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Preparation of Bank Reconciliation Statements

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There are certain factors that are responsible for the preparation of bank reconciliation statements. Those reasons which are responsible for balance variation between pass book and cash book are as follows.

  1. Cheques which are deposited in bank but are not cleared by them

Companies and banks together follow 2 steps in business in case of cheques. From outside parties they receive cheques, and for collection, they deposit it into their respective banks. At the time of depositing cheques, accompany will debit cash from their bank account. This is because the value of cash being an asset will increase.

When banks, in reality, make collection from deposited cheques, it increases a firm’s balance or credits their account. This procedure of cheque collection is called clearance of cheque.

According to a firm’s cash book, every transaction hikes their bank balance when a cheque is deposited. But this increase will only be highlighted in their pass book when payment from issued cheque is collected from drawer’s bank from firm’s bank. Until payment collection hasn’t been made by bank and credited to the account of customer, pass book of a firm will show a less balance figure than their cash book.

  1. Interest paid or collected by banks

There are instances where companies can authorize or directly tell banks to accumulate loan advanced by them or invest on their investment.In such instance, banks on deposits may pay interest. After the interests are being collected by banks, it would be credited to the firm’s account. It is unknown to a company of the interest amount provided by a bank, so they cannot enter the interest amount in their cash book. Its outcome will be the difference in balance value in firm’s cash book and pass book.Therefore balance in cash book will be less than that in pass book.

  1. Dishonour of bills and cheques

General practice for a cheque is to be deposited with banks for it to be cleared when it is received from other parties. In company’s cash book, records of cheques are made at the time of its deposition with bank. Due to this record, company cash book will show an increase in balance.

In case of any cheque being dishonored, banks will not be able to collect any payment from it. A dishonored cheque means bearers’ account is not having sufficient amount required for transaction. A bank will not credit amount into company’s account with this dishonored cheque. Due to this mismatch regarding a dishonored cheque, information about balances will be different in both pass book and cash book.

It was the case of cheques. In case of bill receivables, when bank credits a certain amount in the account of a customer after discounting bill receivables, the customer will debit similar amount to his bank account. Effect of this transaction on balances of both pass book and cash book are positively same. Due to this similar amount effect, bank reconciliation statement will not identify this transaction.

There is also another aspect in this case. Suppose a bank presents the drawee of a bill with a bill where payment is not collected. In such instances, the amount of the bill will be directly debited to the account of the customer. This debited amount will cause a drop in bank balance which is displayed in the pass book.

In case the customer does not have any information regarding sufficient balance in his account, his provided bill be considered dishonored. The record of such bill will not be entered into the cash book. The outcome of such instance is the balance variation in pass book and cash book.

  1. Banks charging interest

A company on borrowing funds or on taking an overdraft will be charged with a certain interest percentage by bank. This is also applicable in case of loan advanced by banks. In this case, the bank balance of the company as per their cash book will be less as bank will debit the interest amount from them.

As the company will not have knowledge about the figurative interest amount, they will not have the idea regarding the interest debited by the bank. This again creates the balance difference between cash book and pass book.

  1. Cheque entry made into cash book but forgotten to be held

When any other gives a cheque to a certain company, there will be an increase in bank balance of the company. This information is entered and gets recorded into their cash book. But there is no change of bank balance of the mentioned company in the records maintained by bank. This is because the company has not sent that cheque to bank for it to be cleared and be collected. This variation in transaction information will show an unchanged balance record in pass book,but in the cash book, it will show an increase in the bank balance. On this ground the balances in pass book and cash book have differences.

  1. Depositing cheques into banks but are under-credited by them

There are instances where you may have deposited a certain amount, like $100 in the form of a cheque in your bank. But due to some error only $70 gets credited to your account. This balance variation in the transaction, i.e., ($100 – $70 = $30), will be recorded as 2 different balance statement in pass book and cash book.

  1. Banks collecting interest and dividends and then crediting those

When instructed to banks by companies, they collect dividends as well as interest on loans and investments. The accumulated amount by banks from these interest and dividends are then crediting on company’s account.Due to this credited amount, according to the bank’s record, there will be an increase in the bank balance of the respective company in their pass book.

As the specific company is not made aware of the amount credited to their account, they will not be able to update their cash book of this monetary increase. This is also one of the reasons for the balance variation in cash book and pass book where the pass book will have the record of increased balance than the company’s cash book.

  1. Banks issuing cheques which are either not debited in cash book or cashed by customers

In favor of other outside parties, issuing cheques against payment is a normal business practice followed by a majority of companies. Companies deliver these checks to their respective parties, expecting them to collect those cheques from the banks. After this procedure, the records of the issued checks are entered into the cash book by the company with its date of issue. This is done with the assistance of a cheque book’s counterfoil.

The validity of payment cheques is usually of 3 or 6 months. So it is not necessary that the parties have to collect their cheques the very same day. Because of this, company cash book has the record of those cheques being issued, but it would not be mentioned in the pass book or bank’s ledger account.

The cash book will display a reduction in company’s bank balance, but its pass book will showcase a bank balance without any changes. This is one of the reasons which caused balance difference between pass book and cash book, which is seen in bank reconciliation statement.

A customer is not cashing their cheques even when it is issued means the customer has not presented the cheque to the bank and the bank has not made any payment for that cheque.A company after issuing cheque credits their bank account as they consider cash a valuable asset which reduces after cheque issue.

After the banks pay the parties for their issued cheques which are done by the company, they debit from the company account. This is done because payment made by bank reduces its financial obligation or liabilities towards the company. Cheques not debited by banks have the similar meaning of customers not cashing their cheques.

  1. Debtor directly depositing cheques in company account

There are instances when certain parties directly deposit the cheques in the banks associated with the company instead of giving it to them. According to the records maintained by the bank, the company’s bank balanced will be increased. But they have no idea of the transaction and the credited interest by bank, according to their cash book, there will not be any bank balanced hike record.

This type of transaction will lead to the difference of bank balance record in pass book and cash book. In here, the cash book will show a decreased balance than the pass book.

  1. Banks making payments on company’s behalf

Customers and banks are interdependent on each other. This is why a bank is also seen as an agent of customers. Being an agent, there are few payment types which are directed to the banks to be collected on customer’s behalf. Those payment types are as follows.

  • Transfer of money
  • Paying insurance premium
  • Payment regarding office or warehouse or godown on rent
  • Payment of loan installment
  • Bank drafts issued in favor of other parties

When bank pays to other parties on behalf of company, it debits the amount from company’s account. This decrease in bank balance will be showcased in the company’s pass book. There will be no change in the bank balance which is recorded in their cash book as they are not aware of the payments made to other parties. This creates a difference between the pass book and cash book where the balance displayed in the pass book is more than the cash book.

  1. Collection or bank charges

For the numerous services provided by the bank, they charge a certain amount for these services.One of the important charges collected by the bank is the collection charge which they impose on outstanding cheque collection. The bank debits such charges from their customer’s account. Due to this, there is a decrease in the customer’s bank balance which is displayed in the pass book.

As a bank, in this case, has not made the customer aware of those imposed charges in his account, he will not be able to enter those bank charges in his cash book. So the record of bank balance will remain the same in the cash book but will be less in the pass book, creating a difference between both.

  1. Payment of cheques in bank but are not entered in cash book

Other parties when giving cheques to a company, those cheques are sent to bank for collection. In this scenario, balance in company account as per bank’s ledger account is displayed to be increased. This hike is because of the amount collect from the cheque.

Now,by any chance, if the record of those cheques is not entered into cash book; as per pass book of company, balance record remains unaffected. This creates a difference in the balance value in both cash book and pass book. Here, balance in pass book is lesser than the cash book.

  1. Bill retirement under rebate by bank

There are instances where many companies give instructions to their respective banks to make payments for their bills payable which they have sent to bank.According to usual procedure, companies deduct the amount of bills payable from their bank account before sending them to the bank.

There may be cases when banks clear bills payable and make payments or retire bills before its due date. Banks perform such activities to earn discounted cash amount for the company. Due to this discounted amount, banks will debit lesser amount from company account. This minimal deduction creates a difference in the balance between pass book and cash book.

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