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Bank reconciliation in case of overdraft -Example

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In this sessions we will learn Preparation of Bank reconciliation statement in case of overdraft. When the bank balance represents an overdraft ,That is a credit balance  as per depositor book or a debit balance as per pass book,the adjustment should be made in the opposite direction of preparing normal bank reconciliation statement.For example, in case the cash book shows an overdraft  and cheques are issued in favor of creditors,overdraft as per cash book will increase.if such cheques have not yet been cashed the passbook balance will remain same,there by causing disagreement.Conversely,when cheques are paid into bank for collection the overdraft as per cash book will be reduced,but if such cheques have not been credited by the bank on the date of reconciliation,the overdraft as per passbook will not be affected.Consider the following illustration.

Note: The term Cash book as per this example refers to the bank account as per depositor books of account.

Example of overdraft bank reconciliation

  1. The pass book of a company showed an overdraft of 25225 on December 31, 2015.On comparing the passbook with the cash book the following facts were ascertained.
  2. Out of cheques worth Rs 4550 paid into bank on December 29,2015, Rs 1550 were credited in the pass book only on 2nd January.
  3. Out of 5880 worth of cheques drawn on December 28 2015 Rs 1880.00 were cashed in December itself; Rs 1500 on 3rd January and the balance not presented for payment till 10th January.
  4. Rs 880, cheque paid into bank ,did not appear in the passbook at all.
  5. There are entries in the passbook for Rs 525 interest on investments collected by the bankers and Rs 75 bank charges.
  6. There is a wrong credit in the passbook for Rs 2500 ascertain the bank balance as per the cash book by preparing a bank reconciliation statement.

Solution

Analyse the reason for disagreement

The following points should be noted while analyzing disagreement.

  • The date on which the reconciliation statement is required to be prepared.
  • The balance with which the bank reconciliation statement should be begun.

In our example

  1. The statement should be prepared as on December 31st 2015.
  2. The given balance is over draft as per Passbook.
  3. The items causing the disagreement be analysed as
  1. Rs 1550 being cheques not credited in the pass book as on 31st December should be deducted from the passbook as overdraft in the passbook is higher by this amount.
  2. Rs 4000 ( That is Rs 5880 minus Rs 1880) being cheques issued but not presented till 31st December should be added to the Pass book as overdraft in the pass book is smaller by this amount.
  3. Rs 880 being cheque paid into bank but not credited in the passbook as in point no(a).
  4. Rs 525 being interest credited in the pass book.But not in the cash book should be added to the Pass book as over draft has been reduced in the pass book by this amount.
  5. Rs 75 being bank charges debited in the passbook not in the cash book should be deducted from the passbook as over draft in the passbook has been increased by this amount.
  6. Rs 2500 being wrong credit in the passbook  should be added as the passbook over draft is smaller by this amount.
    1. First the amounts to be added should be added and then the amounts to be deducted,should be deducted.
Bank Reconciliation Statement as at December 31 2015
Bank Overdraft as per Pass book 25225
Add cheque Issued but not cashed 4000
Add Interest on investments credited by bank 525
Wrong credit given in the passbook 2500 7025
   
Less cheques paid in but not credited by bank 1550 32250
Less cheques paid in but not credited by bank 880
Bank charges debited in the pass book 75 2505
Bank balance as per cash book   29745

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