arises due to the following reasons:
This helps to understand the actual bank balance of the individual or the firm.
It helps to identify all the mistakes made in the cash book or passbook to that of the bank statement.
It detects and prevents the errors and frauds made in recording the banking transactions.
It incorporates specific income/expenditures/ that are credited or debited by the bank in the books of accounts.
It shows the interest and dividends mentioned by the bank but not registered in the cash book.
Q2: What Differences Arise Due to Errors and Omissions in the Recording?
Ans: The differences arise mainly due to the errors and omissions in the recording of transactions that are made in the bank’s passbook or the cash book of the company. We can understand this from the perspective of a solved example on features of BRS.
(i) The error committed by the bank in recording the transactions:
Wrong credit or debit entry in the bank’s column of the account holder.
Recording the bank interests and charges that are already made.
(ii) The error committed by the business entity or firm in recording the transactions.
Cheque issued but not registered in the cash book of the company.
Cheques deposited into the bank but overlooked to register in the cash book of the company.
Miscalculating in balancing or tallying of the bank column of the cash book.