when interest is allowed, the bank credits it to the customer's account. Thisincreases the balance in the pass book.

The firm would pass the corresponding entryin the cash book only when it receives the intimation from the bank or notices it inthe pass book. Hence, the cash book balance will be lower till such entry is made.b) A mounts collected by t h e bank as per t h e standing instructions: The businessmanoften issues standing instructions authorizing his banker to collect on his behalf certain amounts due to him, such as interest, dividends, etc. The bank credits thecustomer's account as and when it collects such\ amounts and sends the necessaryintimation to him. The firm will pass the\ corresponding entry in the cash book whenit receives such intimation. Sometimes the intimation may be misplaced and no entryis passed in cash book. Thus, as on the date of reconciliation, the balances as per thecash book will be lower than the balance as per the pass book.c) D irect payments into t h e bank made by firm's customers: Sometimes, a customermay directly deposit an amount into a firm's bank account. Firm shall record it in thecash book only when it learns about such deposit. But the pass book would show theentry on the date of deposit itself. If by the date of reconciliation, such entry has notbeen passed in the cash book, the balance shown by pass book will be higher thanthe balance as per cash book.d) Bank c h arges: The banks usually charge their customers for various service providedby them. They may charge for collection of outstation cheques, for making orcollecting payments on standing instructions, and so on. The bank debits thecustomer's account for such charges from time to time. However, the firm will knowabout these charges only when it goes through the pass book. So, on the date of reconciliation the pass book balance may differ from the balance as per cash book.e) I nterest on overdraft: W hen a firm avails of an overdraft facility, the bank chargessome interest which it debits to the firm's account periodically. This would reducethe balance or add to the overdraft depending upon the nature of balance in thebank. However, the corresponding entry for interest on overdraft would be passed inthe cash book only when the pass book is received. So, there may be a disagreementof the two balances on the date of reconciliation.f)

P ayments made by t h e bank as per t h e standing instructions: The businessmanissues standing instructions to his banker to make certain payments on his behalf such as insurance premium, rent, etc. W hen the banker makes such payments, hewould immediately debit the customer's account. So, the balance in the pass book would get reduced. If the corresponding entries for such payments have not beenrecorded in the cash book, the balance as per cash book would remain unchanged.g) D iscounted c h eques/bills receivable dis h onored subsequently: Sometimes, whenthe businessman deposits some outstation cheques and wants paymentimmediately, he may request the bank to credit his account immediately withoutwaiting for the actual collection. The bank usually obliges him by discounting thecheque. This means the bank deducts certain amount towards interest (calleddiscount) and credits the remaining amount to his account. Subsequently, if for somereason, such a cheque is dishonored, the bank would immediately debit the firm'saccount. But, the firm would pass the entry for the dishonor only when it receives theintimation from the bank. Thus, the balance as per cash book would differ from thebalance as per pass book till such entry has been passed. The same thing may happenwhen a discounted bill receivable is dishonored.h) Errors in t h e pass book: The bank may also commit errors while recording thetransactions in customer s accounts which may lead to disagreement of the twobalances. Examples of such errors are:i) Omitting to record certain transactions in customer's account. ii) Recording of a transaction on the wrong side of firm's account. iii) Recording of a transaction in the wrong account where the firm has more thanone account in the bank.iv) Recording of transactions which belong to some other customer in the firm'saccount. P r e p a r ation of Bank Reconciliation

S tatement : After identifying the causes of difference, the reconciliation may be done in the followingtwo ways: ( a) P reparation of bank reconciliation statement wit h out adjusting cas h book balance. ( b) P reparation of bank reconciliation statement after adjusting cas h book balance.

( a) P reparation of Bank R econciliation Statement wit h out adjusting C as h Book Balance: To prepare bank reconciliation statement, under this approach, the balance as per cashbook or as per passbook is the starting item. The debit balance as per the cash book meansthe balance of deposits held at the bank. Such a balance will be a credit balance as per thepassbook. Such a balance exists when the deposits made by the firm are more than itswithdrawals. It indicates the favourable balance as per cash book or favourable balance asper the passbook . On the other hand, the credit balance as per the cash book indicatesbank overdraft . In other words, the excess amount withdrawn over the amount depositedin the bank. It is also known as unfavourable balance as per cash book or unfavourablebalance as per passbook. W e may h ave four different situations w h

ile preparing t h e bank reconciliation statement. Th ese are: 1. W hen debit balance (favourable balance) as per cash book is given and the balance asper passbook is to be ascertained. 2 . W hen credit balance (favourable balance) as per passbook is given and the balance asper cash book is to be ascertained.3. W hen credit balance as per cash book (unfavourable balance/overdraft balance) is givenand the balance as per passbook is to ascertained.4. W hen debit balance as per passbook (unfavourable balance/overdraft balance) is givenand the cash book balance as per is to ascertained.