Money deposited into a Bank is recorded in the Bank Column of a Two-Column Cashbook on the debit side while withdrawals are recorded on the credit side. The bank also maintains an account of the customer in its book. Deposits made by the customer are recorded on the credit side of the customer’s account and withdrawals on the debit side. A copy of it is also given to the customer for his knowledge in the form of a passbook or a statement of account
As the same accounting transactions relating to deposits and withdrawals made for a certain period are recorded in the both – Cash book and also pass book, the balances shown by the two records at the end of that period should agree.
But, sometimes the two balances differ. If the two balances do not agree, it becomes necessary to know the reasons for difference. A statement showing the reasons or causes of differences is prepared. This statement is known as Bank Reconciliation statement.
In Financial Accounting Bank Reconciliation statement is prepared on a particular date to reconcile the bank balance in the Cash book with the balance as per Bank Statement by showing reasons or causes of differences between the two.
The difference between the two balances arises due to some entries, which have been recorded in the Cashbook but not in the passbook. Similarly, there may be some entries recorded in passbook but not in the cashbook.
Besides, disagreement between the two balances can also happen because of errors committed either by the customer or by the bank while recording entries in their respective books. Let us therefore understand the causes of differences in the balances of these two books before we reconcile the two balances.
Causes or Reasons for Difference between balances of Cashbook and Pass book
The difference may arise on account of the following causes or reasons:
As soon as cheques are sent to the bank, entries are recorded in the bank column on the debit side of the Cash book. But usually banks credit the customer’s account when they have received the payment from the bank concerned – in other words, when the cheques have been cleared. Again there will be some gap between the depositing of the cheques and the credit given by the bank.
If the bank has allowed interest to the customer, the entry is recorded in the customer’s account And at a later date pass book is updated. The customer usually comes to know of amount of interest by perusing the pass book and only then he records the entry in the Cash book.
The interest charged by the bank and the amount of the bank charges are recorded in the customer’s account and later in the pass book. The customer records the entries in his Cash book only after perusing the pass book.
The bank may be given standing instructions for certain payments such as for insurance premium. When the bank makes such payments, it immediately debits the customer’s account. In this case also the customer may come to know of the payment only on perusing the pass book. The entries in the pass book and the Cash book may thus be on different dates.
If a payment is received by the bank directly, it will be recorded in the customer’s account and also in the passbook. The account holder may come know of the amount on some later date only when he peruses the pass book.
IPA offers accounting course