Bank Reconciliation Statement

          Bank Reconciliation Statement

It has already been discussed that in business we keep our "Bank Account" in the Cash Book-- as a part of Three Column Cash Book, i.e. Bank Account in the Cash Book means two bank column on the both sides of two column Cash Book. It is made up everyday, and we record in it (Bank Columns) all cheques received from the debtors and all cheques paid or issued to our creditors or suppliers. We shall also have several contra entries every month, recording excess cash paid in or cash drawn out when required for personal or office use. At the end of the month the Cash Book (Bank Column) is balanced and the result is bank balance, (as per Cash Book). Thus the Cash Book (Bank Column) tells us, what is our balance with the bank on a particular date.

In the same way, the bank also keeps a record of our bank account with the title "Depositor's Account" and enters into our account everyday what is paid in and what is drawn out. At the end of any day , the bank will gladly tell us our bank balance (as per bank record). So two reciprocal accounts are kept i.e. Bank Account (Cash Book) in books of the depositor and depositor's accounts in the books of bank. The balance shown by two accounts (Bank A/c and Depositor's A/c) should be equal because when the Bank Account is debited (Bank Column of Cash Book is debited), the depositor's account is credited in the bank books and vice versa. In other words, for each transaction opposite entries are made in two books. So if the Cash Book (Bank Column) shows a debit balance, the depositors account will be show a credit balance and if the Cash Book shows a credit balance, the depositor's account in bank books will show a debit balance.

Usually a copy of Depositor's Account is provided by the bank to the depositor, which is called "Pass Book". This book is written by the bank. After suitable intervals the depositor submits the Pass Book to the bank and the bank in turn returns it to the depositor after recording the transactions therein.

Sometimes instead of providing a Pass Book to the depositor, at certain individuals, usually monthly , the bank send each depositor a "Bank Statement", which is a record of the beginning balance, any increase and decrease that have occurred since the previous statement and the ending of the  depositor's account with the bank.  The Pass Book and Bank Statement serve the same purpose to the depositors.

Features Of Pass Book:

• It is written by the bank, but remains in depositor's possession.
• Money deposited is entered on the credit side and withdrawn on debit side.
• It is recorded on the date when it is actually collected from the debtor's bank.
• It is recorded when it is paid by the bank to the creditor.  
• Its debit balance shows bank overdraft and credit balance shows cash at bank.

What Is Meant By 'Reconciliation'?

If there is a dispute between two friends, or they fail to agree about some matter, the disagreement may temporarily end the friendship between them. When they become friends again we say they have 'reconciled' with one another. Reconciliation is, therefore, resuming of friendly relations as a result of reasonable explanations between them.

In business we often have sets of figures (balances of Cash Book and Pass Book) which apparently disagree with one another, but reasonable explanation for the disagreement will reconcile the two sets of figures and show that, in fact, both are right.

There are three reasons why figures (Cash Book balance and Pass Book balance) do not agree:

•  One party may lack the knowledge of the transaction recorded by the order.
•  There is always an unavoidable delay between one party doing something and the other party knowing about it.
• Errors and mistakes often occur.

If there is any discrepancy between the balance of Cash Book and that of Pass Book, the depositor prepares a statement to explain the causes of discrepancies and to reconcile the two balances. This statement of explanation is called "Bank Reconciliation Statement".

The idea of the Bank Reconciliation Statement is to discover the various things the bank has done in the Pass Book which the cashier was not aware of, put right anything that is wrong and draw up a logical explanation of the remaining differences, which are not wrong but are delayed from begin right by the time-lag.

This statement is generally prepared at the end of the month or the year and it is not necessary when there is no disagreement between the Pass Book and the Cash Book balances. One copy of this statement is also sent to the bank if the bank has made some errors or  mistakes in the Pass Book.

The great advantage of preparing this statement is, if by mistake the Pass Book balance is shown less, the bank may wrongly dishonour our cheques  for insufficiency of funds. As a result, the goodwill of the business will be suffered and our creditors will refuse to accept our cheques in future. By preparing this statement true bank balance can be ascertained.