What is Bank Reconciliation

Welcome Friends, you are welcome to learnvern. I am Anshu Sachan.

In the last session we saw about fixed assets that whenever we do some expense, will it be considered under asset or expense.

Now we are going to look into various depreciation policies. So what is the depreciation policy? You can see on the screen that there are 2 types of depreciation policy - 1 is Straight Line Method & other is Written Down Method.

Which one? Straight Line Method & other is Written Down Method. What is the Straight Line Method? We decide a rate that is 10% or 15% on Cost. That means that if our value is 10 Lakhs then every year we will carry out its depreciation value at 10% that is 10,000 10,000, 1 lakh 1 lakh, 1 lakh.

And what is in Written Down? We use Reducing balance.

For example, if you purchased an asset worth 1 lakh & you have decided 10% Written Down Value. So 1 lakh, what is its 10%? 10,000. So the depreciation for the 1st year will be 10,000. What is its value at the end of the first year? 90,000.

So what will happen in the 2nd year? 90,000 multiplied by 10%, means 9,000, okay? As the cost is reduced, its depreciation cost will decrease as well.

While what do we do in a straight line method? We evenly divide the cost, which means it will be the same every year.

I have prepared an excel to show you. You can see on the screen that I have purchased a motor vehicle worth 5 lakhs, okay? Then like I had told you, the management needs to decide the expected working life of the vehicle.

You can see that the expected life is 9 years, okay?

I feel that the motor vehicle that I have purchased will run for 9 years, okay?

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2nd is Salvage Value. What is Salvage value? Salvage value means when you sell that asset, whether it is in scrap or to some 2nd hand user, the value will be around this. Look, 2 things are expected here. I am expecting 2 things here, that is that it will go on for 9 years, which can turn out right or wrong. But what am I doing? I am taking my best judgement by gathering information from all around me that it will work for 9 years, okay? And what is the 2nd thing? If I’m selling it after 9 years, I will get the amount around 50,000 whether it's in scrap or 2nd owner or customer, okay? So you have to decide 2 things, one is expected value & other is salvage value.

Now what will happen? Amount of Depreciation. What is the formula to calculate Amount of Depreciation? Whatever is your Cost, what is it? 5 lakhs minus, you have to deduct. What? Salvage value. Which you will get at the end of the expected life, maybe 50,000. And you will divide it with what? With its expected life. So what will it be? Cost minus Salvage value divided by Expected Life.

That means, 5 lakhs minus 50,000. What will it be? 4,50,000 divided by 9. What will be the result? 50,000. That means what will you do? Every year you will book depreciation expenses. What will you do? You will book depreciation expenses. So what will be the journal entry? It’s entry will be depreciation expense debit to provision for depreciation. Understood? I understood the depreciation expense. What happened below? It’s a provision for depreciation. What will we do here? We follow the historical cost concept. Oh, this is new!

What does historical cost mean? Historical cost means the amount at which we have purchased the asset, we will need to show the same amount in the balance sheet. For example, we have purchased this motor vehicle at what price? I bought it for 5 lakhs. So what will be the amount shown in fixed assets? It will be 5 lakhs. And what will we subtract it from? Provision for depreciation. That means I am providing provision, providing depreciation for however long the vehicle will work.

Means we will subtract 5 lakhs, provide depreciation for 50,000, the value in the outer column will be 4,50,000. Are you understanding it? We are trying to match your balance sheet amount to the market value so that your balance sheet shows you a proper position. So this was a small demo about how you can decide your depreciation amount. -4:54

So friends, let’s see the 2nd depreciation method which is WDV, Written Down Value, right? As you can see on the screen, we have purchased machinery for 1 lakh, okay? And when have we purchased it? On 1st January 2020. Which depreciation method have we used? Written Down Method which we call WDV method, right? Then what do we have to do? What is the rate of Depreciation? 10% annually, right? So what are we doing? We will check in the 1st year how much depreciation will be counted in the first year. What is the cost? 1 lakh. Then what will be the depreciation @ 10%? 10,000. So at the end of 1 year, what will be the amount? Written down value? 90,000. Okay?

So until now, there is no problem in the Straight Line Method & Written Down Method, both are going at the pace, okay? When does the change come? In Second Year, if you remember friends, in the Straight Line Method the depreciation amount stays the same, okay? But in Written Down Value, we take the depreciation % but what do we take it on? On Written Down Value. Here , in the 2nd year, the value went down 90%, okay?

And how much depreciation did we count on it? 10% which comes to 9,000. Therefore what will be the Written Down Value at the end of 2nd year? 81,000. Right? Then what about 3rd year? We will take 10% of 81,000, that is 8100. So we will keep doing Written Down in this manner. That is why it is called the Written Down Method, which means that every year its value keeps decreasing, right? And what is the Straight Line Method? Straight Line stands up to its name. What is a Straight Line? To depreciate the same amount every year, okay everyone?

Let’s move forward to Bank Reconciliation. Now what does Bank Reconciliation mean? Understood Fixed Assets, Depreciation, so the fixed assets portion is completed. Now we will talk about banks. Now if you look at the balance sheet of any organisation, then first we will get fixed assets & then we will get current assets in the balance sheet. I am going stepwise only about how it will look on the balance sheet. We talked about fixed assets, now we will talk about current assets. If you remember, what did I show in current assets? One was Inventory, one was Trade Debtors, one was Petty Cash & Bank, right? And the fourth was Fixed Deposit which is released in 90 days & a short term investment. Hence the bank is a part of the current asset. Is it necessary to categorise? It is necessary to categorise because just as you do ratio analysis, you must have heard about Fixed Asset Ratio, Quick Ratio, Acid - Test Ratio, Liquidity Ratio, all of these are data analytic tools. If we haven’t made a proper bifurcation regarding current assets, fixed assets, they will show a false ratio, the liquidity ratio will be wrong.

Understood? I will explain what Ratio Analysis is as we move ahead. So it is necessary to define anything into Fixed Asset, Current Asset, Non Current Asset, Liability, Current Liability. So let’s move forward to know about Bank Reconciliation.

Reconciliation means you have to reconcile between 2 things. Means you have to match it with each other. It’s very simple, all you have to do is match it. When will that happen? When two different people are making the same thing, that time Bank Reconciliation happens. Suppose you are doing a business, right? You issued a cheque to someone, means you have given a cheque to someone, you will do a book recording as well.

Suppose you gave me 5 lakh rupees, okay? What will you write? Mr. Pradip debit, To Bank 5 lakhs. That means you are maintaining your account also, in that account you are maintaining a bank ledger as well. You credited 5 lakhs. Are you understanding? When I present the cheque in the bank, 5 lakhs will go from your account. That means the bank is also maintaining your ledger. Whose? Your business’. Are you understanding? Which means that one bank statement, bank ledger is maintained by 2 people of each other. So obviously there shouldn't be any difference because I issued & the bank has done the payment, okay?

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So both the balances should match, that means the balance in my books of accounts & the amount in the bank statement should match. This process of matching is called Bank Reconciliation, okay? What is written here? ‘Reconciliation means comparison between two records’ made by the two parties. You might have heard about ‘Wages Reconciliation’. What is in it? ‘Payroll’ is different, ‘HR Department’ is different & ‘Admin Department’ is different, okay? Book Keeping is done by the Admin Department & HR Department does the payment. So 1 thing is maintained by both of them separately, that is where Reconciliation takes place, okay?

So let’s see a very basic example of GST, okay? After we file for GST Return, what do we do? We do Reconciliation that our GST Liability according to books of accounts should be the same as with the department. Are you understanding? There’s only 1 thing but both the parties are making it according to themselves, that is where Reconciliation comes.

Whether it is Payroll Reconciliation, that is Wages Reconciliation, Bank Reconciliation or VAT/GST Reconciliation. We are talking about Bank here. So we need to remember 2 things, we will compare 2 things - one is your Bank Ledger in your Books of Accounting & other is Bank Statement, okay? Who will give you a bank statement? Bank will give, right? And remember one other thing, that it should be of the same period, only then the Reconciliation will take place.

Such as if I am maintaining January’s Bank Ledger, if I am seeing January in the Books of Accounting and I have the statement of February, then it won’t match, right? Because January will have January’s transaction so we have to match it with January’s statement only. So whenever you are about to do bank reconciliation, first of all, see the name of the bank as you can maintain multiple banks together, right? And if you have 4 or 5 different banks, then with which bank am I going to reconcile, look at the name, see the bank account number & based on that, look at the Books of Accounts ledger. Alright?

What is the other thing we have to see? That it should be of the same period, okay? Both should be of the same period. Now, why should I do Bank Reconciliation? What is the importance? What is the need? To confirm that Bank balance as per book agrees with the balance as per bank statement or not. Understood? As we will move ahead with our session of Bank Reconciliation, that time we will see that there are multiple errors when the bank balance & my balance are not matching, okay?

Can it happen that our balances are not matching? Yes, that can certainly happen, okay? We will see ahead the reasons for the balance not matching. But for now, understand that we have to compare 2 things, one is a bank ledger & second is bank statement, okay? What errors can be there? If I define errors and there are differences, so if the balance is not matching, there can be 2 reasons, okay? We can define it in mainly 2 errors - one is presentation error & second is omission error, okay? Now what is Presentation, Omission & Bank Reconciliation statement. See, the short form is BRS. Guys, this is very much important. BRS, Bank Reconciliation Statement is very important in practical life. If you go in any interview, they will surely ask if you know how to make a Bank Reconciliation Statement or not, okay?

We will see in the next session how to make a Bank Reconciliation Statement, how to add and subtract & only we can decide that BRS, Bank Reconciliation Statement is rightly made or not, okay? So what is the necessity? Suppose this is your bank balance according to books of accounts 4,500, okay? And what did you do? We had to issue a cheque of 4,200. But the books of accounts show a 4,500 balance. I will issue a cheque of 4,200. You paid a 4,200 cheque which I presented in the bank but it bounced. What was the reason? Insufficient balance. So what happened? You said, “In my books of Accounting, it is showing 4,500.” right? Then how did it happen? What happened was, the bank had dedicated charges from your account. Bank Account charge. Means they deducted 500 for the Account Handling charges which hasn’t been recorded in the books of accounts.

Because generally, this is known when you fetch the statement from the bank. Nowadays there is a system of receiving a message as soon as the amount is deducted & you will get a real time update. Suppose you got that message but you made a mistake and you did not record it. Then according to you, the balance should be 4,500. But how much is it? 4000. And what amount did we issue the cheque for? 4,200. But what happened? It bounced as the balance was insufficient. So what is the solution? What should I do so that this thing doesn’t repeat? The cheque getting dishonoured again & again is not a good impression in the market, okay?

If my cheque gets bounced, it affects the credit, alright? What is the solution for it to not happen again? Bank Reconciliation should be done. If we use this Bank Reconciliation tool, then we will be able to avoid these things, okay? If you have any queries or comments, click the discussion button below the video and post there. This way, you will be able to connect to fellow learners and discuss the course. Also, Our Team will try to solve your query.

In the next video, we will see how to make a statement. Okay? Until then Thank You.