why bank reconciliation statement is prepared

Introduction

The statement that is prepared for reconciling the two balances (i.e., for explaining the difference between the two balances (Pass book balance - Cash book balance) is called Bank Reconciliation Statement.

The balance shown by the pass book is known as bank balance as per the pass book.

The balance shown by the bank account in the ledger or the bank columns in the cash book is known as bank balance as per the cash book.

Theoretically, the pass book balance should agree with the cash book balance on any date because the same transactions are entered in both the books.

But, in actual practice, these two balances do not agree owing to many reasons. The reasons for the difference between the two balances are as follows:

1.Cheques issued and entered in the cash book, but not presented to the bank for payment.

2.Cheques deposited into the bank for collection and entered in the cash book, but not collected by the bank.

3.Cheques received and entered in the cash book but not sent to the bank.

4.Direct payment into the trader's bank account by the customers of the trader entered (i.e., credited in the bank's book, but not entered in the cash book.

5.Bank commission, bank charges and interest on overdraft debited in the banker's book, but not entered in the cash book.

6.Interest allowed on bank balance by the banker and credited in the banker's book, but not entered in the cash book.

7.Interest and dividend collected and credited by the banker in the banker's book, but not entered in the cash book.

8.Cheques and bills sent to the bank for collection dishonoured and entered i.e., debited in the banker's book, but not entered in the cash book.

9. Payments made by the bank on behalf of the customer and debited in the bank's book, but not entered in the cash book.

10.Wrong entries in the cash book.

11.Wrong entries in the pass book.

Important

• Debit balance as per cash book means Cash at Bank.
• Credit balance as per cash book means Bank Overdraft.
• Debit balance as per pass book means Bank Overdraft.
• Credit balance as per pass book means Cash at Bank.