Bank Reconciliation Statement: Bank balance as shown by the cash book must tally with the balance shown by the passbook. It is quite often seen that the balances as revealed by the cash book and the passbook do not tally. These differences may arise due to numerous reasons. In order to tally the balances of bank column of cash book and the passbook, a statement is prepared (UPBoardSolutions.com) which is known as the ‘Bank Reconciliation Statement’. Thus, Bank Reconciliation Statement may be defined as “The statement which is prepared to find out the reasons of differences in the balances of Cash Book and that of the Pass Book is known as Bank Reconciliation Statement”.

Importance of Bank Reconciliation Statement: 

The various reasons for the preparation of Bank Reconciliation statement are as follows:

1. Cheques Issued but not Presented for Payment: As soon as any person is issued a cheque by the customer of the bank it is recorded on the credit side in the bank column of the cash book. The same cheque is presented by the person after a duration of time. Thus, if in between this duration the balances are reconciled there will be a difference in the two balances.

2. Cheques Deposited but not Collected or Credited by the Bank: As soon as the cheques are deposited in the bank, the customer debits the bank column of the cash book. This will lead to an increase in the balance in the cash book. The bank will not increase the balance unless the amount is really received. The process of collection of cheques takes some time. If during this duration the balances are compared there will be a difference in the two because of these cheques.

3. Bank Charges: The bank provides many services to its customers. It provides services like collection of dividends, collection of interest, etc. The bank charges some extra amount for these services. Thus bank balance is (UPBoardSolutions.com) reduced as this is debited from the customers account without giving an intimation. This reduces the bank balance and no entry is made in the cash book.

4. Direct Deposits by Customers: There may be some customers who may deposit the money directly into the bank. Thus, the bank balance is increased while the balance in the cash book is not adjusted, accordingly this causing a difference in the balance.

5. A collection made by the Bank on Behalf of Customer: The bank may collect dividend on shares, on government securities etc. on behalf of the customer. The bank credits the amount to the passbook. This increases its balance. While the balance of the cash book is undercast. Thus, the two balances will differ from each other.

6. Dishonour of Bill Discounted with the Bank: The customer gets the bill discounted from the bank before the due date but if on the due date it was dishonoured the bank will debit the amount and the passbook balance will be reduced whereas the cash book will remain unchanged. This will also lead to the difference in the balances.

7. Interest Charged and Allowed by the Bank: When there is overdraft, the bank may charge interest on overdraft. The bank, will record it on the debit side of the passbook. There will be no entry in the cash book to this effect unless some information is received by the bank, thus leading to a difference in the balances. The bank allows some interest on the amount deposited by the customer on a specific date but the customer is informed at a later date. The customer will not pass any entry to this effect in the bank column of the cash book. Hence, there will be a difference between the two balances.

The procedure of Preparing a Bank Reconciliation Statement: In order to prepare a Bank Reconciliation Statement, the following steps should be undertaken:

1. Selection of date: Select the date on which the reconciliation statement is to be prepared. It is advisable for the students that the last date of the month should be taken into consideration so that balances as revealed by the Cash Book and the Pass Book may be easily taken out.

2. Scrutinising of entries: The entries on the debit and the credit sides in the Bank column of the Cash Book are checked with the respective credit and debit sides in the statement relating to the period in question. 

3. Grouping of items: The items which are left unticked should be grouped according  to their respective headings.

4. Placing of items: The remaining unticked items should be grouped under two main headings ‘Add’ and ‘Less’. This grouping of items is of course based on a decision whether the student wants to start the reconciliation statement with the Cash Book Balance or the Pass Book Balance. 5. Copying of Statement: The Bank Reconciliation Statement should be copied into the Cash Book at the end of the month or it should be kept safely in a separate record.

Rules to be followed for Bank Reconciliation Statement: If the balance of Cash Book is given in the question and the Pass Book balance is to be scrutinised then the following items will be added:

• Cheques issued but not presented in the bank for payment till the end of the month. 
• Amounts credited by the bank without giving intimation to the customer by the end of the month.

The following items will be subtracted from the given balance:

• Amounts debited by the bank in the account of the customer without giving any information to him by the end of the month.
• Amounts of credit which have been anticipated to be credited but no credit was provided by the bank till the end of the month.

If overdraft (balance) is given then ( – ) sign will be asserted before balancing figures and calculation will be done accordingly. If the balance of Pass Book is given in the problem and balance of Cash Book is asked, 

then Add:

• Amounts debited by the bank in the account of the customer without intimating the customer till the end of the month. 
• Amounts of credit which were expected to be credited but no credit could be given.

Less:

Cheques issued but not presented in the bank for payment till the end of the period in question. 

Amounts credited by the bank without giving intimation to the customer till the end of the month.

Specimen of Bank Reconciliation Statement