Bank Reconciliation Statement

"Bank reconciliation statement is a statement prepared mainly to reconcile the difference between the ‘Bank Balance’ shown by the Cash book and Bank statement."

A company's cash balance at bank and its cash balance according to its accounting records usually do not match. This is due to the fact that, at any particular date, checks may be outstanding, deposits may be in transit to the bank, errors may have occurred etc. Therefore companies have to carry out bank reconciliation process which prepares a statement accounting for the difference between the cash balance in company's cash account and the cash balance according to its bank statement.

  Reasons For Differences between a bank statement and cash accounting records

1	Items recorded in cash book, but not on the bank statement (timing differences)
1.1	Checks issued, but have not cleared the bank	After a check is issued, it may take some time before its holder presents it to the bank. Therefore, a bank statement would not show such checks until they are presented to the bank, but the company has already recorded such checks as cash deductions in their cash account(s).
1.2	Deposits in transit	Checks or amounts received and deposited into the bank account, but not yet processed and recorded by the bank. Similar to checks, such deposits have been recorded by the company, but are not yet reflected on a bank statement.
2	Items on the bank statement, but not in cash book
2.1	Bank interest / charges	Interest or charges already recorded by the bank, but not by the company as the company didn't know about them until the company received the bank statement.
2.2	Standing orders	A bank has a right to pay fixed amounts at regular intervals to another account. Such orders are given to the bank by the bank customer (the company). Usually the company may not know or record such amounts until a bank statement is received.
2.3	Direct debits / ACH	An instruction / permission that a bank account holder gives to another company to deduct amounts directly from its bank account. Direct debits are primarily used in Europe. In the United States, an equivalent is an ACH transfer initiated by a withdrawing party (biller). Again, the company may not know or record such amounts transferred until a bank statement is received.
2.4	Credit / wire transfers	An incoming transfer of money from one bank account to another. For example, a company returns goods purchased from its suppliers and receives the money back from them directly into the company's bank account.
2.5	Dishonored check	For example, a company's payer does not have enough money to cover the payment by check or the check is post-dated. The company has already recorded the check as a cash receipt in the cash register and ledger, but no cash was deposited into the company's bank account and is shown on a bank statement.
3	Cash book errors or bank errors
3.1	Cast errors	A transaction is recorded to an incorrect account.
3.2	Transposition	A figure in the amount is transposed by mistake.
3.3	Omissions	A transaction is not recorded.
3.4	Duplications	A transaction is posted twice.

Preparation of Bank Reconciliation statement

A bank reconciliation statement can be prepared by taking the balance either as per cash book or as per pass book as a starting point.

If the statement is started with the balance as per bank column of the cash book, the answer arrived at the end will be balance as per pass book.

Alternatively, if the statement is started with the balance as per pass book, the answer arrived at in the end will be the balance as per cash book.

A debit balance as per cash book shows the amount of the money in the bank, whereas, a credit balance means that the business has taken an overdraft. In the same way, a credit balance as per pass book shows a positive bank balance whereas debit balance as per pass book shows an Overdraft.