This statement indicates the differences between the passbook and cash book of the entity. By reconciling the differences that exist between the two, a Bank Reconciliation Statement helps in arriving at the exact value of the amount of bank balance held on a particular date.
1. Cheques issued by the bank but not yet presented for payment
When cheques are issued by the firm to suppliers or creditors of the firm, these are immediately entered on the credit side of the cash book. However, the receiving party may not present the cheque to the bank for payment immediately. The bank will debit the firm’s account only when these cheques are actually paid by the bank. Hence, there is a time lag between the issue of a cheque and its presentation to the bank which may cause the difference between the two balances.
2. Cheques paid into the bank but not yet collected
Firm receives cheques from its customers (debtors), they are immediately recorded in the debit side of the cash book. This increases the bank balance as per the cash book. However, the bank credits the customer account only when the amount of cheques are actually realised. The clearing of cheques generally takes few days especially in case of outstation cheques or when the cheques are paid-in at a bank branch other than the one at which the account of the firm is maintained. This leads to a cause of difference between the bank balance shown by the cash book and the balance shown by the bank passbook.
3. Direct debits made by the bank on behalf of the customer
Sometimes, the bank deducts amount for various services from the account without the firm’s knowledge. The firm comes to know about it only when the bank statement arrives. Examples of such deductions include: cheque collection charges, incidental charges, interest on overdraft, unpaid cheques deducted by the bank – i.e. stopped or bounced, etc. As a result, the balance as per passbook will be less than the balance as per cash book
4. Amounts directly deposited in the bank account
There are instances when debtors (customers) directly deposits money into firm’s bank account. But, the firm does not receive the intimation from any source till it receives the bank statement. In this case, the bank records the receipts in the firm’s account at the bank but the same is not recorded in the firm’s cash book. As a result, the balance shown in the bank passbook will be more than the balance shown in the firm’s cash book.
5. Interest and dividends collected by the bank
When the bank collects interest and dividend on behalf of the customer, then these are immediately credited to the customer’s account. But the firm will know about these transactions and record the same in the cash book only when it receives a bank statement. Till then the balances as per the cash book and passbook will differ.
6. Direct payments made by the bank on behalf of the customers
Sometimes the customers give standing instructions to the bank to make some payment regularly on stated days to the third parties. For example, telephone bills, insurance premium, rent, taxes, etc. are directly paid by the bank on behalf of the customer and debited to the account. As a result, the balance as per the bank passbook would be less than the one shown in the cash book.
7. Cheques deposited/bills discounted dishonored
If a cheque deposited by the firm is dishonored or a bill of exchange drawn by the business firm is discounted with the bank is dishonored on the date of maturity, the same is debited to customer’s account by the bank. As this information is not available to the firm immediately, there will be no entry in the firm’s cash book regarding the above items. This will be known to the firm when it receives a statement from the bank. As a result, the balance as per the passbook would be less than the cash book balance
