Bank Reconciliation Statement

Need For Reconciliation

In any business, maintaining a bank account is essential for managing cash flows efficiently and securely. The business keeps a record of its bank transactions in the Cash Book (specifically, the Bank column of the Cash Book or Double Column Cash Book). Simultaneously, the bank also maintains a record of the customer's transactions in its books, and periodically sends a statement to the customer, known as the Bank Statement or Pass Book.

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Ideally, the balance shown in the Bank column of the Cash Book should match the balance shown in the Pass Book on any given date. However, in practice, these balances often differ. A Bank Reconciliation Statement (BRS) is a statement prepared to reconcile (explain) the reasons for this difference between the bank balance as per the Cash Book and the bank balance as per the Pass Book on a particular date.

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The main reason for the difference is the time lag between the recording of transactions in the Cash Book and their recording in the Pass Book, or vice-versa, as well as potential errors.

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Reasons for Difference between Cash Book and Pass Book Balances

The discrepancies arise due to various reasons, which can be broadly classified as timing differences and errors.

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Timing Differences

These occur when a transaction is recorded in one book but not yet in the other due to the time taken for processing.

Cheques Issued By The Business But Not Yet Presented For Payment:

When a business issues a cheque to a supplier or other party, it immediately reduces the bank balance in its Cash Book. However, the bank will only reduce the balance in the Pass Book when the cheque is presented to the bank for payment by the payee. If the payee does not present the cheque immediately, or if the reconciliation is done before the cheque is cleared, there will be a difference.

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Cheques Paid Into The Bank But Not Yet Collected (Credited):

When a business receives cheques from customers (Debtors) and deposits them into the bank, it immediately increases the bank balance in its Cash Book. However, the bank takes some time to collect the amount from the drawer's bank and credit the amount to the business's account in the Pass Book. If the BRS is prepared before the cheques are cleared and credited by the bank, there will be a difference.

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Direct Debits Made By The Bank On Behalf Of The Customer (Standing Instructions):

Sometimes, a customer gives the bank standing instructions to make recurring payments directly from their account (e.g., insurance premium, loan instalment, electricity bill payment via Nach). The bank makes these payments and debits the customer's account in the Pass Book. The business may only become aware of this when they receive the Bank Statement.

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Amounts Directly Deposited In The Bank Account By Customers:

Customers (Debtors) might directly deposit money into the business's bank account using NEFT, RTGS, UPI, or cash deposit machines. The bank credits the amount in the Pass Book. The business may only become aware of this when they receive the bank alert or statement.

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Interest And Dividends Collected By The Bank:

The bank may collect interest on investments or dividends on shares held by the business and credit the amount directly to the business account in the Pass Book. The business records this in the Cash Book only when informed by the bank.

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Direct Payments Made By The Bank On Behalf Of The Customers (Bank Charges, Interest Charged):

The bank debits the customer's account in the Pass Book for various charges (e.g., ATM charges, SMS alert charges, minimum balance charges, interest on overdraft). The business records these in the Cash Book only when informed by the bank statement.

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Cheques Deposited/Bills Discounted Dishonoured:

When a cheque previously deposited or a bill previously discounted is dishonoured by the drawer's bank, the bank debits the business's account in the Pass Book. The business records this only when informed by the bank.

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Differences Caused By Errors

Errors committed by either the business while recording in the Cash Book or by the bank while recording in the Pass Book can also cause a difference.

Errors Committed In Recording Transaction By The Firm (In Cash Book):

• Omitting to record a transaction (e.g., forgetting to record a cash deposit).
• Recording a wrong amount (e.g., recording ₹1,000 instead of ₹10,000).
• Recording on the wrong side (e.g., recording a receipt on the payment side or vice-versa).
• Casting errors (errors in totalling) in the Cash Book.

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Errors Committed In Recording Transactions By The Bank (In Pass Book):

• Making an entry in the wrong account.
• Recording a wrong amount.
• Recording on the wrong side (debiting instead of crediting, or vice-versa).

Reconciling the balances periodically helps identify and rectify such errors.

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Need for Reconciliation:

Preparing a BRS is important for:

• Checking the accuracy of entries in the Cash Book and Pass Book.
• Detecting errors made by either the business or the bank.
• Ascertaining the true bank balance on a given date.
• Preventing fraud or manipulation (especially relevant for internal control).

It is a vital internal control mechanism for cash management.

Preparation Of Bank Reconciliation Statement

The Bank Reconciliation Statement is a statement prepared to explain the differences between the balance as per Cash Book and the balance as per Pass Book on a specific date. It is prepared by starting with one balance and making adjustments (additions and deductions) for the items causing the difference to arrive at the other balance.

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Preparation Of Bank Reconciliation Statement Without Adjusting Cash Book Balance

In this method, the BRS is prepared as a separate statement. The Cash Book entries themselves are not changed during the reconciliation process (though errors found in the Cash Book should ideally be corrected in the Cash Book first before preparing the BRS). However, the BRS itself lists the items that cause the discrepancy between the original Cash Book balance and the Pass Book balance.

There are different starting points for preparing a BRS:

1. Start with Debit balance as per Cash Book (Favourable).
2. Start with Credit balance as per Cash Book (Overdraft).
3. Start with Credit balance as per Pass Book (Favourable).
4. Start with Debit balance as per Pass Book (Overdraft).

The rules for adding or subtracting items depend on the starting point and whether you are trying to reach the Pass Book balance or the Cash Book balance. Let's focus on starting from the Cash Book balance to arrive at the Pass Book balance.

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Dealing With Favourable Balances

A favourable balance is a Debit balance as per Cash Book and a Credit balance as per Pass Book. It means the business has funds in the bank account.

Starting with Debit Balance as per Cash Book:

To reconcile the Cash Book balance with the Pass Book balance, we add items that increased the Pass Book balance compared to the Cash Book and subtract items that decreased the Pass Book balance compared to the Cash Book (or items that decreased Cash Book but not Pass Book, and vice versa).

Bank Reconciliation Statement as on [Date]

Particulars	Amount (₹)	Amount (₹)
Debit Balance as per Cash Book		[Starting Balance]
Add:
Cheques deposited but not yet collected	[Amount]
Interest allowed by bank (not in Cash Book)	[Amount]
Dividend collected by bank (not in Cash Book)	[Amount]
Direct deposit by customer (not in Cash Book)	[Amount]
Errors increasing Pass Book balance or decreasing Cash Book balance wrongly	[Amount]
		[Total Additions]
Subtotal		[Starting Balance + Total Additions]
Less:
Cheques issued but not yet presented for payment	[Amount]
Bank charges (not in Cash Book)	[Amount]
Direct payment by bank as per standing instructions (not in Cash Book)	[Amount]
Cheque deposited/Bill discounted dishonoured (not in Cash Book)	[Amount]
Errors decreasing Pass Book balance or increasing Cash Book balance wrongly	[Amount]
		[Total Deductions]
Balance as per Pass Book (Credit)		[Subtotal - Total Deductions]

Answer:

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Starting with Credit Balance as per Pass Book:

The rules for Add/Less are reversed compared to starting with Cash Book Debit balance.

Bank Reconciliation Statement as on [Date]

Particulars	Amount (₹)	Amount (₹)
Balance as per Pass Book (Credit)		[Starting Balance]
Add:
Cheques issued but not yet presented for payment	[Amount]
Bank charges (not in Cash Book)	[Amount]
Direct payment by bank as per standing instructions (not in Cash Book)	[Amount]
Cheque deposited/Bill discounted dishonoured (not in Cash Book)	[Amount]
Errors decreasing Pass Book balance or increasing Cash Book balance wrongly	[Amount]
		[Total Additions]
Subtotal		[Starting Balance + Total Additions]
Less:
Cheques deposited but not yet collected	[Amount]
Interest allowed by bank (not in Cash Book)	[Amount]
Dividend collected by bank (not in Cash Book)	[Amount]
Direct deposit by customer (not in Cash Book)	[Amount]
Errors increasing Pass Book balance or decreasing Cash Book balance wrongly	[Amount]
		[Total Deductions]
Balance as per Cash Book (Debit)		[Subtotal - Total Deductions]

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Dealing With Overdrafts

An overdraft is a Credit balance as per Cash Book and a Debit balance as per Pass Book. It means the business has withdrawn more money than available in the bank account (with prior arrangement with the bank).

Starting with Credit Balance as per Cash Book (Overdraft):

When starting with an overdraft balance, the items that were added in the favourable balance scenario are now subtracted, and items that were subtracted are now added. Think of overdraft as a negative balance.

Bank Reconciliation Statement as on [Date]

Particulars	Amount (₹)	Amount (₹)
Credit Balance as per Cash Book (Overdraft)		[Starting Balance]
Add:
Cheques issued but not yet presented for payment	[Amount]
Bank charges (not in Cash Book)	[Amount]
Direct payment by bank as per standing instructions (not in Cash Book)	[Amount]
Cheque deposited/Bill discounted dishonoured (not in Cash Book)	[Amount]
Errors decreasing Pass Book balance or increasing Cash Book balance wrongly	[Amount]
		[Total Additions]
Subtotal		[Starting Balance + Total Additions]
Less:
Cheques deposited but not yet collected	[Amount]
Interest allowed by bank (not in Cash Book)	[Amount]
Dividend collected by bank (not in Cash Book)	[Amount]
Direct deposit by customer (not in Cash Book)	[Amount]
Errors increasing Pass Book balance or decreasing Cash Book balance wrongly	[Amount]
		[Total Deductions]
Balance as per Pass Book (Debit - Overdraft)		[Subtotal - Total Deductions]

Answer:

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Starting with Debit Balance as per Pass Book (Overdraft):

Similar reversal of rules as the previous case, starting with the Pass Book balance.

Bank Reconciliation Statement as on [Date]

Particulars	Amount (₹)	Amount (₹)
Debit Balance as per Pass Book (Overdraft)		[Starting Balance]
Add:
Cheques deposited but not yet collected	[Amount]
Interest allowed by bank (not in Cash Book)	[Amount]
Dividend collected by bank (not in Cash Book)	[Amount]
Direct deposit by customer (not in Cash Book)	[Amount]
Errors increasing Pass Book balance or decreasing Cash Book balance wrongly	[Amount]
		[Total Additions]
Subtotal		[Starting Balance + Total Additions]
Less:
Cheques issued but not yet presented for payment	[Amount]
Bank charges (not in Cash Book)	[Amount]
Direct payment by bank as per standing instructions (not in Cash Book)	[Amount]
Cheque deposited/Bill discounted dishonoured (not in Cash Book)	[Amount]
Errors decreasing Pass Book balance or increasing Cash Book balance wrongly	[Amount]
		[Total Deductions]
Balance as per Cash Book (Credit - Overdraft)		[Subtotal - Total Deductions]

After preparing the BRS, any errors found in the Cash Book should be rectified by passing necessary journal entries or making corrections in the Cash Book itself. Errors made by the bank should be communicated to the bank for correction in the Pass Book. The BRS itself is just a statement, not a part of the double-entry system.