USA: +1-585-535-1023

UK: +44-208-133-5697

AUS: +61-280-07-5697

STEPS FOR PREPARATION OF BANK RECONCILIATION STATEMENT

While preparing bank reconciliation statement, the following steps should be adopted :

1. Identification of the balance with which bank reconciliation statement has to be prepared

Bank reconciliation statement can be prepared either from the balance of cash book or pass Book. We have to prepare statement with the balance given. If the balance of cash book is given, we shall prepare the statement with the balance of cash book. If the balance of pass book is given, we shall start bank reconciliation statement with the balance of pass book. If the balance of both the cash book and pass book are given, we can prepare statement with either of the balance.

2. Identification of the plus and minus balance

While preparing Bank Reconciliation statement the amount column is divided into plus and minus columns. Plus balance with the bank means that the firm has financially sound position and has deposited more in the bank than what it has withdrawn. Minus balance means overdraft balance i.e., drawn from the bank more than the deposits. On the following basis, we can identify plus and minus balance : 

PLUS BALANCE

The bank balance will be treated as plus balance in the following cases :

(i)                 If the cash book shows a debit balance. The debit balance of the cash book means excess of the debit side over the credit side of the cash book. The debit side represents amount deposited into the bank and the credit side shows the amount withdrawn from bank. Excess of deposits over the withdrawals shows that we have got certain plus balance in the bank.

(ii)               If the pass book shows a credit balance. The accounting treatment in the pass book, maintained by the bank is quite reverse to the treatment of the transaction made in the cash book. In this way, the bank credits our account for deposits, whereas the same is debited in the cash book. Credit balance of pass book means excess of our deposits in the bank over the amount debited by the bank in our account and thus it is a plus balance.

(iii)             The balance of cash book or pass book, if not specified. In case, it is not specified that the balance shown by the cash book or pass book is debit or credit, we will have to assume the balance as plus, because generally deposits increase the withdrawals from the bank. Most of the firms have plus balance, so it will be appropriate to assume balance as plus. 

MINUS BALANCE

It means financially unsound position of the firm. where bank has paid more on our account than what we have deposited in the bank. The balance will be treated as minus in the following cases :

(i) If the cash book shows credit balance. The credit balance of the cash book means that the credit side of the cash book, which represents payment made by bank on our behalf is more than the debit side which shows our deposits into the bank. We debit bank account or make a posting at the debit side of the cash book in the bank column, while depositing money, whereas the posting is made at the credit side of the cash book when the bank makes payment of cheques drawn by us, or overdraft is sanctioned by the bank or charges made by the bank. In this way, excess of credit side of the cash book will mean more withdrawals than deposits and thus it is minus balance.

(ii) If the pass book shows debit balance. The debit balance of the pass book means the same as the credit balance of cash book. It shows that the bank has debited our account with more amount than what it has credited. Excess of debit over the credit will mean that we are the debtors of the bank or in other words, bank is our creditor. We have to pay to the bank the amount overdrawn, so it will be a minus balance.

(iii) Overdraft balance as per cash book or pass book. Overdraft means the amount overdrawn from the bank. In such cases, the bank makes more payment on our account than the deposits received from us. The word ‘overdraft· itself means minus balance whether it is as per cash book or pass book. The credit balance of cash book or the debit balance of pass book both show overdraft balance. Amount over drawn from the bank is always a minus balance.

3. Determining the effect of the transaction
The statement can be prepared either from the balance of cash book or pass book. If it is prepared from the balance of cash book, the effect of the transaction will be studied on the pass book as compared to cash book. The item will be added, if the bank balance as per pass book increases and in the same way, the item will be deducted, if bank balance as per Pass book decreases. For example, the issue of cheque, not presented for payment will decrease the balance of cash book but as bank has not passed any entry, so the bank balance as per pass book will not decrease. In other words, we can say that the balance as per pass book will be more as compared to the balance as per cash book. We will have to add the item in order to bring the balance of cash book at par or equal to that of pass book. In case the statement is being prepared from the balance of pass book, we will have to study the effect of the transaction on the cash book. In the above example i.e., due to issue of cheque, not presented by the customer, the balance of cash book has gone down but the balance of the pass book remains the same. As the statement is being prepared from pass book, so its effect will be studied on the cash book, whose balance has decreased. so the item will be deducted.
To illustrate it further, we can take another example of bank charges. The balance as per pass book will be lesser as compared to cash book, because the bank balance has already been reduced with the bank charges and it has not been recorded as yet in the cash book. We will have to deduct the item, if we prepare statement with the balance of cash book, because the balance as per pass book is lesser as compared to the balance of cash book. The item will be added if we prepare the statement from the pass book, because the balance of the reverse book i.e., cash book is more than the pass book. The effect is summarized as under :
If the statement is prepared from the balance of cash book :
(a)
Add those items which have resulted in the increase of balance as per pass book.
(b) Deduct those items which have caused the decrease in the balance of pass book.
If the statement is prepared from the balance of pass book :
(a)
Add those items which have resulted in the increase of the bank balance as per cash book.
(b) Deduct those items which have caused the decrease of the balance as per cash book.

4. Considering the date of preparing the statement
Only those transactions which are entered in one of the book i.e., cash book or pass book but not entered in either of the two by the date of preparing statement are identified as transactions for Bank Reconciliation statement. Suppose, if the date of preparing bank reconciliation statement is 30th June, 1998, all those transactions which have been recorded in the cash book but not in the pass book or recorded in the pass book but not in the cash book by 30th June, 1998 will be entered in the bank reconciliation statement. If the transaction has been recorded in both the cash book and the pass book correctly the balance of both the books will either increase or decrease simultaneously with the same amount by 30th June, 1998. Such transactions will be ignored at the time of preparing bank reconciliation statement.
5. Balancing the statement

Final step will be to balance the plus and minus columns. If we started preparing statement with the balance of cash book, we shall be finding out the balance of the pass book. In the same way, if we started preparing statement from the balance of pass book, we shall find out the balance of the cash book. If the total of the plus items exceed the total of the minus items the balance ascertained will be plus. In the same way excess of minus items over plus items will show a minus balance.

The preparation of bank reconciliation statement may be summarized as under :
Bank Reconciliation Statement
 

 

Illustration 1. Prepare bank reconciliation statement from the following information on 31st December, 2005 : 

Cash book showed a balance of $ 15,000 on 31st December; 2005. On comparing the same with the balance of pass book it was revealed that : 

(i)      A cheque of $ 2,000 issued in the month of December; 2005 has not been presented for payment to the bank. 

(ii)     The customer deposited cheques worth $ 3,000 but they have not been collected by the bank. 

(iii)     The bank has allowed $ 200 as interest. 

(iv)     Bank has charged $ 20·as commission for his services. 

Solution. Bank Reconciliation Statement

(as on 31st December; 2005)

Explanation : 

Cash balance. We have been given cash balance of $ 15,000. It has not been specified, whether it is a debit or credit or overdraft balance, so we will assume the balance to be plus. It is a general practice to assume the balance as plus, if not specified. 

Illustration 2. From the following particulars, prepare a bank reconciliation statement, showing the balance as per pass book on 31st March, 2006:

The following cheques were paid into firm’s current account in March, 2006, but were credited by the bank in April, 2006. 

A= $ 2,500, B = $ 3,500 and C = 1,900. 

The following cheques were issued by the .firm in March, 2006 and were cashed in April, 2006.

P = $ 2,500, Q = $ 4,500 and R = $ 4,000. 

A cheque of $ 1,000 which was received from a customer was entered in the bank column of cash book in March, 2006, but the same was paid into the bank in April, 2006. 

The pass book shows a credit of $ 2,500 for interest and debit of $ 1,000 for bank charges. The ·balance as per cash book was $ 1,80,000 on 31st March 2006. 

Solution. –

Bank Reconciliation Statement

as on 31st March, 2006

Particulars
          Amount
Plus items$ Minus items$

 

 

Balance as per cash bookAdd: Cheque issued but not presented for payment 😛      2,500Q     4,500R     4,000Less : Cheque paid into bank but not credited :A     2,500

B     3,500

C     1,900

 

Less : Cheque entered in the cash book but omitted to be banked

Add : Interest allowed by bank

Less : Bank charges debited by the bank

Balance as per pass book.

1,80,00011 ,000 

 

 

 

 

2,500

 

 

193500

 

 

 

7,900

 

1,000

 

1,000

1,83,600

193500

 

 

 

Explanation. We have been given the balance of cash book, so while preparing statement we shall study the effect of every transaction on the balance of pass book. If the balance of pass book is comparatively more than the balance of cash book due to the effect of a particular transaction, the item will be added. On the other hand, if the balance of Pass book is comparatively lesser than the balance of cash book as a result of the transaction, item will be deducted.

 

Illustration 3. Prepare bank reconciliation statement from the following particulars on 31st July, 2005 :

(a)    Balance as per pass book $ 500. 

(b)   Three cheques for $ 60, $ 39.37 and $ 15.25 issued in July, 2005 were presented for payment  to the bank in August 2005. 

(c)    Two cheques of $ 50 and $ 65 sent to the bank for collection were not entered in the pass book by July 31, 2005. 

(d)   The bank charged $ 46for its commission and allowed interest $ 10 which were not entered in his bank account. 

Solution.

Bank Reconciliation Statement

as on 31st July, 2005

Particulars
          Amount
Plus items$ Minus items$

 

 

Balance as per cash bookLess: Cheque issued but not presented for payment :60.0039.3715.25Add : Cheque sent to bank but not yet collected :50.00

65.00

 

Add : Bank charges

Less : Interest allowed by Bank

Balance as per Cash book.

500.00 

 

115.00

 

46.00

 

 

 

661.00

 

114.62 

 

 

 

 

10.00

536.38

 

661.00

 

 

 

Explanation. We have been given the balance of pass book, so we shall be preparing Bank reconciliation statement with this balance. We will have to study the effect of every transaction in the cash book. The item will be added if the bank balance as per cash book is more as compared to the balance of pass book or deducted, if the balance of cash book is lesser than the balance of pass book.

 

Illustration 4. From the following particulars prepare a bank reconciliation statement showing the balance as per cash book : 

The following cheques were paid into bank in Dec. 2005 but were credited by bank in Jan. 2006:

Seema- $ 3,500,  Sangita- $ 2,500,  Sonia- $ 2,000 

The following cheques were issued by the firm in December, 2005 but were presented in January, 2006 :

Arti- $ 4,000,  Bharti- $ 4,500. 

A cheque for $ 1,000 which was received from a customer was entered in the bank column of cash book in Dec. 2005 but was omitted to be banked in Dec. 2005. 

The pass book shows a debit of $ 1,000 for bank charges and a credit of $ 2,000 for interest.

Interest on investments $ 2,500 collected by bank appeared in the pass book.

The bank balance as per pass book was $ 62,000 on 31st December; 2005.

Solution.

Bank Reconciliation Statement

as on 31st December, 2005 

 

Particulars
          Amount
Plus items$ Minus items$

 

 

Balance as per Pass bookAdd : Cheques paid into bank but not credited :Seema-    $  3,500Sangita-   $  2,500Sonia-      $ 2,000 Less : Cheques issued but not yet presented for payment 

Arti-    $ 4,000

Bharti- $ 4,500

 

Add: Cheques entered in the bank column of the cash book but

omitted to be banked

Add : Bank charges

Less : Interest allowed by the bank

Less : Interest on investment

Balance as per cash book

62,0008,000 

 

8,500

 

 

1,000

1,000

 

 

 

 

72000

 

 

 

 

 

 

 

 

2,000

2500

59000

 

72000

 

 

 

 

Explanation. We shall study the effect of every transaction on the cash book, because the statement is being preparing with the balance of pass book. All those items which have to be added will be shown in the plus column and other items which have to be deducted will be shown in the minus column

 

Illustration 5. On 31st December, 2006, the cash book of Jain iron Works showed an overdraft of $ 5,600. From the following particulars make out a bank reconciliation statement : 

(a)   Cheques drawn but not cashed before 31st December, 2006 amounted to $ 3,946. 

(b)   Cheques paid into bank but not collected and credited before 31st December, amounted to $ 4,891. 

(c)    A bill receivable for $ 520 previously discounted with the bank had been dishonored and debited in the pass book. Bank charges debited in the pass book amounts to $ 55.

(d)   Debit is made in the pass book for $ 120 on account of interest on overdraft. 

(e)    The bank has collected interest on investment-and credited $ 760 in the pass book.

Solution.

Bank Reconciliation Statement

as on 31st December; 2006

Particulars
          Amount
Plus items$ Minus items$

 

 

Overdraft as per cash bookAdd : Cheque issued but not yet presented for paymentLess : Cheque paid into bank but not yet creditedLess : Dishonored bills debited by the bankLess : Interest on overdraft debited in the pass bookLess : Bank chargesAdd: Interest on investment collected and credited by bankOverdraft as per pass book
39467606480

11186

 

5600489152012055 

11186

 

 

 

 

Explanation. The bank reconciliation statement is to be prepared from the balance of cash book so the effect of the transactions will be studied in the pass book even though it is an overdraft balance. All those transactions, which increase the balance of pass book in comparison to cash book will be added. Other transactions which result in the decrease of the balance of pass book will be deducted.

 

Illustration 6. The bank pass book of Mr. X showed an overdraft of $ 33,575 on 31st March, 2005. On going through the pass book, the accountant found the following:

(i)                 A cheque of $ 1,080 credited in the pass book on March 28, is dishonored and debited in the pass book on April I, 2005. There was no entry in cash book about the dishonor of the cheque until 15th April. 

(ii)               Bank had credited his account with $ 2,800 for interest collected by them on his behalf but the same has not been entered in his cash book. 

(iii)             Out of $ 20,500 paid in by Mr. X in cash and by cheques on 31st March, cheques amounting to $ 7,500 were collected on 7th April. 

(iv)             Out of cheques amounting to $ 7,800 drawn by him on 27th March, a cheque for $ 2,500 was encashed on 3rd April.

 

Prepare bank reconciliation statement on March 31,2005. 

Solution.

 Bank Reconciliation Statement

as on 31st March, 2005

Particulars
          Amount
Plus items$ Minus items$

 

 

Overdraft as per pass bookLess : Interest collected and credited by the bankAdd : Cheques paid into bank but not yet collectedLess : Cheques issued but not yet encashedOverdraft as per cash book
750031375

38875

 

3357528002500

38875

 

 

 

 

Note. Item No. l of the question will not be shown in the statement because it has appeared in both the cash book and pass book before 31st March. 2005.

Explanation. The statement is to be prepared from the balance of pass book. Different transactions will be added or deducted after studying their effect on cash book. If the balance of cash book is comparatively more than the balance of pass book due to the effect of certain transaction, the item will be added. In the same way, transaction affecting decrease in the balance of cash book will be deducted.

(i) The pass book shows overdraft balance, which will be written in the minus column, as overdraft balance is always a minus balance, whether it is from cash book or pass book. While preparing statement with plus and minus columns determination of items to be added or deducted will be made in the same way as if it has a plus balance. After putting overdraft balance in the minus, the treatment of other items will be made in the usual way.