Reasons for the difference between Cash Book Bank balance and Bank Statement

Niran Marshall Perera
A free video tutorial from Niran Marshall Perera
Attorney at Law, LL. B graduate (University of London) & Business Commerce graduate ( University of Sri Jayewardenapura)
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Bank Reconciliation Statement using Excel - Easy Guide

Keep a track of Your Bank Balance through a Bank Reconciliation Statment and Develop your own Template

01:01:58 of on-demand video • Updated October 2017

  • Understanding what is a bank reconciliation
  • learn how to reconcile the cash balances of a company's cash book and cash balance of that company's bank account
  • Develop a template for Bank Reconciliation Statement using Excel
English In this chapter we will discuss the reasons for difference between the balance which is in our account and the balance in the bank statement. There are two types of reasons. One is transactions appeared in the company's or individual's record but not in the bank statement. That is to say transactions that known to us but not known to bank. So in other way transactions that are being recorded in our account but not in bank statement. Then the other reason is transactions appeared in the bank statement but not in company's or individual's records. So those are the transactions which is known to the bank but not known to us. So they appear in the bank statement but not in our records. So let's discuss these reasons in detail. The first type of reason is transactions appeared in company's for individual's records but not in the bank statement. These kind of transactions can appear due to two reasons. One is deposits in-transit. So deposit in transits means deposits which have been sent by the company or individual to the bank but not have been received by the bank at proper time before the issuance of bank statement. Basically this kind of transactions appear at the end of the particular period. For an example let's say you receive the bank statement monthly and it starts from the first of the month and ends at the last date of the month. Let's say by 31st the accounting period ends. So on 29th we deposit a cheque and we believe that it has been credited in to your account. But as you know cheque clearance takes time. So by the time the bank statement is issued this check may not have been cleared and deposited into account. But we think that it has been deposited. So we record it in our accounts but it will not reflect in the bank statement because it has not been cleared and deposited properly in to our account. The next type of reason is outstanding cheques. So outstanding cheques means cheques which have been issued by the company or individual but were not presented or cleared before the issuance of the bank statement. Basically what this mean is we draw a cheque and give it to a some other party may be for supply of goods or services by them, then we expect them to present it to the bank straight away and cash it. But for some reason that party may have delayed it. So in the belief that person may have presented and cash it, we debit our account or in other way deduct from our account balance but it may have not been presented to the bank. So the bank balance will not reflect this unless and until this person present this cheque and cash it. So those are the two main types of transactions that appear in the company's or individual's records but not in bank statement. So let's move on to the other type of reasons. The other type of reason is transactions appeared in the bank statement but not in company's records. So let's discuss these reasons in detail. The first one is bank charges. Bank may charge an amount for the service supplied by them. So bank charges and the cheque book charges and such similar charges is not known to the company or individual until we receive the bank statement. So the next one is interest income. again we will not know how much that the bank has added as an interest income we know for a fact that we will get an interest But we don't know the exact amount until we receive the bank statement. Then the next one is Non Sufficient Funds Cheques so non sufficient funds cheques means cheques deposited by the bank in the bank account but the bank is unable to receive a payment on those checks due to insufficient funds in the payer's account. in simple language we receive a cheque from some other party so we deposit on our bank account so we debit our bank account thinking that there are sufficient funds. But if there is no sufficient funds the cheque will return. So we call such cheques dishonoured cheques. So there is no sufficient funds to honour the cheque. In such cases we will believe that it has been deposited. But actually it has not been deposited. So we does not know until we receive the bank statement. In some situations there are dishonouring cheque calls from the bank but majority of the times we will not know until we receive bank statement. So the next one is direct deposits. Direct deposits happen when a debtor or some other party directly deposit to our bank without notifying us. In such case we doesn't know that he has directly deposited to the bank. We will get to know about it once we receive the bank statement. Then the next one is direct collections. Direct collections means the amount that is directly collected by the bank such as dividend income and interest income. In such case what happens is we have given our bank details as the remmitance account. So whatever the income source it may be directly depositted to our account without our knowledge. so we'll get to know about it, once we receive the bank statement. Next one is Standing Orders. So we want to make a payment regularly monthly or quarterly or yearly, We can use standing instructions. So what will happen is bank will directly send funds from our account to the particular account where we want to send funds. So in that case also we will not know until we receive the bank statement. Then the next one is taxes. The government may charge several taxes. The amount of taxes we will get to know after we receive the bank statement. Now let's see the impact of these reasons. So if we take the reason number one, deposits in transit. Due to deposits in transit bank statement balance shows a lower balance. What it means is cash book balance is higher than the bank statement value. In that case when we are preparing bank reconciliation statements starting from the cash book balance, We have to deduct it. So keep in mind deposits in transit we have to deduct it. So due to outstanding cheques bank statement balance shows a higher balance than the cash book balance. So other way around cash book balance shows a lesser value. So we have to add that. So keep in mind outstanding cheques we have to add it. So those two transactions are in our records but not in bank statement. So we have to adjust them in the bank reconciliation statement. Then due to bank charges, cash book balance shows a higher balance because we have not deducted it. So we have to credit it while preparing adjusting cash book or we have to deduct in the bank reconciliation statement if you're not preparing adjusted cash book. Then with interest income cash book balance shows a lower balance. So we have to add that to the cash book balance. Then due to non sufficient funds cheques cash book balance shows a higher balance. So in that case we have to deduct it from the cash book balance. so we can credit it from the adjusted cash book or we can deduct in the bank reconciliation statement. Then the direct deposit. Due to direct deposit cash book balance shows a lower balance. So again we have to add them in the cash book or we have to add them in the bank reconciliation statement similar with the direct collections. So when it comes to standing orders cash balance shows a higher balance due to standing orders. So we have to deduct them from the cash book balance. So when it comes to taxes again cash book balance was a higher balance so we have to deduct that them from the cash book balance. So if I summarize the items which are highlighted in green goes to bank reconciliation statement and items which are highlighted in red goes to adjusted cash book. In other words items which are highlighted in green are in our records but not in bank statement. Then the items which are highlighted in red are in the bank statement but not in our records. Therefore we have to adjust in our records. So let's move on.