Understanding Banking - Bank account Reconciliation

August 28, 2016

Bank account Reconciliation

In business majority of payments are made through banks. Similarly all the receipts are routed through the Bank account. In the cash book of  the trader a bank column is provided on both sides .

The Bank account is a personal account. When a cheque is received and deposited in bank the transfer debits his bank account by applying the principle of personal account, debit the receiver . When a cheque is issued for payment

In a bank,  customers account is opened based on the same principle.  Banker credits the customer’s account when cheque is deposited by a trader is cleared and debits his account when a cheque drawn by him is presented to it for payment

Entries for deposits and withdrawals are immediately recorded in the Cash Book by the trader The Bank, however records these on the dates of clearing of the cheques and on the dates when the cheques are presented for payment over the counter or through the process of clearing house.

Thus the date of entries in the cash book and Bank pass book may differ and balances shown by the cash book and pass book may not tally.

Let us suppose  that a trader receives a cheque for Rs80,0000/ from his customer on 30th june and deposit it into his bank account on the same date. The Bank will credit the same to his account only after clearance  of the same from the bank on which cheque is drawn This process may take about three to four days.

Thus in order to ascertain the actual balances in the Bank it is necessary to reconcile the books  on a periodical basis.

Causes of difference :
a)  Cheques issued but not yet presented  for payment
b)  Cheques deposited  into the bank not yet  collected
c)  Bank charges
d)  Interest on Savings Bank
e)  Interest on Overdraft.
f)   Amount paid by the bank on standing instructions
g)  Direct payment into the Bank made by  traders customers  through NEFT/RTGS
h)  Dishonour of cheques
i)  Errors

Preparation of a Bank Reconciliation statement

While preparing a reconciliation statement , the following steps should be kept in mind.
a)  When there is a positive balance , it appears on the debit side in the cash book  and credit side in the pass book.
b)  When there is overdrawn balance , it appears on the debit side of the passbook , but on the credit side in the cash book.
c)  Open a rough cash book and pass book and mark the given balance in both the books by way of a cross (x)
d)  Write G (given) on the top of the cash book if balance is given as per Cash book and F (find out) on the top of the passbook
e)  Enter the given entry in the problem in the cash book or pass book wherever it appears and put a dash on the opposite side of the other book.
f)  Draw the balance in both the books. If the figure is below the balance (x) balance will be (x)+ the amount and if the figure is on the opposite side of the (x) balance will be (x)- amount.
g)  If F balance is more add to the starting balance in the reconciliation  statement and when F is less reduce from the starting balance

Example
 

The Cash book of Mr Shaw shows Rs 8364 as the balance at Bank as on 31st Decemb 1997, but you find this does not agree with the balance as per the bank pass book. On scrutiny you find the following.
1)  On 1st December the payments side of the Cash Book was undercast by Rs100/
2)  A Cheque of Rs 131 issued on 25th December was not taken in the bank column.
3)  One deposit of Rs 150 was recorded in the cash book as if there is no bank column therein.
4)  On 18th December the debit balance of Rs1526/ as on the previous day was brought forward as credit balance
5)  Of the total cheques amounting to Rs 11514 drawn in the last week of December  cheques  aggregating to Rs 7815/ were encashed in December.
6)  Dividend of Rs250/ collected by the bank and subscription of Rs100/ paid by it were not recorded in the cash book.
7)  One out- going cheque of Rs350/ was recorded twice in the cash book.
8)  Prepare a Bank Reconciliation statement.

Answer
 
Details of the entries
Amount in Rupees
Amount in Rupees
Bank account Reconciliation  statement as on 31st Dec  1997.
 
 
8364
Add --- Amount deposited but not recorded in the cash book
150
 
Add - Debit balance in the cash book wrongly carried forward as credit balance
3052
 
Add ----- Cheques issued but not presented
3699
 
Add --- Dividend collected but not recorded  in cash book
250
 
Add -- Cheques issued but recorded twice in cash book
350
15 865
 
 
 
Less – payment side of cash book undercast
100
 
Less Cheques issued but not recorded
131
 
Subscription paid ------ debited in pass book entry
100
15,534
 
 
Balance as per Cash Book  Rs15,534/
 
Example -2

From the extracts of the Cash Book (Bank Column only) and the pass book of Suresh Trading Company prepare a Bank Reconciliation  statement as on 31st December 1997.
Cash Book
Dec 1997
Particulars
Rs
Dec 1997
Particulars
Rs
1
To balance c/d
12,500
4
By Goyal
3,000
10
To mamta
3,000
8
By Pitre
4,000
15
To Geeta
5,000
10
By George
2,000
20
To Vidya
8,000
15
By Joshi
8,000
29
To Sheela
10,500
25
By Black
5,000
30
To David
840
30
By White
100
 
 
 
 
By Madanlal
4,000
 
 
 
 
By Balance b/d
13,740
 
Total
39,840
 
 
39,840
 
Bank Pass Book

Dec 1997
Particulars
Withdrawal  Rs
Deposits  Rs
Balance  Rs
1
By Balance b/d
 
12,500
 
6
To Goyal
3,000
 
 
10
By Mamta
 
3,000
 
 
To Pitre
4,000
 
 
16
By Geeta
 
5,000
 
18
To Joshi
8,000
 
 
22
By Vidya
 
8,000
 
25
By dividend
 
480
 
28
To Black
5,000
 
 
31
To LIC Premium
500
 
Cr 8, 480
 
To Balance c/.d
8,480
 
 
 
Total
28,980
28,980
 

Reconciliation Statement

Particulars
Rs
Rs
Balance as per cash book
 
13,740
Add  Cheques issued but not presented
George
White
Madanlal
 
 
2,000
 
100
 
4,000
19,840
Less  Cheques deposited but not cleared
Divident  amount recorded more in  840
Cash book  -- 480
LIC Premium  paid but not recorded in cash book
10,500
 
360
500
 
 
 
8,480

Few Questions and Answers

1)  Positive balance appears in the cash book on ------------ side  Ans Debit
2)  Credit balance as per cash book means ------- Ans: Overdraft.
3)  Entries in the cash book appears on the ------------ side of the pass book  Ans: Opposite
4)  Pass book debit balance means ------------- balance Ans: Overdraft.
5)  Always compare ------ balance with the given balance  Ans: Find
6)  If F is more amount will be ------------ in the Bank Reconciliation statement  Ans: Added
7)  A Bank account is opened  to avoid ---------- transactions  Ans  Cash
8)  Cheque received from a customer is recorded  on the ------- side of the cash book. Ans: Debit
9)  Copy of the account appearing  in the books of a bank is called  --------- Ans: Bank Statement
10)  Bank account is a ------- Account Ans: Personal account

Match the following

Sl No
Description
Description
Answer
1
On depositing cash in the bank
The Bank debits our account while we credit bank account on the date of withdrawal
2
2
On withdrawing cash from the Bank
The bank debits our account only when the cheque is presented for payment
5
3
Interest credited  by Bank to our account
Expense  for the trader while  they are Income for the Bank
4
4
Bank charges are levied by the Bank
We debit bank account while the bank credits our account on the date of deposit.
1
5
When  we  issue  cheques to our supplier , we credit bank account on the date of the issue of the cheque.
The bank credits our account only when cheque is realized
6
6
When we deposit a cheque  received from our customer we debit bank account when the cheque is deposited
Increases  the bank liability to us.
3
 


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