Bank Reconciliation: Identifying & Reconciling Cash Book and Pass Book Differences, Study notes of Financial Accounting

Download Bank Reconciliation: Identifying & Reconciling Cash Book and Pass Book Differences and more Study notes Financial Accounting in PDF only on Docsity! BANK RECONCILIATION STATEMENT INTRODUCTION All receipts for the customer are credited in the pass book and all payments for him are debited in it. If transactions recorded by the trader in the bank column of his cash book and those appearing in his pass book are the same, it is quite obvious that the balance shown by the pass book should agree with bank balance shown by cash book. However in practice, these two balances do not agree. It is due to certain items which lead to difference in the cash book and pass book balances. A statement is prepared to bring the cash book balance in agreement with the balance as per pass book which is known as Bank reconciliation statement. PURPOSE OF PREPARING A BANK RECONCILIATION STATEMENT When a trader maintains a Bank account he incorporates deposits made and withdrawals in this cash book in the bank column. The banker supplies the customer with a pass book and makes entries at periodical intervals from his ledger. Most of the banks now a days supply their current account customers with a statement of account which is more or less like a pass book. When such statement is received from the bank, it is necessary for the cashier to compare the entries made in the pass book with that made in the cash book. On any one day there will be always be a difference between the pass book balance and the cash book balance. To find out the accuracy of entries made in the cash book and pass book the entries which are not recorded either in the pass book or cash book are taken out and a statement is prepared. After making adjustments if the balance arrived at tallies with the pass book balance then the entries made in the cash book/pass book are correct. But if they do not tally it means there should be some entries left out or some wrong entries might have been made by the accountant in preparing the cash book. The statement prepared for ascertaining the correctness of balances as shown by the cash book and pass book is called Bank Reconciliation statement. Errors in cash book and pass book Errors in any of these two books may also lead to disagreement in the balances. Such errors may be (a) By recording cheques issued in the cash column instead of bank column of cash book. (b) By recording the amount of cheque drawn against one account, in another account with the same bank. (c) By recording wrong amounts in cash book or pass book. (d) By mistakes in totaling, balancing etc. PREPARATION OF THE BANK RECONCILIATION STATEMENT Specimen Bank Reconciliation statement as on 31st Dec… Balance as per cash book Add: Cheques issued but not presented Interest credited in pass book Deposits made directly by outsiders Wrong credit made in the pass book by the bank Less: Cheques deposited but not credited Bank charges debited in pass book Interest on overdraft debited in pass book Insurance premium paid by bank Cheque entered in the cash book but not deposited Cheques dishonoured and entered in pass book Balance as per pass book OVERDRAFT The amount drawn by the customer of a bank is excess of his deposit balance is called overdraft. In case of overdraft, the bank column of the cash book will have credit balance & the pass book will have debit balance. On preparing the reconciliation statement starting with overdraft, the adjustments should be made in the opposite direction of starting with the debit balance. For example, on direct payment by a customer to the bank, when there is an overdraft as per pass book, the overdraft will be reduced by the amount. Conversely, when the bank makes any payment for the customer, the overdraft as per pass book increases^^. Specimen: Bank Reconciliation statement as on 31st Dec…. Overdraft as per cash book Add: Cheques deposited but not credited Interest on overdraft debited in pass book Amount remitted by banker on behalf of customer Cheque dishonoured and entered in pass book Cheques debited in cash book but not paid in to Bank Bank charges debited in pass book only Rs. Less: Cheques issued but not presented Interest credited in pass book Dividend, interest collected and credited in pass book Overdraft as per pass book Bank reconciliation statement may be divided in to the following for different cases, on the basis of the balance with which it is started. Case I Starting with debit balance as per cash book Cash II Starting with credit balance as per cash book Cash III Starting with overdraft as per cash book Cash IV Starting with overdraft as per pass book METHOD OF PREPARATION OF BANK RECONCILIATION STATEMENT Various methods to prepare bank reconciliation statement 1. Balance shown by the cash book and the pass book on a specified date is to be noted. Debit balance in the cash book and credit balance in the pass book indicate that the business has favourable balance in the bank. Similarly, credit balance in the cash book and debit balance in the pass book indicate that the business has unfavorable balance in the bank. It means bank has given ‘overdraft’ to the business. 2 All the debits and credits shown in the cash book must be compared with the entries in the pass book to identify any items omitted. Similarly all the debits and credits in the pass book should be compared with the entries in the cash book to ascertain the items which were no recorded. Any items recorded in both the books but amounts being different should be carefully noted to adjust the difference in the amounts. It is preferable to make a list of all the differences. 1. The balance shown by the cash book or pass book can be taken as the ‘Starting balance’, each difference should be either added to or subtracted from the starting balance depending on the nature of the difference . 2. When all the differences are adjusted, the balance must be the balance as per the other book. If cash book balance was the starting balance, the final balance must be the balance as per the pass book and vice versa. Performa of a bank reconciliation statement In this section, we have presented a Performa which indicate the effect of each ‘difference’ on cash book balance or pass book balance. a) If we take cash book balance or overdraft as per pass book as the starting point: Bank Reconciliation Statement as on….. Rs. Rs. Balance as per cash book Or overdraft as per pass book Add: (i) Cheques issued / drawn but not presented (ii) Direct deposit made by customers into bank not recorded in cash book (iii) Dividend or other incomes collected by the bank not recorded in cash book (iv) Interest credited by the bank but not debited in cash book Less: (i) Cheques paid / deposited into bank but not credited (ii) Payments by the bank as per standing instruction, not entered in cash book (iii) Bank charges debited in pass book but not recorded in cash book (iv) Cheques issued and recorded in cash book as deposited into bank but the same was not deposited into bank (v) Cheques issued but not recorded in cash book (vi) interest on bank deposits recorded in cash book but not credited by the bank Balance as per pass book or overdraft as per cash book xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx