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PREPARATION OF BANK RECONCILIATION STATEMENT

While preparing Bank Reconciliation Statement let us fust consider causes responsible for its Preparation : 

Causes Responsible for the Difference Between the Balances of Cash book and Pass Book

1.      Cheque issued or drawn but not yet presented for payment or cashed by customers or debited in the pass book. It is a common practice of the business to issue cheques in favour of outside parries against the payment. These cheques are delivered to the parties, who are expected to collect the payment of the cheque from our bank. The firm will record the issue of cheques in the cash book on the date of the issue of cheques with the help of the counterfoils of the cheque book. As the payment of cheque may be collected within six or three months from the date of its issue, so the party receiving the cheque may not collect its payment the same day from the bank. It will mean that the issue of cheque has been recorded in the cash book but it does not find a place in ledger accounts of the bank or the pass book, maintained by the bank. The transaction will definitely reduce our bank balance as shown by the cash book, but the bank balance as shown by the pass book will remain the same i.e., not reduced. There will be difference between the balance of cash book and pass book and the transaction will be identified for bank reconciliation statement.

Cheques issued but not cashed by the customers means that the cheque has not been presented by the customer and the payment has not been made by the bank. While issuing cheque, we credit bank account because cash at bank as an asset will reduce or the bank is giver. The bank on the other hand will debit our account after making payment of the cheque issued by us because the payment by the bank will reduce bank’s liability towards us. Cheques, not debited by the bank will mean the same things i.e., not presented or not cashed by customers.

 2.      Cheques debited or deposited or paid into the bank but not yet collected or cleared or credited by the bank. We may receive cheques from outside parties and deposit into the bank for collection. The firm will debit bank account at the time of depositing cheques, because cash at bank, as an asset will increase. By debiting bank account while sending the cheque to the bank means that our bank balance as per our cash book has been increased. The bank will credit our account or increase our balance, only when the bank actually collects the payment of the cheques, deposited with it. Collection of cheques is also known as clearance of cheque. After collection of cheques the bank increases our balance with it or credits customer’s account.

The transaction increases our bank balance as per cash book at the time of depositing the cheque bank, but the bank balance as per the pass book will increase, when the bank actually collects the payment of the cheque from the Drawer’s bank. As the bank has not yet collected the payment and credited customer’s account, bank balance as per pass book will be lesser than the balance as per cash book and the result will be

the difference between the balances of cash book and pass book. 

3. Cheques directly deposited by the debtors to our account in the bank. It is just possible that certain parties, instead of sending the cheque to us may deposit the same into our bank account directly. The transaction will increase our bank balance, as per the records maintained by the bank, because the payment has already been received by the bank. The firm does not have any knowledge of this direct deposit, so bank balance as per cash book will not increase. The transaction will be responsible for resulting in the difference between the balances of cash book and pass book. The balance of pass book will be more than the balance of cash book. 

4.lnterest paid or allowed or credited or collected by the bank. The bank may allow or pay interest on our deposits. It is just possible that we may instruct the bank to collect interest on our investment or loan advanced by us. The bank after collecting the interest, will credit the same into our account. As we do not have any knowledge of the interest credited by the bank into our account, there will be no entry of interest in the cash book. The result will be the difference between the balance as per cash book and pass book. The balance of pass book will be comparatively more than the balance of cash book. 

5. Interest on overdraft or interest charged or debited by the bank. If we take an overdraft or borrow funds from the bank, interest will be charged by the bank on overdraft or loan advanced by the bank. The bank will debit the amount of interest to our account, thus our bank balance as per pass book will decrease or the amount of loan or overdraft will increase. The balance of the cash at bank will remain, unchanged as per cash book, because of the ignorance of the interest debited by the bank. There will be difference between the bank balance as per cash book and pass book, so far the interest charged by the bank is not entered into cash book. 

6. Payment made by the bank on our behalf. The bank is also an agent of the customer, so the bank may be instructed to make the following payments on behalf of the customer: 

(a)   payment of insurance premium

(b)   payment of installment of loan

(c)    payment of office or godown rent

(d)   issue bank draft in favour of certain outside party

(e)    make any transfer of money.

In all these cases, the bank debits the amount paid on behalf of his customer into his account and his bank balance as per pass book will decrease. As the customer has not been informed of these payments, it will not have been recorded in the cash book, so the balance of cash book will remain the same i.e., lesser than the pass book.

7. Dishonor of cheque and bills. The cheques received from outside parties are deposited with the bank. Deposits of cheques is recorded in the cash book at the time of depositing, it with bank and thus balance of cash book will increase. The bank could not collect the payment of the cheque, because it was dishonored so the amount will not have been credited by the bank into our account. As a result of the treatment of dishonored cheque in the cash book and pass book the balances of the two books will differ.

While discounting the bills receivable, the bank will credit the customer’s account and the same amount will be debited to the bank account by the customer. It means the transaction affects positively the balance of both the cash book and pass book with the same amount and cannot be identified as transaction for bank reconciliation statement. In case the bill is presented by the bank to the drawee of the bill and the payment is not received, the bank will immediately debit the amount of the bill into customer’s account, causing decrease in bank balance as per pass book. Due to ignorance and lack of information, dishonour of the bill will not be recorded in the cash book and the result will be the difference between the balances of cash book and pass book.

8. Bank charges or collection charges. The bank may charge certain amount for the services rendered. The notable charge is collection charge, which is charged by the bank for collection of outstation cheques. These charges are debited by the bank in the customer’s account, so they reduce bank balance as per pass book. The bank charges have not been entered in the cash book by the customer, because he was not informed of it as yet The bank balance as per cash book will remain unchanged and thus there will be difference between the balance of cash book and pass book.

9. Cheques entered into cash book but omitted to be banked. The cheque received from outside parties if entered in the cash book will increase our bank balance as per our record but the question of increase in the bank balance as per the records of the bank does not at all arise, because the cheque has not yet been sent to the bank for collection. The transaction will increase bank balance as per cash book but the balance of pass book will remain unchanged i.e., Jesser as compared to cash book. The transaction will thus cause difference between the balances of cash book and pass book.

10. Cheques paid into bank but omitted to be entered in the cash book. The cheque received from outside party has been sent to the bank for collection, so the bank balance, as per ledger accounts of the bank will increase after the collection of the cheque. The cheque has not been recorded in the cash book by mistake, ·so the bank balance as per our record will remain unchanged. The transaction will result in the difference between the balances of cash book and pass book and will be identified as an item of bank reconciliation statement.

11. Cheques deposited into the bank but under-credited by the bank. It may sometimes happen that we may deposit a cheque for $ 50 in the bank but the bank may wrongly credit our account with $ 15 only. The transaction will cause a difference of Rs. 35 (i.e., 50—15) between the balances of cash book and pass book. because the customer debited bank account with $ 50 whereas the bank credited customers account with $ 15 only. 

12. Retiring a bill under rebate by the bank. In certain cases, we may send our bills payable to bank and instruct to make its payment. We shall be deducting the entire amount of the bills payable from our bank balance while sending the bill. The bank may retire the bill or make its payment before its due date and earn certain amount of cash discount for us. The bank will reduce lesser amount from our account i.e. , the amount of the bills less amount of discount, so there is going to be the difference between the balances of cash book and pass book.

13. Dividends and interest collected and credited by the bank. The bank may collect dividends on our investment in shares and also interest on our investments and loans as per our instruction. The bank will credit these dividends and interest collected in our account. This will increase our bank balance as per the records of the bank. The transaction will not be recorded in the cash book because we have not been informed of it as yet. The balance of cash book will, therefore be lesser than the balance of pass book.