MEANING OF BANK RECONCILIATION STATEMENT UPSC EPFO

Bank Reconciliation Statement is a statement prepared on a particular day to reconcile the bank balance as per Cash Book with the balance as per Bank Pass Book showing entries causing difference between the two balances.

 • Amount deposited (both cash and cheque) into bank is recorded in the Bank Column of Three-column Cash Book on the debit side (i.e., Receipts Side) while withdrawals and issue of cheques are recorded on the credit side (i.e., Payments side).

 • Bank also maintains an account of the account holder in its books of accounts. Deposits by the account holder are recorded on the credit side of the account holder’s account and withdrawals on the Debit side. A copy of it is given to the account holder in the form of statement or Pass Book for its records and reconciliation • Thus, debit entries in the Cash Book are reflected on the credit side of the Bank Pass Book, while credit entries in the Cash Book are reflected on the debit side of the Bank Pass Book.

 • Balances shown by the Cash Book and Bank Pass Book records at the end of the period should normally agree, i.e., should be same.

 But, sometimes the two balances differ. If the two balances differ, it is necessary to know the reasons for the difference as it may require entry to be passed in the books of accounts. A statement showing the reasons or causes of difference is prepared. This statement is known as Bank Reconciliation Statement.

 NOTE:- Preparation of Bank Reconciliation Statement is not a part of Double Entry System of Book Keeping. It is a method or technique to reconcile bank balance in Cash Book with the balance as per Bank Pass Book to ensure that errors if any, are corrected and transactions if omitted, are recorded.

 NEED AND IMPORTANCE OF BANK RECONCILIATION STATEMENT:-

 1. It brings to light errors that may have been committed either in the Cash Book or in the Bank Pass Book.

 2. Undue delay in the clearance of cheques deposited is known from the reconciliation.

 3. Regular Reconciliation discourages embezzlements.

 4. Reconciliation helps the management to verify the accuracy of entries recorded in the Cash Book.

 5. It shows actual bank balance.

 BANK STATEMENT OR BANK PASS BOOK

 Bank Pass Book or Bank Statement is a copy of account of the account holder in the books of the bank. It is issued by the bank to the account holder so that entries in the Bank Pass Book can be compared with the entries in the Cash Book and differences determined.

 A debit balance in the Bank Pass Book means an asset for the bank and liability for the account holder, whereas a credit balance means a liability for the bank and an asset for the account holder.

 REASONS OF DIFFERENCE BETWEEN BALANCES AS PER CASH

 BOOK AND BANK PASS BOOK

 1. Difference Due to Timing :- There is always a time gap between recording a transaction in the books of accounts and it being recorded by the bank. For example, a cheque issued is recorded in the Cash Book immediately but the bank records it when it is presented for payment.

 2. Transactions Recorded by the Bank :- Sometimes transactions are recorded by the bank, which are not known to the account holder. For example, interest charged or allowed, bank charges, transfer of balance from one account to another.

 3. Errors :- Errors may be committed by the bank or the account holder and these errors result in difference in the balances of Cash Book and Bank Pass Book. For example, wrong balance may be carried forward, a transaction may not have been recorded in the Cash Book or a transaction wrongly recorded in an account.

 NOTE :

 1. Debit Balance as per Cash Book and Credit Balance as per Pass Book means favourable balance.

 2. Credit Balance as per Cash Book and Debit Balance as per Pass Book means unfavourable balance.

 3. Amended Cash Book is prepared to record unrecorded entries that have been debited and credited by the bank and passing rectifying entries for errors in the Cash Book.

 Importance of Bank Reconciliation Statement

 Generally while making a comparison between the company’s cash book and bank balance, the balance does not tally. Therefore, it is important to determine the cause for the difference and display them in the bank reconciliation statement and then tally the two balances. The bank reconciliation statement helps in explaining the differences in the amount between the company’s cash book and bank balance. The cash book and the bank passbook differences are caused by: The difference in timing recording the transactions: The difference in timing can be caused by many factors which are: Bank-issued cheque but not yet deposited for payment

 Paid cheque in the bank but yet not cleared

 Bank made direct debit from the customer’s side

 Cheque/ amount deposited directly to the bank account

 Dividends and Interest collected by the bank

 Bank made direct payment from the customer’s side

 Cheques deposited/bills discounted dishonoured

 Errors made by the company or by the bank: In a few occasions, the error in two balances can be made from the bank side or in the company’s cash book. Few errors are as follows: Errors made while registering the transaction by the company Errors made while registering the transaction by the bank Additional Reading: DK Goel Solutions for Bank Reconciliation Statement Types of Bank Reconciliation Statement

 The Bank Reconciliation Statement can be prepared in 2 ways: Documenting of bank reconciliation statement without adjusting the cash book balance.

 Filing of bank reconciliation statement after adjusting the cash book balance.

 Steps to Prepare Bank Reconciliation Statement:

 First, the date on which the statement is recorded is mentioned.

 After which the balance displayed in the cash book is mentioned in the statement. Sometimes, the balance mentioned in the passbook can also be mentioned.

 The deposited cheques which are not collected are deducted.

 Then the cheques issued but the deposited for payment, but amount directly deposited in the bank account are recorded All the transactions like overdraft interest, amount debited by the bank but not recorded in the cash book, cheques and bills dishonoured are deducted.

 All the credits and profit collected by the company and directly deposited in the bank is added.

 Adjustments of errors are made

 Now the balance between the cash book and statement should be equal or the same.

 Why bank reconciliation statements are prepared?

 With the definition of a bank reconciliation statement, you might be wondering why bank transactions recorded in the books of accounts do not match with the bank statement? There are plenty of reasons and some the common ones are listed below: Cheques Issued but not cleared in the bank

 Difference in cheque deposited and cheque credited date

 Date of cheque issued towards payment and date on which it is debited is different Cheque issued or received is not presented to the bank for clearing Bank interests, charges etc. are not accounted for. Reason being it is not known till you reconcile.

 Banks can also do mistake in debiting or crediting the transactions Just like banks, you too can make mistake in accounting the bank transactions in books of accounts and so on….

 Due to the reasons listed above, the closing bank balance in your books of accounts and actual bank balance as per bank will not match. This means, the bank balance what you think you have it your bank is not the one available in the bank. Deciding basis the book balance will put you in an uncomfortable situation.

 To avoid those situations, bank reconciliation statements are prepared. This statements simply matches the bank transactions as per company books with bank statement so that you always have accurate bank balance reflecting in the books of accounts.

 When does a business prepare bank reconciliation Statement?

 Depending on the volume and value of bank transactions, the reconciliation activities are carried out daily, weekly, fortnightly etc. If the volume or value of transactions is higher, the reconciliation activities are carried on daily to mitigate the risk of payment/cheque bounce.

 How to prepare a bank reconciliation statement?

 Bank reconciliation statement (BRS) involves the process of identifying the transactions individually and match it with the bank statement such that the closing balance of bank in books matches with the bank statement. For one which is not matched, suitable adjustments or correction will be done in the book to match it.

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