What is Bank Reconciliation Statement? Explain the causes of disagreement in the balances shown by cash Book and Pass Book.
Answers
1. Cheques issued but not presented for payment.
2. Cheques paid or deposited but not collected and credited by the bank.
3. Interest credited by the bank but entered in cash book.
4. Bank charges, commission and interest in overdraft debited by the bank but not entered in cash book.
5. Expenses directly paid by the bank on behalf of customer but not recorded in cash book.
6. Incomes directly collected by the bank on behalf of customer but not recorded in cash book.
7. Amount directly deposited into the bank by debtors but not entered in cash book.
8. Cheque deposited into the bank but dishonored.
9. Dishonor of bill discounted with the bank.
10. Errors committed in the cash book and pass book.
In Layman's term: A "Bank Reconciliation Statement" is a process by the help of which the bank tries to find out if there's a difference in between the record of bank account and that of the consumer's account for a specified date or not. Generally both the records must match, but in rare cases it mismatches, thus to sort it out this statement is made.
Causes of differences between the cash book and the pass book are:
1. Differences caused due to time gap
2. Differences caused by errors
Time differences are:
1. Cheque issued by the bank but not yet presented for payment: When cheque are issued to creditors or anyone we immediately make a recording on the credit side of the bank column of the cash book. However the bank will debit the firms account only when it actually receives the cheque. Thus there is a time gap which cause difference in the cash book and the pass book.
2. Cheque paid into the bank but not yet collected: When cheques are received from the debtors, they are immediately recorded on the debit side of the cash book and the balance of the cash book increase, however the bank takes some time say a few days to actually realise the amount which cause a difference between the cash book and the pass book.
3. Payments made by bank on our behalf: Sometimes we give the bank authority to pay for some specific things on our behalf. Until the information is received from the bank of the same the pass book is gonna show a decreased balance as compared to the cash book.
4. Direct deposit into the bank by customers: Sometimes the customers or debtors directly deposit the amount they owe to us to the bank. If the information is not received from the bank for the same. for that specific time the pass book will show an increased balance as compared to the cash book.
5. Interest Charged by the bank: Usually bank charges some money for the services it renders and the balance of the pass book decrease. However the firm will record it only when it receive a bank statement. For the mean time, the pass book will show an decreased balance as compared to the cash book.
6. Interest and Dividend collected by the bank: Sometimes the bank collects interest and dividend on our behalf and credits the firms amount. However the firm will debit the same only after receiving the bank statement. thus for the mean time the pass book will show an increased balance as compared to the cash book.
7. Cheques etc. Dishonored: If a cheque or bill discounted gets dishonored the pass book balance will decrease. The firm will also reduce the same amount from the cash book only after receiving the bank statement. In the mean time the pass book will show a decreased balance as compared to the cash book.
Differences caused due to errors:
1. Errors made while recording of transactions by us: we ain't perfect. sometimes we make mistakes while recording of the transactions like in totalling, posting single entry two times etc. which cause difference between the cash book and the pass book.
2. Errors made by bank in recording the transactions: Even the bank make mistakes in recording transactions like posting on wrong side, wrong totalling etc. which cause a difference between the cash book and pass book.