Bank Reconciliation Statement

Bank Account
All transactions carried out through the current account of a business are
recorded in its bank account. All cheques received and issued will be recorded.
A favorable balance in the bank account is an asset. The opening balance
will appear on the debit side (Debit balance).
An unfavorable balance in the bank account is a liability and is called a
bank overdraft. The opening balance will appear on the credit side
(Credit balance).

Bank Statement
The commercial bank will maintain a current account on behalf of a business in
its own books. The bank will record the transactions of a business conducted
through the current account by the business.
When cash and cheques are paid into the bank the customers account
will be credited in the books of the bank. As it is the amount payable by
the bank to the customer. Thereby the business account in the bank is
treated as a liability of the bank.

Therefore, the bank records the transactions of the business according to

the double entry principle for liabilities.

The values which are debited in the bank account maintained by the
business are credited by the bank in the account maintained by the
bank.

The values which are credited by the business in the bank account are
debited by the bank in the account they maintained.
Once a month the bank sends a statement to its current account
holders(customers) detailing the transactions that have taken place during the
month. At present the banks send a computer printout to the business. The
statement that is sent by the bank is known as the bank statement or
the statement of accounts. (Refer text book pg. 123 a printout of a bank
statement is given).
When the entries on a bank statement are compared to those in the bank
account (maintained by the business) it will be found that they are
recorded on the opposite sides of the account.
The bank account-: prepared and maintained by the business.
The bank statement-: prepared and maintained by the bank.
The bank account (prepared by the business) shows the balance in the current
account of the business in the perspective of the business, whereas the
bank statement (prepared by the bank) shows the balance in the current
account of the business according to the books of the bank. If both the
parties record all transactions the two balances should be similar. However in
reality the two balances may differ.

Reasons why bank account balance and bank statement

balance may differ.
Items which are recorded in the bank account but not in the bank statement:
1. The cheques issued but not presented to the bank for payment
(Unpresented cheques)-
These are cheques issued by the business therefore entered on the
credit side of the bank account but do not appear on the bank statement.
This maybe because the
payee (person we issued the cheque to) has not paid the cheque into the
bank or the cheque is still in the banking system.

2. The cheques deposited but not realized (Unrealized cheques)-: These

are cheques that have been deposited into the bank and have been
entered in the debit side of the business bank account but do not appear
on the bank statement. As it would take few days for the cheque to be
collected and added to the balance in the bank current account.
Therefore, these cheques can be identified as cheques deposited but
not yet realized and not yet recorded as deposits in the bank statement.
Items entered in the bank statement but not in the bank account:
1. Direct remittances-: this is when customers deposit their due directly
into the current account of the business. Rent receivable, interest and
dividends can be directly remitted to the current account. Also called
credit transfers into the account.
2. Standing orders-: this is when the business has instructed the bank to
pay its bills of regular amounts every month directly from the bank
account. The business gets to know of the payment after receiving the
bank statement.
3. Bank charges and charges on cheque books-: the bank may deduct
an amount from the customers account to cover the cost of maintaining
the account. This is called bank charges. They would also charge for the
cheque book issued by the bank. The business would know about these
after receiving the bank statement.
4. Dishonored cheques-: A cheque paid into the bank will be credited by
the bank on receipt of the cheque. However, the drawer doesnt not have
sufficient funds in his account the bank will now (debit) the amount that it
originally credited. The business may get to know about the dishonored
cheque after receiving the bank statement.
To adjust the balances and compare reasons for differences, two steps must be
followed. They are,
Adjusting the bank account balance of the business.
Prepare the bank reconciliation statement based on the adjusted bank
balance obtained under step 1

Adjusting the bank account balance of the business

The bank account needs to be adjusted by including items not recorded in the
bank account previously.
Direct remittances, dividends received and all receipts will now have to be
debited in the bank account as it increases the bank balance.
Standing orders, bank charges, dishonored cheques and all payments not
recorded in the bank account previously needs to be credited as it reduces
the bank balance.
Generally accepted format-:

Date Description L. Value(R Date Description L. Values(R

F S) F S)
01.0 Balance b/f 2000 xx.0 Bank 500
8 Direct 5000 8 charges 2000
xx.0 remittance 10000 xx.0 Standing 1000
8 Credit 8 order
xx.0 transfers xx.0 Direct debits 5000
8 8 Dishonoured 8500
xx.0 cheques
8 Balance c/d
-------- (Adjusted -------
17000 31.0 bank 17000
-------- 8 balance) -------
8500

Balance b/f
01.0
9
 Bank account (adjusted)

Prepare the bank reconciliation statement based on adjusted

bank balance
Unpresented cheques and unrealized deposits will not appear in
the bank statement we now need to enter them in the bank
reconciliation statement to reconcile the balances.
Bank reconciliation statement for the month ended 31st august 2016
RS. RS.
Adjusted bank balance 8500
Add-cheques not presented to the bank (cheque 16000 16000
no.05) 24500
10000 (10000)
Less-unrealized cheques. (cheque no.6) 14500
Balance per the bank statement as at
31.08.2016