Bank Reconciliation Statement- How to Tally Your Cash Book with Passbooks

Bank Reconciliation Statement

Bank reconciliation means reconciling your account book entries with the bank's records. Reconciliation is the process of tallying and aligning the records.

Every business keeps a bank account to make transactions easy. You can make transactions online, including receiving payments, making payments, and transferring funds, with the click of your mouse or a tap on the phone. Now, you are expected to record all these transactions in your books of account. Banks will automatically update your accounts with each transaction. But your entries are based on the vouchers prepared at your end. So, there can be slips in your entries.

Due to the enormous workflow, some omissions or commissions may occur at both ends in recording these transactions. Because even banks can make mistakes. 

So, you need to tally the entries from your books with your bank. This tallying of accounts is known as Bank reconciliation.

Importance of Bank Reconciliation Statements 

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, as there can be time gaps.

 

Under such circumstances, you should prepare to explain the reasons for the differences at both ends. This is for your own balance confirmation and for explaining to the Board of Directors and auditors who check your accounts each year. 

So, it is important to prepare bank reconciliation statements regularly.

Reasons for Differences in Bank Books

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

1. You may have issued a cheque to one of your parties but 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 the bank did not collect those amounts and so not credited to your account.
3. Banks might have charged some bank charges, and the entries were not done in your books.

Above are common features which affect your bank balances. 

When you account for all these things, then only your balances tally with the 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. 

All other discrepancies get sorted out and corresponding entries made in your books before closing your books.

• If the Bank debits any charges to you, you will account for 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 reduce your receipts by reversing the deposits made into the bank. So these two items will stand in the Bank Reconciliation Statement as reasons for the differences between your Books and the Bank Books.

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 reconciliation statement above, we are adding back the amounts of those checks issued by us (but not presented to the bank) because we already reduced our balance when we issued the checks. Similarly, we already increased our bank balance when the drafts were deposited into the bank. Therefore, we have to decrease the amount in the bank reconciliation statement (if the draft is not collected by the bank) to match the bank balance.

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