Bank Reconciliation Statement: Bank balance as shown by the cash book must tally with the balance shown by the passbook. It is quite often seen that the balances as revealed by the cash book and the passbook do not tally. These differences may arise due to numerous reasons. In order to tally the balances of bank column of cash book and the passbook, a statement is prepared which  is known as the ‘Bank Reconciliation Statement’. Thus, Bank Reconciliation Statement may be defined as “The statement which is prepared to find out the reasons of differences in the balances of Cash Book and that of the Pass Book is known as Bank Reconciliation Statement”.

Importance of Bank Reconciliation Statement: 

The various reasons for the preparation of Bank Reconciliation statement are as follows: 

1. Cheques Issued but not Presented for Payment: As soon as any person is issued a cheque by the customer of the bank it is recorded on the credit side in the bank column of the cash book. The same cheque is presented by the person after a duration of time. Thus, if in between this duration the balances are reconciled there will be a difference in the two balances. 

2. Cheques Deposited but not Collected or Credited by the Bank: As soon as the cheques are deposited in the bank, the customer debits the bank column of the cash book. This will lead to an increase in the balance in the cash book. The bank will not increase the balance unless the amount is really received. The process of collection of cheques takes some time. If during this duration the balances are compared there will be a difference in the two because of these cheques.

3. Bank Charges: The bank provides many services to its customers. It provides services like collection of dividends, collection of interest, etc. The bank charges some extra amount for these services. Thus bank balance is reduced as this is debited from the customers account without giving any intimation. This reduces the bank balance and no entry is made in the cash book. 

4. Direct Deposits by Customers: There may be some customers who may deposit the money directly into the bank. Thus, the bank balance is increased while the balance in the cash book is not adjusted, accordingly this causing a difference in the balance. 

5. A collection made by the Bank on Behalf of Customer: The bank may collect dividend on shares, on government securities etc. on behalf of the customer. The bank credits the amount to the passbook. This increases its balance. While the 

6. Dishonour of Bill Discounted with the Bank: The customer gets the bill discounted from the bank before the due date but if on the due date it was dishonoured the bank will debit the amount and the passbook balance will be reduced whereas the cash book will remain unchanged. This will also lead to the difference in the balances.

7. Interest Charged and Allowed by the Bank: When there is overdraft, the bank may charge interest on overdraft. The bank, will record it on the debit side of the passbook. There will be no entry in the cash book to this effect unless some information is received by the bank, thus leading to a difference in the balances. The bank allows some interest on the amount deposited by the customer on a specific date but the customer is informed at a later date. The customer will not pass any entry to this effect in the bank column of the cash book. Hence, there will be a difference between the two balances. 

Reasons Liable for the Difference between the balance of Cash Book and Bank Pass Book.

The reasons liable for the difference may be summarised as below: 

1. Cheques Issued but not Presented for Payment: As soon as any person is issued a cheque by the customer of the bank, it is recorded on the credit side in the bank column of the cash book. The same cheque is presented by the person after a duration of time. Thus, if in between this duration the balances are reconciled, there will be differences in the two balances. 

2. Cheques Deposited but not Collected or Credited by the Bank: As soon as the cheques are deposited in the bank, the customer debits the bank column of the cash book. This will lead to an increase in the balance in the cash book. The bank will not increase the balance unless the amount is really received. The process of collection of cheques takes some time and if during this duration the balances are compared, there will be differences in the two because of these cheques. 

3. Bank Charges: The bank provides many services like collection of dividends, collection of interest, etc. The bank charges some extra amount for these services. Thus, the bank balance is reduced as this is debited from the customer’s account without giving any intimation. This reduces the bank balance and no entry is made in the cash book.

4. Direct Deposits by Customers: There may be some customers who may deposit the money directly into the bank. Thus, the bank balance is increased while the balance in the cash book is not adjusted accordingly, causing a difference in the balances. 

5. Collection by the Bank on behalf of Customer: The bank may collect dividend on shares, on government securities etc. on behalf of the customer. The bank credits the amount to the passbook, and this increases its balance. While the balance of the cash book is undercast. Thus, the two balances will differ from each other. 

6. Dishonour of Bill Discounted with the Bank: The customer gets bill discounted from the bank before the due date but if on the due date it was dishonoured the bank will debit the amount and the passbook balance will be reduced whereas the cash book will remain unchanged. This will also lead to the difference in the balances.

7. Interest Charged and Allowed by the Bank: When there is overdraft, the bank may charge interest on overdraft. The bank will record it on the debit side of the passbook. There will be no entry in the cash book to this effect unless some information is received by the customer leading to a difference in the balances. Similarly, the bank allows some interest on the amount deposited by the customer on a specific date but the customer is informed at a later date. The customer will not pass any entry to this effect in the bank column of the cash book. Hence, there will be a difference between the two balances.