Bank Reconciliation

Topics: Cheque, Accounts receivable, Double-entry bookkeeping system Pages: 24 (8067 words) Published: June 29, 2011
K.M. Khairul Hasan Arif
MBA, CMA ( Cont.)
Bank Reconciliation

What Is Bank Reconciliation?

The word “reconciliation” means to make two sets of amounts correspond with each other (i.e. make them equal to each other) by explaining why the two sets of amounts differ. Bank reconciliation is the process of matching and comparing figures from accounting records against those presented on a bank statement.  Less any items which have no relation to the bank statement, the balance of the accounting ledger should reconcile (match) to the balance of the bank statement. Bank reconciliation allows companies or individuals to compare their account records to the bank's records of their account balance in order to uncover any possible discrepancies. Since there are timing differences between when data is entered in the banks systems and when data is entered in the individual's system, there is sometimes a normal discrepancy between account balances.  The goal of reconciliation is to determine if the discrepancy is due to error rather than timing. A bank reconciliation statement is a statement which indicates on a specific date why there is a difference between the bank account balance in the general ledger and the current account balance on the bank statement. Entries that appear on the bank statement, but are not recorded in the cash receipts journal or cash payments journal, are recorded in the relevant journal. The journals are therefore adjusted by the missing entries. Items recorded in the cash receipts journal or cash payments journal, but not appearing on the bank statement, are recorded in the bank reconciliation statement.

Differences between the cash book and the bank statement can arise from:

• Timing of the recording of the transactions

• Errors made by the business, or by the bank
Also we can explain another way that the causes that lead to the disagreement of the balances in the cash book and the Pass book can be classified as follows: * Transactions that usually appear in the cash book, but not in the pass book. * Transactions that usually appear in the pass book, but not in the cash book. Let us, now discuss in detail the nature of these transactions and show how they cause the difference in the balances of these two books.

* Transactions that Usually Appear in the Cash Book, but not in the Pass Book:

When you compare the cash book entries with their corresponding entries in the pass book, you will find a number of transactions which appear in the cash book but not in the pass book. Such transactions have been discussed below. a) Cheques deposited into bank but not yet collected: When a payment is received by cheque, the firm sends it to the bank for collection and records it immediately on the debit side of the cash book. This increases the bank balance as per cash book. But the bank will not credit the firm's account till the cheque is actually collected. So, the balance in the pass book remains unaffected till the proceeds of the cheque are collected and credited. Thus, on a particular date, it is possible that certain cheques which were sent for collection might not have been collected by the bank and so not shown in the pass book. All such cheques pending collection would make the cash book balance different from the pass book balance. For example, the firm sends a cheque of Rs. 2,000 on December 28, to the bank for collection. The cheque is collected on January 6. Now, if the balances as on December 31 are compared, they will be different because the credit of Rs. 2,000 will not appear in the pass book by December 31. b) Cheques issued but not yet presented for payment: Whenever a payment is made by cheque, the cash book is immediately credited. This reduces the balance in the cash book. But, it would always take some time before those cheques are actually presented for payment. The bank would debit the firm's account only when...
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