Is a process that gives the reasons for differences between the bank statement and cash book maintained by a business?
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December 6, 202032 min read In this article, you will learn: In today’s world, transactions (whether receipts or payments) are done via a bank. All deposits and withdrawals undertaken by the customer are recorded both by the bank as well as the customer. The bank records all transactions in a bank statement (also known as passbook) whereas the customer records all their bank transactions in a cash book. The bank balance showcased in the passbook or the bank statement must match with the balance reflected in the cash book of the customer. It is up to you, the customer, to reconcile the cash book with the bank statement to report any errors to the bank. In this article, we are going to review Bank Reconciliation, the Bank Reconciliation Procedure, the Purpose of Bank Reconciliation, and give a Bank Reconciliation Example. Introduction to Bank ReconciliationBank reconciliation is the process of matching the bank balances reflected in the cash book of a business with the balances reflected in the bank statement of the business in a given period. Such a process determines the differences between the balances as per the cash book and bank passbook. Reconciling bank statements with cash book balances helps you as a business to know the underlying causes that lead to such differences. Once, the underlying cause of the difference between the cash book balance and the passbook balance is determined, you can make the necessary corrections in your books of accounts to ensure accuracy. Therefore, the bank reconciliation process should be carried out at regular intervals for all of your bank accounts. This is because reconciling the cash book with the passbook at regular intervals ensures that your business’s cash records are correct. In the absence of proper bank reconciliation, the cash balances in your bank accounts could be much lower than the expected level. This may result in bounced cheques or overdraft fees. In addition to ensuring correct cash records, the bank reconciliation process also helps in keeping a track of the occurrence of any form of fraud. Such insights would help you as a business to control cash receipts and payments in a much better way. Bank Reconciliation Terminology
Deposits in transit are also referred to as outstanding deposits. Such deposits are not showcased in the bank statement on the reconciliation date. This happens due to the time lag between when your business deposits cash or cheque into its bank account and when your bank credits the same. Now, your business records the increase in bank balance in its books of accounts the moment it deposits cash or cheque in its bank account. This means that the balance as per the cash book is greater than the balance as per the passbook till the time the bank processes such a deposit. Thus, such outstanding deposits must be deducted from the balance as per the cash book in the bank reconciliation statement.
A bank charges various types of fees to you as an account holder. Such fees are charged to maintain your account with the bank. In addition to the maintenance fees, the bank charges a fee in respect of other specific transactions. Such fee may include:
Such bank charges are charged to your account directly. This reduces your bank balance as reflected in your bank statement. It is important to note that such charges are not recorded by you as a business till the time your bank provides you with the bank statement at the end of every month. As a result, the balance as per the bank statement is lower than the balance as per the cash book. Such a difference needs to be adjusted in your cash book before preparing the bank reconciliation statement.
Not Sufficient Funds (NSF) refers to a situation when your bank does not honour your cheque. This is because the transaction account on which the cheque is drawn does not have sufficient funds to honour the cheque. In addition to this, the NSF may also refer to a situation where an individual intends to purchase with a credit card but is unable to do so. This is because there are insufficient funds in the associated bank account to make a purchase. NSF cheques is an item to be reconciled while preparing the bank reconciliation statement. This is because when you deposit a cheque in your bank account, you consider that the cheque has been cleared by the bank. But this is not the case as the bank does not clear an NFS cheque. As a result, the cash on hand balance gets reduced.
An outstanding cheque refers to a cheques payment that has been recorded in the books of accounts of the issuing company. But, such a cheque has not yet been cleared by the bank account of such a company as a deduction from its cash balance. This means that the bank balance of the company is greater than the balance reflected in its cash book. Bank Reconciliation ProcedureBefore discussing the procedure to reconcile the cash book balance with passbook balance it is important to note that ‘Debit balance as per cash book’ means deposit in bank or cash at bank or ‘Credit balance as per passbook’. Likewise, ‘Credit balance as per cash book' means excess amount over deposits withdrawn by the account holder or overdraft balance or ‘Debit balance as per passbook.’ This means that you can start reconciling your cash book balance with the passbook balance from any of the four balances:
Now, there are two ways in which you can undertake bank reconciliation once you identify the reasons for the difference:
If you want to prepare a bank reconciliation statement using this approach, you can take balance as per the cash book or balance as per the passbook as your starting point. As mentioned above, debit balance as per cash book means the deposits held in the bank. Further, such a balance would be a credit balance as per the passbook. Now, such a balance exists when the deposits made by your business at your bank are more than the withdrawals. So, this indicates that you have a favourable balance as per the cash book or a favourable balance as per the passbook. Whereas, credit balance as the cash book indicates bank overdraft or the excess amount withdrawn from your bank account over the amount deposited. This is also known as unfavorable balance as per the cash book or unfavorable balance as per the passbook. Now, while preparing the bank reconciliation statement we can encounter four different situations:
Several items cause a difference between cash book and passbook balances. Typically, such items mainly reflect in the passbook only. The following are the adjustments that you need to make to prepare the bank reconciliation statement:
After adjusting all the above items, what you get is the adjusted balance as per the cash book. This balance must match with the balance as per the passbook. It is important to note here that adjusting the cash book balance before preparing the bank reconciliation statement reduces the number of items that cause a difference between the cash book and passbook balances. Therefore, such adjustment procedure helps in determining balance as per bank that goes into the balance sheet. The above case presents preparing a bank reconciliation statement starting with positive bank balances. However, there can be situations where your business has overdrafts at the bank. As mentioned above, bank overdraft is a condition where a bank account becomes negative as a result of excess withdrawals over deposits. Now, such a figure is shown as a credit balance in your cash book. However, in the bank statement, such a balance is showcased as a debit balance and is known as the debit balance as per the passbook. Therefore, an overdraft balance is treated as a negative figure on the bank reconciliation statement.
As per the rules mentioned above, balance as per cash book is the starting point for preparing a bank reconciliation statement (BRS). However, you can also start with balance as per passbook for preparing a BRS. In case you do so, the treatment for all the items mentioned above shall be reversed. Accordingly:
There can be four different scenarios while preparing a bank reconciliation statement. These include:
Typically, the difference between the cash book and passbook balance arises due to the items that appear only in the passbook. Therefore, it makes sense to first record such items in the cash book to determine the adjusted balance of the cash book. Once the adjusted balance of the cash book is worked out, then the bank reconciliation statement can be prepared. In this way, the number of items that cause the difference between the passbook and the cash book balance gets reduced. Furthermore, it gets easier to ascertain the correct amount of balance at the bank in the balance sheet. This means that only those items that cause difference due to a time lag in recording such items appear in the bank reconciliation statement. Such items may include:
Therefore, the bank reconciliation statement using this approach is prepared by following the steps below:
After adjusting all the above items what you get is the adjusted balance of the cash book. Bank Reconciliation ProblemsThe purpose behind preparing the bank reconciliation statement is to reconcile the difference between the balance as per the cash book and the balance as per the passbook. Now, the differences between the cash book and passbook balance occur primarily due to the following reasons:
When you compare the balance of your cash book with the balance showcased by your bank passbook, there is often a difference. One of the primary reasons responsible for such a difference is the time gap in recording the transactions of either payments or receipts. Now, various factors affect such a time gap. These include:
When your business issues to its suppliers or creditors, such amounts are immediately recorded on the credit side of your cash book. However, there might be a situation where the receiving entity may not present the cheques so issued by your business to the bank for immediate payment. The bank will debit your business account only when the bank pays these issued cheques. So, this means there is a time lag between the issue of cheques and its presentation to the bank. Such a time lag is responsible for the differences that arise in your cash book balance and your passbook balance.
When your business receives cheques from its customers, such amounts are recorded immediately on the debit side of the cash book. As a result, the bank balance as per the cash book increases. However, there may be a situation where the bank credits your business account only when the cheques are actually realised. It is important to note that it takes a few days for the bank to clear the cheques. This is especially common in cases where the cheque is paid in at a bank branch other than the one at which your account is maintained. Thus, such a situation leads to the difference between bank balance as per the cash book and balance as per the passbook.
At times, your bank may deduct certain amounts associated with various services directly from your bank account without your knowledge. You come to know about such deductions only when you receive the statement from the bank. The deductions may include:
Thus, such debits made by the bank directly from your bank account lead to a difference between the balance as per cash book and the balance as per the passbook.
At times, your customers directly deposit funds into your business’ bank account. But, your business entity does not receive any indication about this until the time it receives the bank statement. In such a case, your bank has recorded the receipts in your business' account at the bank. However, you did not record such a transaction in your cash book. As a result, the balance showcased in the bank passbook would be more than the balance shown in your company’s cash book.
Your bank may collect interest and dividends on your behalf and credit such an amount to your bank account. But, you will record such transactions only in your business' cash book only when you receive the bank statement. Until then, your balance as per the cash book would differ from the balance as per the passbook.
At times, you might give standing instructions to your bank to make some payments regularly on specific days to the third parties. For instance, insurance premiums, telephone bills, rent, GST, etc are directly paid by your bank on your behalf and debited to your account. As a result of such direct payments made by the bank on your behalf, the balance as per the passbook would be less than the balance as per the cash book.
There are times when your business entity deposits a cheques or draws a bill of exchange discounted with the bank. However, such deposited cheques or discounted bills of exchange drawn by your business entity get dishonored on the date of maturity. As a result, the bank debits the amount against such dishonored cheques or bills of exchange to your bank account. Such information is not available to your business immediately. Therefore, you record no entry in the business' cash book for the above items. You will know about such information only when you receive the bank statement at the end of the month. As a result, your balance as per the passbook would be less than the balance as per the cash book.
At times, the balance as per the cash book and passbook may differ due to an error committed by either bank or an error in the cash book of your company. The following are the errors that can be committed on the part of the bank as well as your company:
At times, your business entity may omit or record incorrect transactions for cheques issued, cheques deposited, the wrong total, etc. Such errors are committed while recording the transactions in the cash book. As a result, the balance as per the cash book differs from the passbook.
At times, your bank may omit or record incorrect transactions of cheques deposited, wrong total, etc. Such errors are committed while recording the transactions in the bank passbook. As a result, the balance as per the cash book differs from the passbook. Bank Reconciliation ExampleExample 1: Preparation of Bank Reconciliation Statement Without Adjusting the cash book BalanceFrom the following particulars of Zen Enterprises, prepare a bank reconciliation statement as of December 31, 2019.
You first need to determine the underlying reasons responsible for the mismatch between balance as per cash book and passbook. Once you have determined the reasons, you need to record such changes in your books of accounts. Now, there are two ways to record bank reconciliations:
Journal entries, also known as the original book of entries, refer to the process of recording transactions as debits and credits. Once the journal entries are recorded, the general ledger is prepared. All of this can be done by using online accounting software like QuickBooks. In case you are not using accounting software, you can use Excel to record such items. Now, while reconciling your books of accounts with the bank statements at the end of the accounting period, you might observe certain differences between bank statements and ledger accounts. In such a case, you simply need to mention a note indicating the reasons for the discrepancy between your bank statement and cash book.
Once you complete the bank reconciliation statement at the end of the month, you need to print the bank reconciliation report and keep it in your monthly journal entries record as a separate document. Such a document makes the auditors aware of the reconciled information at a later date.
Bank reconciliation is the process of comparing balance as per cash book with balance as per the passbook (bank statement). The very purpose of reconciling the bank statement with your business’ books of accounts is to identify any differences between the balance of the two accounts. The very idea of locating differences is to update your books of accounts in order to match them with the bank statement. In other words, bank reconciliation is undertaken in order to ensure that your balance as per the bank statement is correct. So, to reconcile a bank statement with your business' books of accounts, you need to follow the steps below:
Looking for a quicker way to reconcile your statement? Cloud accounting software like Quickbooks makes preparing a reconciliation statement easy. Because your bank account gets integrated with your online accounting software, all your bank transactions get updated automatically. Furthermore, each of the items is matched with your books of accounts. Understanding the Bank Reconciliation StatementAs mentioned above, the process of comparing your cash book details with the records of your business' bank transactions as recorded by the bank is known as bank reconciliation. To undertake such a process, you need to ensure that the cash book is complete. Further, make sure that the bank’s statement for the current month has also been obtained from the bank. The very purpose of reconciling bank statements with your business' cash book is to ensure that the balance as per the passbook must match with the balance as per the cash book. However, in practice there exist differences between the two balances and we need to identify the underlying reasons for such differences. What Are the Steps to Reconcile a Bank Statement?Once you receive the bank statement at the end of the month, you need to follow the steps below for undertaking bank reconciliation:
Required Information to Create a Bank Reconciliation StatementIn order to prepare a bank reconciliation statement, you need to obtain the current as well as the previous month’s bank statements and the cash book. Then you need to prepare a bank reconciliation statement. This is done by taking into account all the transactions that have occurred until the date preceding the day on which the bank reconciliation statement is prepared. This is because certain transactions would occur on the date when the bank reconciliation statement is prepared. Ensure that you take into account all the deposits as well as the withdrawals posted to an account in order to prepare the bank reconciliation statement. Bank Reconciling Statement: Adjusting Balance per BankYou need to adjust the closing balance of your bank statement in order to showcase the correct amount of withdrawals or the cheques issued but not yet presented for payment. Such cheques are the ones that have been issued by your business, but the recipient has not presented them to the bank for the collection of payment. For instance, you issue a cheque on November 30. When you prepare the bank reconciliation statement for the month of November as on November 30, 2019, the cheque issued on November 30 is unlikely to be cashed by the bank. Therefore, you need to deduct the amount standing against such cheques from your bank balance. In addition, there may be cases where the bank has not cleared the cheques, however the cheques have been deposited with the bank by your business. Banks take time in clearing cheques. Therefore, the bank needs to add back the cheque's amount to the bank balance. Bank Reconciling Statement: Adjusting Balance per BooksAt times, the bank may charge a fee for maintaining your account. Such a fee is typically deducted automatically from your account. Therefore, while preparing a bank reconciliation statement you must account for any fees deducted by the bank from your account. In addition to this, the interest or dividends earned on investments is directly deposited into your bank account after a specific period of time. Therefore, you need to pass a journal entry in your books of accounts showcasing the increase in cash balance due to the interest or dividend earned. Finally, when all such adjustments are made to the books of accounts, the balance as per the cash book must match with that of the passbook. If both the balances are equal, it means the bank reconciliation statement has been prepared correctly. How Often Should You Reconcile Your Bank Account?Ideally, you should reconcile your books of accounts with your bank account each time you receive the statement from your bank. The bank may send you your bank statement at the end of each month, every week, and even at the end of each day in case of businesses having a huge number of transactions. Be aware that before you reconcile your bank account, you should ensure that you record all the transactions of your business until the date of your bank statement. In case you have access to online banking, you can download the bank statements in order to undertake the bank reconciliation process at regular intervals instead of manually entering the information. What Is the Purpose of Bank Reconciliation?The following points indicate the purpose of undertaking the bank reconciliation process:
Helpful Tips for Bank Reconciliation AdjustmentsBank Reconciliation is a process of comparing your business’ books of accounts with your bank statements. It is done periodically to cheques whether the bank related transactions are recorded properly in your books of accounts. Therefore, when your balance as per cash book does not match with your balance as per passbook, there are certain adjustments that you have to make in order to balance the two accounts. While making Bank Reconciliation adjustments, the following are the points that you should take note of:
Company’s Process for Preparing its Bank ReconciliationThe bank reconciliation procedure includes the following general steps:
Therefore, to prepare the bank reconciliation statement for a company in a proper manner, we need to follow the steps below: Step #1: Match Each Item On the Bank Statement With Every Item in Your Company’s Cash Account
Step #2: Work Out the Balance as Per Bank Side of the Bank Reconciliation StatementOnce you determine the differences between balance as per cash book and balance as per the passbook, you need to start working on the balance as per the bank portion of your bank reconciliation statement. To do this, follow the steps below:
Step #3: Work Out the Balance as Per Cash Book Side of the Bank Reconciliation StatementOnce you complete the balance as per the bank side of your company’s bank reconciliation statement, the next step is to start working on the balance as per the cash book side of your bank reconciliation statement. To do this, follow the steps below:
Step #4: Make Sure That the Balance As Per Bank Matches With the Balance As Per Cash BookOnce you have incorporated the adjustments in the bank reconciliation statement, you have to ensure that the totals of both the sides mentioned at the bottom must match. In other words, the adjusted balance as per bank must match with the adjusted balance as per cash book. Step #5: Record All The Adjustments As Per Cash Book Into Your Company’s General Ledger Cash AccountAfter adjusting the balance as per cash book, make sure that you record all such adjustments in your company’s general ledger accounts. This is because, on the date of bank reconciliation, such adjustments have not been recorded in your company’s general ledger accounts. You must post the journal entries of all the adjustments made to the balance as per cash book. Once you post the journal entries for all the adjustments made to the balance as per cash book into your company ledger accounts, make sure that the cash account balance is equal to the adjusted balance per cash book shown in the bank reconciliation statement. Looking for something else?Get QuickBooksSmart features made for your business. We've got you covered. Help Me ChooseUse our product selector to find the best accounting software for you. QuickBooks SupportGet help with QuickBooks. Find articles, video tutorials, and more. What causes the difference between cash book and bank statement?The difference between cash book balance and bank statement balance results due to certain transactions been recorded by either the company or the bank. Such discrepancies are regularly noted due to time lags in processing transactions and lack of knowledge of certain charges debited to the company account by the bank.
What is called a process of comparing the bank statement and the accounting records of the company?A bank reconciliation is the process of matching the balances in an entity's accounting records for a cash account to the corresponding information on a bank statement. The goal of this process is to ascertain the differences between the two, and to book changes to the accounting records as appropriate.
What is difference between bank and cash book?What are the differences between a Cashbook and a Bank book? A cashbook records the cash and bank transactions of an organisation that takes place within a financial year. A bank book is issued to the account holder by their bank and it keeps a record of deposits and withdrawals.
What are the differences between bank column of cash book and bank statement?What is the difference between cash book and a bank statement? Cash book is used to record all transactions for cash, checks, money orders, or postal order while a bank statement is the list of entries to each account holder that have been made in their personal account.
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