Preparation of Bank Reconciliation Statement

After recognizing the causes of difference in bank balance, the reconciliation might be done in the following two ways:

(a) Preparing the bank reconciliation statement without adjusting the cash book balance.

(b) Preparing the bank reconciliation statement after adjusting the cash book balance.

It might be noticed in practice that the bank reconciliation statement is prepared after adjusting the cash book balance.

Preparation of Bank Reconciliation Statement without adjustment of Cash Book Balance:

For preparing a bank reconciliation statement, under this methodology, the balance according to the cash book or as per the passbook is the starting item. The debit balance according to the cash book means the balance of deposits held at the bank. Such a balance will be a credit balance according to the passbook. Such a balance exists at the point when the total deposits made exceed the withdrawals.





It demonstrates the favourable balance according to the cash book or favourable balance according to the passbook. On the other hand, the credit balance according to the cash book demonstrates bank overdraft. In other words, the excess sum withdrawn over the sum deposited in the bank. It is also called unfavourable balance according to cash book or unfavourable balance according to the passbook.

There may be four different situations while preparing the bank reconciliation statement such as:

  1. At the point when debit balance (favourable balance) as per the cash book is given and the balance according to the passbook is to be ascertained.
  2. At the point when credit balance (favourable balance) according to the passbook is given and the balance according to the cash book is to be ascertained.
  3. At the point when credit balance according to the cash book (unfavourable balance/overdraft balance) is given and the balance according to the passbook is to be ascertained.
  4. At the point when debit balance according to the passbook (unfavourable balance/overdraft balance) is given and one has to ascertain the cash book balance.





(a) Dealing with favourable balances: The following steps may be initiated for preparing the bank reconciliation statement:

  1. The date on which the statement is prepared and is written at the top, as part of the heading.
  2. As shown by the cash book the first item in the statement is generally the balance. Alternatively, the starting point can also be the balance as per the passbook.
  3. The cheques which are deposited but are not yet collected are deducted.
  4. All the cheques which are issued but not yet presented for the payment, also the amounts which are directly deposited in the bank account are added.
  5. All the charges such as interest on overdraft, payment by the bank on standing instructions given by the client and debited by the bank in the passbook but not entered in the cash book, bills and cheques dishonoured etc. are deducted.
  6. All the credits such as interest on dividends collected, etc. and any direct deposits are added.
  7. Adjustment for the errors are made according to the principles of rectification of errors.
  8. Now the net balance shown by the statement ought to be the same as shown by the passbook.

(b) Dealing with overdrafts: Till now we have dealt with bank reconciliation statements where bank balances have been positive – i.e., there has been money in the bank account. However, businesses some of the time have overdrafts at the bank. Overdrafts are where the bank the account becomes negative and the businesses as a result have borrowed from the bank. This is also shown in the cash book as a credit balance. In the bank statement, wherever the balance is followed by words Dr. (or sometimes OD) it implies that there is an overdraft which is called debit balance according to the passbook. An overdraft is treated as a negative figure on a bank reconciliation statement.

Thus, preparation of bank reconciliation is an inevitable step for drafting the financial statements of the organisation. Bank Reconciliation Statement states the reasons for difference in bank balance.

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