Bank reconciliation statement is the comparison of a bank statement (sent by bank) with the cash book (prepared by business) in order to explore, identify, explain and to account for the difference between the cash book and bank statement balances
1) Errors or mistakes
Mistakes in calculation or in recording receipts and payments of cash which are most likely made by the business in its cash book, but banks make mistakes as well.
Bank might deducts charges and fee for its service and interest on overdraft which you (i.e business) are not informed about until you receive the bank statement
3) Time difference
There are cheques that you have received and deposited into your bank account, but bank has not yet cleared these cheques (banks need time to process cheques). So, though your record shows that cash has been received but it is not being shown in bank statement prepared by bank
Similarly, you made a payment via cheque and you have deduced some amount from cash book but the person that received the cheque has not yet banked this cheque for a while. Therefore, it has not been deducted by bank and bank statement didn’t show that deduction. Even that person has banked the cheque, the bank needs some time to clear it
Checks drawn or paid by the business and credited in cash book but these checks haven't yet been presented to bank for the payment or not cleared by the bank
For example, a business pays a check for $500 to Mr.Z as the payment for goods purchased. Business has recorded the check in its cash book. However, Mr. Z’s bank has not yet cleared the check. Therefore, there is a deduction in cash book but at the same time business bank account balance is same as it was before
Checks received by business, paid into bank and debited in cash book but not yet cleared by the business bank and entered them in its books. So, these checks will not appear in bank statement.
For example, a business receives a check for $500 from Mr. Z as the receipt for goods sold. Business has recorded the check in its cash book. However, the business bank has not yet cleared the check. Therefore, there is an addition in cash book but at the same time business bank account balance is same as it was before
Also referred to as non-sufficient funds (NSF) check, bad check, hot check, cold check etc.
A check returned by the bank due to insufficient balance in the account on which the check was drawn. In other words, a check presented for the payment but the amount written on check is exceeding the amount available in bank account
You wrote a check for $500, however your bank account balances was $400. Resultantly your check was returned unpaid by the bank
» When a check is received from a debtor
Bank = Debit and A/C Receivable = Credit
» When a check is dishonoured
A/C Receivable = Debit and Bank = Credit
It’s a statement of depositor’s account in the bank ledger. Cheques drawn and paid into the bank are recorded in this book.
When cash or a cheque is paid into the bank, it appears as credited in passbook. When a cheque issued or cash is withdrawn from bank account, it is debited in passbook
Overdraft is debited in bank statement because in case of overdraft banks treat the customers same like debtors. On the other hand, the person or organization that has obtained the overdraft records overdraft as a liability and treats bank as a creditor which is why overdraft is credited in cash book.
You should be aware of that the bank see customer’s transactions from an opposite angle that is when a customer or business credits something, banks debits the same thing and vise versa
They are listed below:
Adjustments to cash book
Dividends received and paid into business bank account but not yet entered in cash book by the business
Bank charges for its services, interest on overdraft charged by the bank
Payment made from business bank account with standing order and direct debit.
Business paid cheque or received cheque and deposited in bank account but the cheque has been dishonored by the bank. The information of dishonoured cheque might not yet receive by the businesses
Adjustments to bank statement
Checks drawn or paid by the business and credited in cash book but these checks haven't yet been presented to bank for the payment (these checks are known as unpresented checks)
Checks received by the business, paid into the bank and debited in cash book but not yet cleared by the bank and entered them in its record. So, these checks will not appear in bank statement (these checks are called uncollected or credited checks)
The term “not sufficient funds” implies that there are not sufficient funds available in your bank account so as to meet your demand for cash. When a business writes a check and passes this check to someone as a payment to something not knowing how much amount is available in its bank account, such checks are likely to be returned by the bank stating the reason that there is not sufficient balance in your account to withdraw. For example you have $5000 in your bank account but you write a check for $7000. Guess what the check will be returned for the lack of funds available in your account. Such checks are also known as dishonored checks
Deposit in transit means that you have deposited cash into your bank account, but your deposit is still not processed or cleared to be used or shown as your bank balance.
It is likely that business sent cash to bank at the late hours and recorded it in cash book whereas since cash was reach at the late hours in bank, bank hasn’t entered it in its accounts. Therefore, if you receive a bank statement on the same day or the next day by mail, you won’t see your deposit in bank statement while you have recorded it in your cash book considering the fact that the next day might not be the working day of bank