Which of the following must be deducted from the bank statement balance in preparing a bank?

Bank Reconciliation Terminology

Deposits in Transit

Deposits in transit are also referred to as outstanding deposits. Such deposits are not showcased in the bank statement on the reconciliation date. This happens due to the time lag between when your business deposits cash or a cheque into its bank account and when your bank credits the same.

Your business records the increase in bank balance in its books of accounts the moment it deposits cash or cheque in its bank account. This means that the balance as per the cash book is greater than the balance as per the passbook until the time the bank processes the deposit.

These outstanding deposits must be deducted from the balance as per the cash book in the bank reconciliation statement.

Bank Service Charge

A bank charges various types of fees to you as an account holder. Such fees are charged to maintain your account with the bank. In addition to the maintenance fees, the bank charges a fee in respect of other specific transactions. Such fees may include:

• Cheque clearing charges
• Charges for fund transfer
• Collection charges, etc

These bank charges are charged to your account directly. This reduces your bank balance as reflected in your bank statement. It is important to note that such charges are not recorded by you as a business till the time your bank provides you with the bank statement at the end of every month.

As a result, the balance as per the bank statement is lower than the balance as per the cash book. Such a difference needs to be adjusted in your cash book before preparing the bank reconciliation statement.

Not Sufficient Funds Cheques

Not Sufficient Funds (NSF) refers to a situation when your bank does not honour your cheque. This is because the current account on which the cheque is drawn does not have sufficient funds to honour the cheque.

In addition to this, the NSF may also refer to a situation where an individual intends to purchase with a credit card but is unable to do so. This is because there are insufficient funds in the associated bank account to make a purchase.

NSF cheques are an item to be reconciled while preparing the bank reconciliation statement. This is because when you deposit a cheque in your bank account, you consider that the cheque has been cleared by the bank. But this is not the case as the bank does not clear an NFS cheque.

As a result, the cash on hand balance gets reduced.

Outstanding Cheques

An outstanding cheque refers to a cheque payment that has been recorded in the books of accounts of the issuing company. But, the cheque has not yet been cleared by the bank as a deduction from the company’s cash balance.

This means that the bank balance of the company is greater than the balance reflected in its cash book.

Bank Reconciliation Procedure

Before discussing the procedure to reconcile the cash book balance with the passbook balance it is important to note that ‘Debit balance as per cash book’ is the same as ‘Credit balance as per passbook’ meaning the cash book (company side) is higher than the passbook (bank side). In other words, deposits made by the company into a bank are higher than withdrawals. Likewise, ‘Credit balance as per cash book' is the same as ‘Debit balance as per passbook’ meaning the reverse of the above i.e. withdrawals made by a company from a bank account exceed deposits. You can start reconciling your cash book balance with the passbook balance from any of the four balances:

• Debit balance as per cash book
• Credit balance as per cash book
• Debit balance as per passbook
• Credit balance as per passbook

There are two ways in which you can undertake bank reconciliation once you identify the reasons for the difference:

• Preparation of Bank Reconciliation Statement Without Adjusting the cash book Balance
• Start with Unadjusted Balance as per cash book

If you want to prepare a bank reconciliation statement using either of these approaches, you can take balance as per the cash book or balance as per the passbook as your starting point.

As mentioned above, debit balance as per the cash book refers to the deposits held in the bank. Such a balance would be a credit balance as per the passbook. This balance exists when the deposits made by your business at your bank are more than the withdrawals.

This indicates that you have a favourable balance as per the cash book or a favourable balance as per the passbook.

Whereas, credit balance as the cash book indicates bank overdraft or the excess amount withdrawn from your bank account over the amount deposited.

This is also known as unfavorable balance as per the cash book or unfavorable balance as per the passbook.

Make Necessary Adjustments in the Balance as per cash book

Several items cause a difference between cash book and passbook balances. Typically, these items are mainly reflected in the passbook only. The following are the adjustments that you need to make to prepare the bank reconciliation statement:

• Specify the balance as shown by the cash book as the first item in the statement. Or you can start with balance as per the passbook as well.
• Deduct cheques deposited but not yet collected or credited by the bank into the company account.
• Add all the cheques issued but not yet presented for payment and the amounts directly deposited in the bank account.
• Deduct all charges such as interest on an overdraft, payment by the bank on standing instructions, and debited by bank in the passbook but not entered in the cash book, bills and cheques dishonored, etc
• Add all credits provided by the bank like interest on dividends collected and direct deposits in the bank.

After adjusting all the above items, what you get is the adjusted balance as per the cash book. This balance must match the balance as per the passbook.

It is important to note here that adjusting the cash book balance before preparing the bank reconciliation statement reduces the number of items that cause a difference between the cash book and passbook balances.

Therefore, such adjustment procedures help in determining the balance as per the bank that goes into the balance sheet.

The above case presents preparing a bank reconciliation statement starting with positive bank balances.

However, there can be situations where your business has overdrafts at the bank.

As mentioned above, bank overdraft is a condition where a bank account becomes negative as a result of excess withdrawals over deposits.

Now, such a figure is shown as a credit balance in your cash book. However, in the bank statement, such a balance is showcased as a debit balance and is known as the debit balance as per the passbook.

Therefore, an overdraft balance is treated as a negative figure on the bank reconciliation statement.

Other Points to Remember

As per the rules mentioned above, balance as per the cash book is the starting point for preparing a bank reconciliation statement (BRS). However, you can also start with balance as per passbook for preparing a BRS. In case you do so, the treatment for all the items mentioned above shall be reversed. Accordingly:

• cheques issued but not yet presented are deducted from the balance as per the passbook
• cheques deposited but not yet collected are added back to the balance as per the passbook
• dishonored bills and cheques are added back to balance as per passbook
• charges in respect of interest on an overdraft are added back to balance as per passbook

There can be four different scenarios while preparing a bank reconciliation statement. These include:

• debit balance or favourable balance as per cash book is given and balance as per passbook needs to be determined
• credit balance or unfavorable balance as per cash book is given and balance as per passbook needs to be determined
• credit balance or favourable balance as per passbook is given and balance as per cash book needs to be determined
• debit balance or unfavorable balance as per passbook is given and balance as per cash book needs to be determined
• Preparation of Bank Reconciliation Statement After Adjusting the cash book Balance

Typically, the difference between the cash book and passbook balance arises due to the items that appear only in the passbook. Therefore, it makes sense to first record these items in the cash book to determine the adjusted balance of the cash book.

Once the adjusted balance of the cash book is worked out, then the bank reconciliation statement can be prepared. In this way, the number of items that cause the difference between the passbook and the cash book balance gets reduced. Furthermore, it gets easier to ascertain the correct amount of balance at the bank in the balance sheet.

This means that only those items that cause a difference due to a time lag in recording appear in the bank reconciliation statement. These items may include:

• cheques issued but not yet presented
• cheques deposited but not yet collected
• error in passbook, etc

Therefore, the bank reconciliation statement using this approach is prepared by following the steps below:

• specify the balance as per passbook as the first item in the bank reconciliation statement
• add cheques issued but not yet presented for payment
• deduct cheques deposited but not yet collected or credited
• deduct cheques debited in error

After adjusting all the above items what you get is the adjusted balance of the cash book.

Bank Reconciliation Problems

The purpose behind preparing the bank reconciliation statement is to reconcile the difference between the balance as per the cash book and the balance as per the passbook.

Now, the differences between the cash book and passbook balance occur primarily due to the following reasons:

Timing Differences in Recording of Transactions

When you compare the balance of your cash book with the balance showcased by your bank passbook, there is often a difference.

One of the primary reasons responsible for such a difference is the time gap in recording the transactions of either payments or receipts.

Various factors affect such a time gap. These include:

Cheques Issued by the Bank But Not Yet Presented for Payment

When your business issues a cheque to its suppliers or creditors, such amounts are immediately recorded on the credit side of your cash book.

However, there might be a situation where the receiving entity may not present the cheques issued by your business to the bank for immediate payment.

The bank will debit your business account only when the bank pays these issued cheques.

So, this means there is a time lag between the issue of cheques and its presentation to the bank.

Such a time lag is responsible for the differences that arise in your cash book balance and your passbook balance.

Cheques Paid into the Bank But Not Yet Collected or Credited

When your business receives cheques from its customers, such amounts are recorded immediately on the debit side of the cash book.

As a result, the balance as per the cash book increases. However, there may be a situation where the bank credits your business account only when the cheques are actually realised.

It is important to note that it takes a few days for the bank to clear the cheques. This is especially common in cases where the cheque is deposited at a bank branch other than the one at which your account is maintained.

Thus, such a situation leads to the difference between bank balance as per the cash book and balance as per the passbook.

Debits Made by the Bank on behalf of the Customer

At times, your bank may deduct certain amounts associated with various services directly from your bank account without your knowledge.

You come to know about such deductions only when you receive the statement from the bank.

The deductions may include:

• cheque collection charges
• incidental charges
• interest on overdraft
• unpaid cheques deducted by the bank (bounced cheques)

Thus, such debits made by the bank directly from your bank account lead to a difference between the balance as per cash book and the balance as per the passbook.

Direct Deposits into the Bank Account

At times, your customers directly deposit funds into your business’ bank account. But, your business entity does not receive any indication about this until the time it receives the bank statement.

In such a case, your bank has recorded the receipts in your business account at the bank. However, you did not record such a transaction in your cash book. As a result, the balance showcased in the bank passbook would be more than the balance shown in your company’s cash book.

Interest and Dividends Collected by the Bank

Your bank may collect interest and dividends on your behalf and credit such an amount to your bank account.

But, you will record such transactions only in your business' cash book only when you receive the bank statement. Until then, your balance as per the cash book would differ from the balance as per the passbook.

Direct Payments Made by the Bank

At times, you might give standing instructions to your bank to make some payments regularly on specific days to the third parties. For instance, insurance premiums, telephone bills, rent, sales taxes, etc are directly paid by your bank on your behalf and debited to your account.

As a result of such direct payments made by the bank on your behalf, the balance as per the passbook would be less than the balance as per the cash book.

Cheques Deposited or Bills Discounted Dishonored

There are times when your business entity deposits a cheque or draws a bill of exchange discounted with the bank. However, such deposited cheques or discounted bills of exchange drawn by your business entity get dishonored on the date of maturity.

As a result, the bank debits the amount against such dishonored cheques or bills of exchange to your bank account.

Such information is not available to your business immediately. Therefore, you record no entry in the business' cash book for the above items.

You will know about such information only when you receive the bank statement at the end of the month.

As a result, your balance as per the passbook would be less than the balance as per the cash book.

Errors Made by Your Business or your Bank

At times, the balance as per the cash book and passbook may differ due to an error committed by either bank or an error in the cash book of your company.

The following are the errors that can be committed on the part of the bank as well as your company:

Errors Committed by your Business While Recording Transactions

At times, your business entity may omit or record incorrect transactions for cheques issued, cheques deposited, the wrong total, etc.

Such errors are committed while recording the transactions in the cash book. As a result, the balance as per the cash book differs from the passbook.

Required Information to Create a Bank Reconciliation Statement

In order to prepare a bank reconciliation statement, you need to obtain the current as well as the previous month’s bank statements and the cash book.

Then you need to prepare a bank reconciliation statement. This is done by taking into account all the transactions that have occurred until the date preceding the day on which the bank reconciliation statement is prepared.

Ensure that you take into account all the deposits as well as the withdrawals posted to an account in order to prepare the bank reconciliation statement.

Bank Reconciling Statement: Adjusting Balance per Bank

You need to adjust the closing balance of your bank statement in order to showcase the correct amount of withdrawals or the cheques issued but not yet presented for payment.

Such cheques are the ones that have been issued by your business, but the recipient has not presented them to the bank for the collection of payment.

For instance, you issue a cheque on November 30. When you prepare the bank reconciliation statement for the month of November as on November 30, 2019, the cheque issued on November 30 is unlikely to be cashed by the bank.

Therefore, you need to deduct the amount of these cheques from your bank balance.

In addition, there may be cases where the bank has not cleared the cheques, however, the cheques have been deposited by your business. Banks take time in clearing cheques. Therefore, the bank needs to add back the cheque's amount to the bank balance.

Bank Reconciling Statement: Adjusting Balance per cash Books

There are times when the bank may charge a fee for maintaining your account. Such a fee is typically deducted automatically from your account. Therefore, while preparing a bank reconciliation statement you must account for any fees deducted by the bank from your account.

In addition to this, the interest or dividends earned on investments is directly deposited into your bank account after a specific period of time. Therefore, you need to pass a journal entry in your books of accounts showcasing the increase in cash balance due to the interest or dividend earned.

Finally, when all such adjustments are made to the books of accounts, the balance as per the cash book must match that of the passbook.

If both the balances are equal, it means the bank reconciliation statement has been prepared correctly.

Company’s Process for Preparing its Bank Reconciliation

The bank reconciliation procedure includes the following general steps:

• The first step is to determine if there are any differences between each amount reflected on your company’s bank statement with each and every amount showcased in the company’s cash book.
• Once you identify the differences between balance as per the cash book and balance as per the passbook, you need to figure out the correct or the adjusted balance for your company’s cash. This is done by first listing your bank’s unadjusted cash balance, your company’s unadjusted cash balance, and then finally listing out the differences that you were able to figure out between the two balances.
• Finally, when you are able to figure out the differences between your cash balance and bank balance, you need to make adjustments to your company’s cash account.

The below steps are a deeper dive into the bank reconciliation process:

Step #1: Match Each Item On the Bank Statement With Every Item in Your Company’s Cash Account

• First, compare each and every deposit processed by your bank with the cash receipts or cash proceeds recorded in your company’s cash book. Check if there are any differences due to deposits in transit or any other errors committed by your bank. Such differences must be showcased on your bank reconciliation statement.
• Next, match the amount of each and every cheque paid or cleared by your bank with each and every amount reflected in your company’s cash book. In case there are any differences, due to outstanding cheques or any other errors, specify the differences in your company’s bank reconciliation statement.
• Finally, match all the other items reflected in your company’s bank statement with the items showcased in the company’s cash book. In case there are any differences between the two balances due to bank fees, dishonored due to insufficient funds, etc, record such differences in the bank reconciliation statement.

Step #2: Work Out the Balance as Per Bank Side of the Bank Reconciliation Statement

Once you determine the differences between the balance as per the cash book and the balance as per the passbook, you need to start working on the balance as per the bank portion of your bank reconciliation statement.

To do this, follow the steps below:

• First, mention the unadjusted balance from your company’s bank statement as the first item of the Balance Per Bank side of your Bank Reconciliation Statement.
• Next, you need to add the Deposits in Transit, that is, the deposits not showcased in the bank statement on the reconciliation date. This happens due to the time lag between when your business deposits cash or cheque into its bank account and when your bank credits the same.
• Then, deduct outstanding cheques, if there are any. Outstanding cheques refer to Cheque payments that have been recorded in the books of accounts of the issuing company but have not been cleared by the bank yet. This amount is deducted from the cash balance.
• Next, add or deduct any other items along with their amounts that were not recorded correctly by your bank.
• Finally, total the amounts reflecting the above adjustments and show the total amount at the bottom as ‘Adjusted Balance As Per Bank’.

Step #3: Work Out the Balance as Per Cash Book Side of the Bank Reconciliation Statement

Once you complete the balance as per the bank, the next step is to work out the balance as per the cash book

To do this, follow the steps below:

• First, mention the unadjusted balance that appears on your company’s General Ledger Cash Account as the first item of the Balance Per Cash Book side of your Bank Reconciliation Statement.
• Next, you need to add any Credits made to the company’s bank account by the bank on account of interest earned, bank credit notes, etc. If you have not already recorded these credits, you can add them now.
• Then, deduct any Charges that have been automatically debited by the bank directly. 
• Next, add or deduct any other items along with their amounts that were not recorded correctly by your company.
• Finally, total the amounts reflecting the above adjustments and show the total amount at the bottom as Adjusted Balance As Per Cash Book.

Step #4: Make Sure That the Balance As Per Bank Matches With the Balance As Per Cash Book

Once you have incorporated the adjustments in the bank reconciliation statement, you have to ensure that the totals of both sides mentioned at the bottom match.

In other words, the adjusted balance as per the bank must match with the adjusted balance as per the cash book.

Step #5: Record All The Adjustments As Per Cash Book Into Your Company’s General Ledger Cash Account

After adjusting the balance as per the cash book, make sure that you record all adjustments in your company’s general ledger accounts. 

You must post the journal entries of all the adjustments made to the balance as per the cash book. Once you post the journal entries into your company ledger accounts, make sure that the cash account balance is equal to the adjusted balance per cash book shown in the bank reconciliation statement.

Which of the following must be deducted from the bank statement balance in preparing a bank reconciliation which ends with an adjusted cash balance?

Which of the following would be deducted from the balance per bank statement in a bank reconciliation?

Which of the following would be deducted from the balance per bank statement to arrive at the correct cash balance?

Are fees deducted from the bank statement for the bank's processing of the checking account activity?