Question

define bank reconciliation statement. explain the purpose and causes of difference between cash book and pass book. ​

Answer 1

ANSWER :

Bank Reconciliation Statement is a statement prepared mainly to reconcile the difference between the 'Bank Balance' as shown by the Cash Book and 'Bank Balance' as shown by the Bank Pass Book.

• Bank Reconciliation Statement is not an account. It is prepared in a separate sheet of paper.

• It is prepared to verify the accuracy the entries made in the Cash Book and Pass Book.

• It is generally prepared by the business which has current account with the bank.

❖ Some purpose and causes of difference between Cash Book and Pass Book are as follows :-

• [1] Cheques paid into the bank for collection but not yet credited by the bank : When a firm receives cheques, drafts etc. from its customers, they are immediately deposited into bank for collection and an entry is made on the debit side of the bank column of the cash book. But the bank will credit the firm's account only when it has actually collected the payment of these cheques. There may be time gap between the depositing of the cheques into the bank and credit given by the bank. Hence, until the cheques are collected and credited by the bank, the cash book will show an increased balance in comparison to the pass book as the netry for the same has been made in the cash book but not in the pass book.

• [2] Cheques paid into/deposited into the bank for collection but dishonoured : When the cheques received from outside parties are deposited with the bank, these are immediately recorded on the debit side of the bank column of the cash book. But if the cheques are dishonoured, no entry will be made by the bank in the customer's account. As a result, the cash book will show an increased balance in comparison to the pass book.

• [3] Cheques issued but not yet presented for payment in the bank : When a cheque is issued bu the firm to a creditor, the issue of cheque is immediately recorded on the credit side of the bank column of the cash nook as if the payment has been collectrf by the creditor from the bank. But the bank will debit the firm's account only when this cheque is actually presented to the bank for payment. Generally there is a time gap between the issue of cheque and its presentation to the bank. Hence, until the cheques are presented for payment, the cash book will show a reduced balance in comparison to the pass book.

• [4] Interest allowed/credited by the bank : Where the bank allows interest on the balance maintained by the account holder, the amount of such interest is credited to the account by the bank at the end of every six months. But the account holder comes to know about the amount of interest credited only when he gets his up to dage pass book after a gap time. In such case, the balance of cash book will be comparatively less than that of the pass book.

• [5] Interest charged by the bank on overdraft : When there is overdraft in bank by a firm, the bank charges interest on this overdraft and debits the firm's account for such interest from time to time. But the entry for interest will be made in the cash book only when the customer receives statement from the bank or when he receives the pass book duly completed. Until this happens, the balance as shown by the pass book and cash bool will be different.