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Preparing Bank Reconciliation Statement:

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Recording in Cash Book:

In businesses, the bank account is usually kept in cash book - as a part of the three column cash book, i.e. bank account in the cash book means two bank columns on the both sides of two column or three column cash book. It is made up everyday, and we record in it all checks received from our debtors and all checks issued to our creditors or suppliers. We shall also have several contra entries every month, recording excess cash paid in or cash drawn out when required for use in business. At the end of the month, the cash book (bank column) is balanced and the result is a bank balance (as per cash book). Thus the cash book (bank columns) tells us, what is our balance with the bank on a particular date.

Recoding in Pass Book:

The bank also keeps a record of our bank account with the title "depositor's account" and enters into our account everyday what is paid in and what is drawn out. At the end of any day, bank will gladly tell us our bank balance (as per bank record). So two reciprocal accounts are kept i.e., bank account (bank column in the cash book) in the books of depositor and depositor's account in the books of the bank. The balances shown by the two accounts (bank account and depositor's account) should be equal because when the bank account is debited, the depositors account is credited by the bank and vice versa. In other words, for each transaction opposite entries are made in two books. So if the bank column of the cash book shows a credit balance the depositor's account will show a debit balance in the books of bank.

Usually a copy of depositor's account is provided by the bank to the depositor, which is called 'pass book'. This book is written by the bank. After suitable intervals the depositor submits the pass book to the bank and the bank in turn returns it to the depositor after recording the transactions there in.

Bank Statement as An Alternative Source to Pass Book:

Sometimes, instead of providing a pass book to the depositor, at certain intervals, usually monthly, the bank sends each depositor a 'bank statement', which is a record of the beginning balance, any increase and decrease that have occurred since the previous statement and the ending balance of the depositor's account with the bank. The pass book and bank statement serve the same purpose to the depositor.

Rules for Preparing Bank Reconciliation Statement:

The statement must be given a proper heading. The statement is usually prepared at the end of the month or year, so the heading will be given in the following way:

Name of Business
Bank Reconciliation Statement
As on 31st Jan...........

Bank reconciliation statement may be started with either cash book balance or pass book balance. If it is started with cash book balance, it will be finished with pass book balance and if it is started with pass book balance, it will be finished with cash book balance.

After heading, the balance given to us should be written in the following way:

Balance as per cash book or pass book                                               XXX

The causes of disagreement are added with or deducted from the starting balance to get balance of the other book.

Usually the cash book shows a debit balance (a favorable balance for depositor) and the pass book shows a credit balance (a favorable balance for depositor).

The bank reconciliation statement is a statement showing causes of disagreement between the cash book balance and pass book balance on a specific date, so while preparing it only those items should be considered which cause disagreement up to that specific date. For example, a checks for $2,000 were sent to bank for collection on 20th December, out of these $1,100 were collected and credited by the bank up to 31st December. The statement was prepared on 31 December. The collected checks were only $1,100 and un-collected checks were $900 which caused disagreement between two balances, so checks for $900 (being not collected) were considered only while preparing the bank reconciliation statement.

Example:

From the following particulars, prepare a bank reconciliation statement of Mr. N as on 31st December 2005.

1. Balance as per cash book (Dr.) $64,000
2. Checks deposited but not yet collect $40,400
3. Checks issued but not yet paid by bank $26,000
4. Interest credited by bank but not recorded in cash book. $500
5. Bank charges debited by bank but not entered in cash book $100

Solution:

Mr. N
Bank Reconciliation Statement
As on 31st Jan...........

  $ $
Bank balance as per cash book      Dr.   64,000
Less:    
      Checks deposited but not yet collected by the bank 40,400  
      Bank charges debited in pass book 100 40,500
 

    23,500
     
Add:    
       Checks issued but not yet paid by the bank 26,000  
       Interest credited by the bank in pass book 500 26,500
 

Ans: The balance as per pass book     Cr.   50,000
   

If the statement is started with pass book balance:

Mr. N
Bank Reconciliation Statement
As on 31st Jan...........

  $ $
The balance as per pass book     Cr.   50,000
Less:    
      Checks issued but not yet paid by the bank 26,000  
      Interest credited by the bank but not entered in the pass book 500 26,500
 

    23,500
     
Add:    
      Checks deposited but not yet collected by the bank 40,400  
      Bank charges debited but not entered in the cash book 100 40,500
 

Ans: Bank balance as per cash book      Dr.   64,000
   

It may be noted from the above two statements that the causes of disagreement which are added in the first method are deducted in the second method.

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More study material from this topic:

Preparing a bank reconciliation statement
Difference between cash book and pass book
Causes of disagreement between cash book and pass book

 

A D V E R T I S E M E N T

 

Financial Accounting Topics


  Introduction to Accounting
 ----------------------------------------------------------------------------
  Transactions and Accounting Equation
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  Analysis of Business Transactions
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  Journal, Ledger and Trial Balance
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  Accounting for Bills of Exchange
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  Special Journals
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  Cash Book
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Bank Reconciliation Statement
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  Final Accounts
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  Work Sheet
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  Capital and Revenue Items
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  Valuation of Inventories
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  Accounts of Non-profit Making Organizations
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  Statement of Cash Flows
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  Accounting Ratios Analysis
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  Depreciation, Provisions and Reserves
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  Accounting Dictionary
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  Financial Calculators
 
 
 
Managerial Accounting Topics

  Financial Statements
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  Cost Volume Profit Relationship
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  Variable Costing System
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  Materials and Inventory Cost Control
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  Activity Based Costing System
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  Standard Costing and Variance Analysis
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  Balanced Scorecard
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  Capital Investment Analysis/Capital Budgeting
 

 

 
 

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