What is Reconciliation in Accounting

What is Reconciliation in Accounting

What is Reconciliation in Accounting

Bank reconciliation statement (reconciling) is the statement that reconciles the difference between the two balances that is balance as per cash book and the balance as per passbook.

Generally, the bank balance as shown by the passbook or bank statement does not agree with the balance shown by the cash book Bank column does bank reconciliation statement is a statement that displays the items of difference between the balance of an account reported by the bank and the account maintained by the customer.

Reasons or causes a Bank Balance Will Differ from a Company’s Balance

  • Some of the following items which create the cause of differences
  • Cheques deposited but not credited or released by the bank.
  • Cheques issued or drawn but not presented for payment in the bank.
  • Dividend income or insurance claim etc. Collected by the bank but not recorded in the cash book.
  • Interest credited by the bank but not recorded in the cash book.
  • Bank charges not entered in the cash book.
  • Direct deposit made by the customers.
  • Insurance premium pay orders or any expenses paid by banks and not entered in the cash book.
  • Any error done either in cash book or in the passbook.

Note: 

The students are advised to note that the debit side of the cash book balance must be equal to the credit side of the bank passbook and vice versa.

  • The debit balance of the cash book is a favourable balance.
  • The credit balance of the cash book is an unfavourable balance.
  • The debit balance of Passbook is an unfavourable balance
  • The credit balance of the passbook is a favourable balance.

Preparation of Bank Reconciliation Statement

The reconciliation can be done in any of the following ways:

  1. If cash book and pass book both balances are given
  2. If only cash book balance is given.
  3. If only passbook balance is given

1. If cash book and pass book both balances are given

In this case, first, find out the adjusted or corrected balance as per the cash book and passbook.

Note:

  • Adjusting entries are required to pass in cash book (Bank column), only for those transactions:
  1. Not recorded in the cash book
  2. Any error made by the cash book.
  • No, adjust in the entry is a pass in the cash book (Bank column) for all those transactions:
  1. Not shown in passbook but recorded in cash book (Bank column)
  2. Any error made by the passbook (bank statement)

Account Reconciliation Example:

A comparison of cash and bank records of RQ Corporation revealed the following information:

i. Balances as per cash book$25000
ii. Balances as per bank statement$50000
iii. Cheques deposit but not shown in the bank statement$15000
iv. Cheques issued but not presented at the bank$32000
v. Direct deposit by the customer in the bank$8000
vi. Dishonoured cheque$1500
vii. Bank service charges$500
viii. Profit has given by the bank$2000

Required:

  1. Prepare the bank reconciliation statement.
  2. Prepare necessary adjusting entries.

RQ Corpotation

Bank Reconciliation Statement

As on (month, date and year)

ParticularCash bookPaas Book
Balance as per book$25000$50000
Add: Un-cleared cheque$15000
Less: Un-presented cheque($32000)
Add: Direct deposit by the customer$8000
Less: Dishonoured cheque($1500)
Less: Bank Charges($500)
Add: Profit given by the bank (interest income)$2000
Adjusted or correct Balance$33,000$33,000

RQ Corporation

Adjusting Entries

DateParticularP/RDebitCredit
(v)Bank8000
A/c Recievable8000
To record direct deposit by the customer
(vi)A/c Receivable 1500
Bank1500
To record cheque dishonoured
(vii)Bank Charges500
Bank500
To record bank service charges
(viii)Bank2000
Interest income2000
To record profit given by the bank

2. If only cashbook balances are given

In this case, first, find out the adjusted or corrected balance of cash book only because passbook balance is not given and then taking the address to the balance of cash book prepare the reconciliation statement to arrive at the balance of passbook

Note: 

  • Adjusting entries are required to pass in cash book (Bank column), only for those transactions:
  1. Not recorded in the cash book.
  2. Any error made by the cash book.
  • No adjusting entry is passed in the cash book (Bank column), for all those transactions:
  1. Not shown in passbook but recorded in the cash book ( Bank column)
  2. Any error made by the passbook (bank statement).

Account Reconciliation Example:

On December 31, 2020, the bank column of the cash book of Mr John shows a debit balance of $922 on examination of the cash book and statement you find that:

  1. A cheque amounting to $1260 issued before December 31 and entered in cash book was not presented for payment till after the date.
  2. A cheque amounting of $500 credited in the cash book as sent to the bank for collection on December 31 were entered in the bank statement after that date
  3. A cheque from a debtor for $146 had been dishonoured prior to December 31 but no record appeared in the cash book.
  4. A dividend warrant for $76 was paid direct to the bank and nothing appeared in the cash book.
  5. Bank interest and charges amounting of $84 were not entered in the cash book but appeared in the bank statement.
  6. There was no entry in the cash book for a club membership subscription for $20 paid by bankers order in November 2020.
  7. Banks charges (postal) for a cheque book received by Michael $2 was entered in the cash book twice.
  8. A cheque for $54 drawn by James had been charged to Robert account in error.

Required:

  • Prepare a bank reconciliation statement, with adjustment in cash book to bring down the correct balance and prepare a statement reconciling the corrected cash book balance with the balance as per bank statement.

Mr John

Corrected balance of Cash book

As at 31, December, 2020

Balance as per cash book$922
  
Less: Dishonored cheque($146)
Add: Dividend income$76
Less: Bank charges($84)
Less: drawing (club membership subscription)($20)
Add: Bank Charges (cancellation of wrong entry)$2
Adjusted or corrected balance of cash book$750

Mr John

Bank reconciliation Statement

As at 31st December 2020

Adjusted balance as per cash book$750
  
Add: Un-presented cheque$1260
Less: Un-cleared cheque($500)
Less: Bank error (cheque draw wrongly charged at Robert a/c)($54)
Balance as per pass book$1456

3. If only passbook balance is given

In this case, first find out the adjusted or corrected balance of the passbook only, because cash book balance is not given, and then taking the adjusted balance of passbook prepare the reconciliation statement to arrive at the balance as per cash book.

Note:

  • Adjusting entries are required to pass in cash book (Bank column) only for those transactions:
  1. Not recorded in the cash book.
  2. Any error made by the cash book
  • No adjusting entry is passed in the cash book (Bank column) for all those transactions:
  1. Not shown in passbook but recorded in cash book (Bank column).
  2. Any error made by the passbook (bank statement).

Account Reconciliation Example:

From the following particular, prepare a bank reconciliation statement showing the balance as per cash book on 31st March 2021.

1. Balances as per pass book (Cr. Balance)$8000
2. Cheque deposited but not credited by the bank$1000
3. Cheque issued but not presented for payment$500
4. Cheque deposited into Bank without recording in cash book$600
5. Cheque issued to creditors  but not recorded in the cash book$700
6. Dividend collected by bank, not. Recorded in cash book.$100
7. Debtors directly deposited into Bank not recorded in cash book.$2000
8. Debit side of the cash book was under cast by$1000
9. Bank charges debited in pass book, not recorded in cash book$50
10. Bank met a bill payable for $1000 on 30-3-2021 under advice to the firm on 2-4-2021—-
11. A bill for $2000 discounted for $1900 returned dishonored by bank, noting charge being$10
12. A bill for $1000 discounted with the bank is entered in the cash book without recording the discount charges$100

Solution

Adjusted balance

As at 31st March 2021

Balance as per pass book$8000
  
Add: Un-cleared cheque$1000
Less: Un-presented cheque($500)
Adjusted balance$8500

Bank reconciliation Statement

As at 31st March, 2020

Adjusted balances as per pass book$8500
  
Less: Cheque deposited but not recorded in cash book.($600)
Add: Cheque issued but not recorded in cash book.$700
Less: Dividend collected but not recorded in cash book($100)
Less: Direct deposit by the customer($2000)
Less: Cash book error (debit side of cash book under cast)($1000)
Add: Bank charges not recorded in cash book$50
Add: Bill payable paid by bank not recorded in cash book$1000
Add: Bill discounted and dishonored not recorded in cash book (2000+10)$2010
Add: Bill discounted, discount charges not recorded in cash book$1000
Balance as per cash book$8660

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