How Bank Reconciliation Statement is prepared

The bank statement which is prepared by the depositor at a particular date to reconcile the differences of the balance as shown in the bank statement and balance shown in the depositor’s books of accounts is called the bank reconciliation statement.

MEIGS and MEIGS say,

A bank reconciliation is a schedule explaining any differences between the balance shown in the bank statement and the balance shown in the depositor’s accounting record.

Hermansons, Edwards and Maher says,

A bank reconciliation, often called a bank reconciliation statement or schedule, is a schedule the depositor prepares to reconcile or explain, the difference between the cash balance on the bank statement and the cash balance on the depositor’s books.

A business concern prepares a bank reconciliation statement to ascertain correct cash balance and to correct cash balance in the ledger passing necessary journal entries.

Causes of disagreement between the cash balances as shown in the depositor’s book and bank statement

It is likely that cash balances as shown in the depositor’s book and bank statement are equal. But in practice these are not always found equal due to some unknown reasons.

It’s main causes are time gap and lack of timely communication. Customer and bank are two separate entities. Time gap hindrance is created in the execution of an order by these entities.

Sometimes the order is not sent to the bank but given to third party for presentation. For example, a payment has been made to a person by cheque. Though cheque issue is a direct order to the bank for payment, but the responsibility of presentation of the cheque rests on the payee.

The depositor credits the amount of cheque in his books of accounts just after issue of the cheque.

But the bank might not debit it in the bank statement on the same day as the payee may fail to present the cheque before the bank on that day.

So for this time gap, disagreement between cash balance as shown in the depositor’s book and that of bank statement arises.

Steps in preparing a bank reconciliation statement

The following steps are to be taken in preparing a bank reconciliation statement:

  1. Deposits mentioned in the bank statement and deposits shown in the depositor’s books of account are to be compared. Any deposit not recorded in the bank account would be treated as deposit in transit and it should be added to the balance shown in the bank statement.
  2. The encashed cheques should be arranged chronologically and each of them is to be compared with the cash disbursement journal.Cheques issued but not paid by the bank termed as outstanding cheques should be listed and the amount of these cheques should be deducted from the balance shown in the bank statement.
  3. Credit memo issued by the bank, if not recorded in the books of the depositor, should be added to the depositor’s cash balance. For example, collection note receivable Tk.2,500 shown in the bank account. Bank sends a credit memo for this to the depositor. In this case the amount mentioned in the credit memo $2,500 he added to the cash balance of depositor’s account.
  4. The debit memo issued by the bank, if not recorded in the depositor’s book, should be deducted from the cash balance shown in the depositor’s account.
  5. Bank statement and depositor’s account are to be adjusted properly for rectification of errors, if any.
  6. It is to be ensured that adjusted cash balance of bank statement and adjusted cash balance of depositor’s ledger account are equal.
  7. Adjusting journal entries are to be passed for those items which are added to and deducted from the cash balance of depositor’s ledger account in the bank reconciliation statement.

Two-part bank reconciliation statement

Modem accountants prepare bank reconciliation statement under this two-part bank reconciliation method. This helps in achieving the object of reconciliation on one hand and knowing the bank balance on the other.

Besides, adjustments to be made in the books of depositors can clearly be known from this type of reconciliation statement.

This method of preparing bank reconciliation statement is termed as two – part bank reconciliation statement.

Under this method a bank reconciliation statement is prepared taking balances of bank statement and cash book simultaneously in ‘T’ form or statement form.

The transactions which have been recorded in the depositor’s cash book, but not recorded in the bank statement are adjusted with the balance of bank statement.

On the other hand,

The transactions which have been recorded in the depositor’s bank statement or bank account but not recorded in the depositor’s book of accounts are to be adjusted with the cash balance of depositor’s account.

It may be mentioned that under this process two adjusted balances will be equal. If both the balances do not agree, it is evident that the adjustments were not made correctly.

Specimen of two part reconciliation bank statement

 

The mechanism of two part bank reconciliation statement in the following diagram;

Depositor’s book amended method

This amended method is a realistic approach in presenting bank reconciliation statement correctly, easily and briefly.

Undo- this method depositor’s account is prepared to ascertain its correct cash balance before preparing bank reconciliation statement.

The transactions which have been shown in the depositor’s bank statement only are recorded in the account of depositor to ascertain corrected cash balance.

For example,

Bank charge, interest on deposit, direct deposit into bank by debtor, dividend realized by the bank, payment made by the bank, dishonored, discounted bill etc.

The corrected cash balance ascertained through preparation of depositor’s amended cash book will be same as cash balance shown in bank statement. Bank reconciliation statement is prepared with that corrected cash balance.

The transactions which have been shown in the depositor’s account but not recorded in the bank statement are recorded in the bank reconciliation statement.

Single Balance Method

This is not quite a scientific method.

Nevertheless, sometimes, in problems, cash balance of only one party i.e. depositor’s cash balance or cash balance of bank statement is mentioned. In such case, sometimes bank reconciliation statement is prepared under single balance method.