Bank charges are the various fees accountholders are charged in respect of maintenance of the account along with any other charges incurred in respect of specific transactions (e.g. cheque clearance charges, fund transfer charges, collection charges, etc). Bank charges are charged directly to the customer account thereby reducing the bank balance shown in the bank statement. These charges are usually not recorded by the business until the bank provides the bank statement at the end of a month which is why balance as per bank statement may be lower than the cash book balance. The difference needs to be eliminated by adjusting the cash book of the company before the preparation a bank reconciliation.
Example
ABC & Co. has been charged $500 in respect of bank charges for the month of December 2010. The Company has not yet recorded the bank charges in its books. The balance on the cash book shows a balance of $20,000. Bank statement shows the following:
| Bank Statement of ABC & Co. for the month of December 2010 | |||||
|---|---|---|---|---|---|
|
Date |
Particulars |
Opening Balance |
Debit |
Credit |
Balance |
|
01-12-2010 |
|
20,000 |
- |
- |
20,000 |
|
30-12-2010 |
Charges - December |
20,000 |
500 |
- |
19,500 |
As the bank has already debited the account of ABC & Co. in respect of bank charges, the balance as per bank statement is lower than the cash book balance by $500. In order to remove the difference, ABC & Co. must record the bank charges in its cash book before preparing the bank reconciliation. Following accounting entry must be recorded to arrive at the corrected cash book balance:
|
Debit |
Bank Charges |
$500 |
|
Credit |
Bank |
$500 |