Bank Reconciliation Statement
Introduction
A Bank Reconciliation Statement (BRS) is a statement prepared mainly to reconcile the difference between the 'Bank Balance as per Cash Book' and the 'Bank Balance as per Pass Book' on a specific date.
Concept of Balances
| Book | Debit Balance | Credit Balance |
|---|---|---|
| Cash Book | Favorable (Asset) | Unfavorable (Overdraft) |
| Pass Book | Unfavorable (Overdraft) | Favorable (Asset) |
Note: Unless specified, 'Balance as per Cash Book' means Debit (Favorable) and 'Balance as per Pass Book' means Credit (Favorable).
Causes of Difference
1. Timing Differences
Transactions recorded in one book but not yet recorded in the other due to time gap.
- Cheques issued but not yet presented for payment: Reduces Cash Book balance immediately, but Pass Book balance remains high until presented.
- Cheques deposited but not yet collected/cleared: Increases Cash Book balance immediately, but Pass Book balance remains low until cleared.
2. Transactions recorded by Bank only
- Interest allowed by Bank (Increases Pass Book).
- Bank Charges/Interest on Overdraft (Decreases Pass Book).
- Direct deposit by customer into bank (Increases Pass Book).
- Direct payments by bank (e.g., Insurance premium) as per standing instructions (Decreases Pass Book).
- Dishonor of cheques/bills discounted.
3. Errors
- Errors committed in recording transactions by the firm or by the bank (e.g., Wrong amount, wrong side, wrong totaling).
Procedure for Preparing BRS
Rule of Thumb: "Do whatever the other book has done." (If you start with Cash Book balance, adjust it to match Pass Book).
Starting point: Balance as per Cash Book (Dr.)
- ADD: Items that have increased Pass Book balance (e.g., Cheques issued but not presented, Interest allowed, Direct deposits).
- LESS: Items that have decreased Pass Book balance (e.g., Cheques deposited but not cleared, Bank charges, Direct payments).
Result: Balance as per Pass Book (Cr.)
Starting point: Balance as per Pass Book (Cr.)
- ADD: Items that have increased Cash Book balance (e.g., Cheques deposited but not cleared, Payments recorded in CB).
- LESS: Items that have decreased Cash Book balance (e.g., Cheques issued but not presented, Receipts recorded in CB).
Result: Balance as per Cash Book (Dr.)
Amended Cash Book Method
To ascertain the correct bank balance, the Cash Book is first adjusted/amended for items recorded only in Pass Book (Bank Charges, Interest, etc.) and errors in Cash Book.
- Step 1: Prepare Adjusted Cash Book.
- Step 2: Prepare BRS using the Amended/Adjusted Cash Book Balance as the starting point.
Importance of BRS
- Ensure accuracy of balances.
- Detects errors and frauds (e.g., embezzlement).
- Helps in keeping a track of cheques (unpresented/uncleared).
- Reflects actual bank balance.
Numericals & PYQs
Part A: Numericals (10 Questions)
Add to Cash Book Balance.
Since cheques issued reduced CB balance, but PB balance is higher. So, add ₹2,000.
Balance as per PB = 10,000 + 2,000 = ₹12,000
Add means increasing Overdraft.
Bank charges reduce PB balance (increase OD in PB). To match CB overdraft with PB overdraft, we must increase CB OD.
OD as per PB = 5,000 + 100 = ₹5,100
Add to PB Balance.
Depositing cheques increased CB. PB is lower. To reach CB from PB, we must Add.
Balance as per CB = 20,000 + 5,000 = ₹25,000
Credit Balance in CB = Overdraft.
Direct deposit increases actual bank balance (reduces OD). So, Subtract from OD.
OD as per PB = 2,000 - 1,000 = ₹1,000
Dr. Balance in PB = Overdraft.
Outgoing cheque recorded twice means CB balance reduced excessively (OD increased). PB OD is lower.
Start: OD per PB (10k). Goal: OD per CB. We must Add.
OD as per CB = 10,000 + 1,000 = ₹11,000
+ Interest (200) - Insurance (500) = Net -300.
PB Balance = 5,000 + 200 - 500 = ₹4,700
Depositing increased CB. Dishonor means PB did not increase. PB is lower.
Less: ₹5,000.
Wrong debit reduces PB balance. PB is lower.
Less: ₹500.
Undercast payment means CB balance is shown higher than actual. PB is lower.
Less: ₹100.
Only Bank Charges affect Adjusted CB. Unpresented cheque goes to BRS.
Adjusted CB Bal = 10,000 - 50 = ₹9,950
Part B: Previous Year Questions (PYQs) (10 Questions)
Account Holder (Customer).
Overdraft (Unfavorable balance).
Outstanding Cheques.
Bank column of Cash Book and Bank Pass Book.
Trial Balance (Note: BRS purpose is reconciliation, not arithmetic check).
Added.
To identify causes of difference between Cash Book and Pass Book.
Debit Balance.
Deducted from Cash Book Balance.
Statement (Not an Account).