Bank Reconciliation Statement- How to tally with Pass Books

What is Bank Reconciliation Statement?

Bank reconciliation means reconciling the entries with Bank. Reconciliation stands for tallying of figures.

Every business keeps a Bank A/C for making easy transactions. You can make transactions online- receiving payments or making payments and transferring funds so easily at the click of your mouse. Now, you are expected to record all these transactions in your books of accounts. Banks will be updating your accounts automatically at each click of your transaction.

But sometimes, due to enormous workflow, some omissions or commissions may take place at both ends in recording these transactions. So, you need to tally the entries from your books with your bank. This tallying of accounts is known as Bank reconciliation.

Why the need for reconciliation? 
The need for a Bank Reconciliation statement arises due to the fact that at any particular point of time, the balances in your books may not tally with the Bank statement or passbook. So, you need to explain or verify for the differences at both ends. This is for your own balance confirmation purpose as well as for explaining to the auditors who check your accounts each year. So, it is very useful to prepare bank reconciliation statements regularly.

What can be the reasons for differences in accounts?

There can be many reasons for differences in your Bank balance and the balance as per Bank Books. The most common reasons are:

1. You may have issued some cheque which is not yet presented to the bank by the receiver of the cheque.
2. You deposited some drafts or cheques received from others into your account, but bank not collected those amounts and so not credited to your account.
3. Banks might have charged some bank charges and same entries not recorded by you in your books.

Above are common features which affect your bank balances. When you account for all these things, then only your balances can tally with bank passbook.

A Sample format of Bank Reconciliation Statement

Generally, a typical bank reconciliation statement will project only cheques issued but not presented and deposits made but not collected as the only differences in the Bank Reconciliation statement. All other discrepancies are sorted out and corresponding entries made in your books before closing your books.

If the Bank debits some charges to you, you will take them in your expenses and credit the Bank A/C. If any interest is credited to your account, you will credit your income and debit the bank in your books.

But, there will be no corresponding entries for cheques issued but not presented or deposits made but not credited to your account. You can not reduce your expenses by reversing the cheques or should not reduce your receipts by reversing the deposits made into Bank. So these two items will stand in the Bank Reconciliation Statement as reasons for the differences in your balance as compared with Bank Balance or passbook.

So a typical Bank Reconciliation Statement will be like this:

Balance as per our Books                  (say)         10,000 Dr.

Add:

Cheques issued but not presented     (say)           5,000

                                                 Total                  15,000 Dr.

Less:

Drafts deposited but not collected    (say)           3,000    

Balance as per Bank statement or PassBook     12,000 Dr.

In the above Reconciliation statement, we are adding back the amounts of those cheques issued by us (but not presented to Bank) as we have already reduced our balance while issuing the cheques. Similarly, we have already increased our bank balance when the drafts were deposited into the bank. So, we have to decrease the amount in the bank reconciliation statement (if the Draft is not collected by Bank) to tally it with Bank  Balance.

This is the general procedure for preparing a Bank Reconciliation Statement.