Welcome Friends, you are welcome to learnvern. I am Anshu Sachan. In the last session we saw Bank Reconciliation, right? We saw what Bank Reconciliation is, we had done a comparison between 2 things. Which 2 things? One is a Bank Book according to your ledger, according to your books of accounts & second, Bank statement that the bank gives us. Today we will see that we are maintaining bank transactions in my books of accounts, okay. And the bank statement is happening according to the bank. So why would there be a difference?
Today we will see the reasons for my balance not matching with the bank balance. You can see the 2 reasons on the screen. One is Omission Error which can also be called Adjusting Difference. Look, the name is self suggestive that you need to pass some adjustments. Let’s see who will pass the adjustments. Generally, in 99% cases, I, that is the person who is keeping the Books of Accounts will pass the adjustments, okay? There is a 1% chance that the bank makes some mistake then our bank statement is revised but in 99% cases, we only will have to pass an adjustment in our books of accounts so that my balance matches as per the statement, okay?
So one is the Omission error which is also called Adjusting Difference. And second is Presentation error which can also be called Non Adjusting Difference. It is clearly known by the name itself that you have to pass adjustments in one & don’t have to in another. So let’s see when do we have to pass the adjustments & when do we not. So what is an omission error? That you missed recording a transaction. Sometimes that might happen, like we saw in the last session that the bank had debited the charges, that means the charges went away from my account, 500 got deducted from my account. I got the text also but I forgot, it got omitted from my mind so I did not pass the entry in the books of accounts.
So what happened? My balance did not match with the bank statement, alright? If you remember, the balance was 4500, 500 was cut for the charges & I had issued a cheque of 4200 because of which it bounced due to insufficient balance. Are you understanding? So what is it called? Omission error. Means it got omitted, the transaction did not record at all. When does it happen, generally? It happens when there are Bank Charges, if the bank credited some interest in your account, if a customer directly deposited in your account.
Means that is a regular customer & they have your bank details. So what did they do? They deposited directly in your account. But you haven’t taken out the statement, okay? You haven’t even reconciled. You aren’t using Bank Reconciliation so you won’t know until the customer tells you that they have deposited 5000 or 10,000 in your account. What is it called? Direct Deposit. Sometimes what happens is, we might follow the ECS system. We might have also told them to do ECS on every 10th or every 15th so the amount gets automatically deducted from our account. So you remember ECS, but it got omitted from the books of account. Are you understanding? Suppose you have taken a business loan, okay? Its installment comes on every 10th which got debited from your account but it got omitted to record in your books of account. What will happen now? Your books of accounts will have more balance while the bank statement will be less. Understood? So these are the types of transactions which might have been omitted. They are called Omission Error. What will we do if we get the error? Nothing. The error that we got, such as we have not booked an interest so if you book interest, then it will match.
And if the charges have been deducted, if you book, then the balance will match with the statement. That is why I told you previously that in 99% of cases, you will have to alter or adjust your books of accounting, okay? In rare cases, your account will falsely get the money. Most of the time this mistake does not happen, but sometimes it can happen that the bank mistakenly deposits your account, okay? It can happen & there are 1% chances of the bank revising its account.
Okay understood the omission error but what about Presentation error. What is in the Presentation Error? You’d already know that when we issue a cheque, if it’s the same bank, then it gets cleared on the same day. But if it’s some other bank, suppose I have Axis bank & you too have Axis bank, so if I gave you a cheque then it might get cleared in 1 day if they have deposited the cheque. Sometimes what happens is, we issue cheque to the customer and the customer doesn’t have time so they deposit it after 3-4 days. And if you check your balance in between, you can see that your bank balance is less but the statement is more because the cheque has not been presented yet.
What is it called? Cheque issued. Means you have issued the cheque to anyone but it has not reached the bank. For your information, I’ll tell you that any bank cheque validity is 3 months. How many months? 3 months, right? The check is valid till 3 months. You will have to revise it after 3 months, there is a validity of 90 months, alright? What is the other thing? ‘Cheque deposited but yet not cleared’. That means what have you done? You received the cheque & you will update your books of account. Suppose the customer gave you a cheque of 50,000. What entry will you give? Cash and bank. Means Bank Account debit, To that particular customer account. So what will be your Bank Balance? It increased according to your account. So what did you do? You deposited that cheque into the bank but it has not yet been cleared as the clearing process takes a couple of days, okay? So what will happen? Variation will occur. Means if you deposited it today and if you sit in the evening to do Bank Reconciliation, then your Bank Balance & your book balance won’t match. Why? Because the effect has taken place once, that is in the books of accounts but the effect is still left in the bank. Are you understanding? So this will be a presentation error in which you don’t have to pass any adjustment. What can be the ideal time to do Bank Reconciliation? Do I have to do Bank Reconciliation everyday? But I don’t have that much time. It depends on the bundle of transactions through the bank, okay? Means if your 90% transactions are happening through the Bank & the volume is more, then it’s preferable that you do Bank Reconciliation on a daily basis. But if there are less Bank transactions, then it’s advisable to do Bank Reconciliation every 15 days or every month so that you can know if the bank balance matches your book balance, okay?
So what happens ideally? You can do Bank Reconciliation every 15 days or every month. There is no predefined time that you have to do it every week or everyday or once in a year. If you do it once a year then too it will be problematic as you won’t be able to track why you are getting the difference. Suppose a cheque got dishonoured in the month of February. You deposited a cheque but it got dishonoured but you didn’t realise that because you hadn’t taken out the statement. You got to know about it right now when you are doing the BRS, Bank Reconciliation with the Statements in December, right? It doesn’t matter after 9-10 months now. So, if you want to stay updated, then it is advisable to do Bank Reconciliation every month, okay?
Is there any predefined format? Yes. There is a predefined format that if you do Bank Reconciliation in this format, then Bank Reconciliation will happen. So we will learn this. See, Bank Reconciliation statement. You can see the Bank Reconciliation Statement on the screen. What is written here? Overdraft. Overdraft means OD. There is no balance but there is negative balance. You have used more than your balance. Okay?
Then what has happened? Some things have been added, some have lessened & what will come after that? Bank Balance as per pass book. Pass book means a bank statement. Is it confirmed that first I write according to the cash book then I add, subtract according to the statement. No! You can do the reverse also. You can start with the Balance as per statement plus minus balance as per cash book. You have to decide where to go. Suppose we started balance as per statement, for example 50,000, okay? And I have to reach the balance according to the balance as per cash book. So we have to reverse the transactions of the bank. Suppose the bank has applied the charges so it has subtracted it, therefore I will add it, okay? We have to apply the reverse effect. How it is going from statement to cash. Are you understanding? Generally we have added interest on overdraft. It would be the bank who would’ve taken interest on overdraft. That means the balance would have been decreased. What are we doing here? We are adding it. The reverse effect.
We have to do the reverse effects of what the bank has done. Bank Charges. The bank would have deducted the bank charges, while we will be adding it. Do you understand what I am saying? We have to reverse what the bank is doing and then we will get a Bank Reconciliation statement. Then ‘Cheque Paid in’, means you have paid the cheque ‘but not cleared’. Okay? It increased the balance. Then comes ‘Bills Receivable dishonoured’. You had a BR but it got dishonoured. We will do plus and minus in this way, we will make a statement in this manner, look, the name is also written Bank Reconciliation Statement. This is the format according to which you will make BRS, okay?
So like I have said, there is an omission error & a presentation error. If it has been omitted, then pass an adjustment in your books of account & update the balance in the bank statement. If it is in the presentation, then show the presentation that I have issued this cheque today but it has not yet been presented in the bank, it might happen in the next month, okay?
What will be the benefit of Bank Reconciliation? If the cheque is 3 months old & the customer has not yet presented it then you can claim that they have not presented it so it became invalid so to take a fresh cheque from you. And if any customer’s cheque gets dishonoured, then they will tell the customer that the cheque given by them has been dishonoured due to insufficient balance. So a benefit through BRS, Bank Reconciliation tool, is that you will be updated about your exchanges. If there is any issue about increase or decrease, then you will know that time only. Suppose you told someone to deposit 10,000 in your account, okay? They deposited only 8,000 but kept 2000 for themselves. Then how will you know? You have written Bank debit 10,000, to cash in your books of account. So what happened? I introduced cash in my bank balance, okay? But how much did he deposit? Only 8,000. That means according to your bank balance & books of accounts, there will be a difference of 2000. But when will the difference take place? When you will do Bank Reconciliation. Therefore, you will get to know if there is a theft regarding cash or if someone has not deposited, if there is some fraud.
Did you understand? Bank Reconciliation is quite important so please utilise it in your business & even in practical life when you do a job, that time also, Bank Reconciliation will be needed. Okay??
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In the next topic we will learn about Journal Entry.
Until then Thank You.
Very good initiative .
Siddharth Nair R
I belong to science background and have almost zero knowledge of accounting but after starting the course I am gaining knowledge from the scratch as it is beautifully explained.
its quite easy to learn here
RAJESH KUMAR SAMOTA
Very good course
Amazing course content and easy to understand.Your English speaking and voice of tone is very good which a teacher needs.
Ali Kamel Abd El Aziz
The course is very important for the beginner to learn and practice. Instruction given by instructor is very easy to understand.