BANK RECONCILIATION STATEMENT MEANING: Bank Reconciliation Statement is a statement prepared to reconcile the difference between the balances as per the bank column of the cash book and pass book on any given date.
NEED OF PREPARING OF BRS: It is neither compulsory to prepare Bank Reconciliation Statement nor a date is fixed on which it is to be prepared. It is prepared from time to time to check that all transactions relating to bank are properly recorded by the businessman in the bank column of the cash book and by the bank in its ledger account. Thus, it is prepared to reconcile the bank balances shown by the cash book and by the bank statement. It helps in detecting, if there is any error in recording the transactions and ascertaining the correct bank balance on a particular date.REASONS FOR DIFFERENCE: When a businessman compares the Bank balance of its cash book with the balance shown by the bank pass book, there is often a difference. As the time period of posting the transactions in the bank column of cash book does not correspond with the time period of posting in the bank pass book of the firm, the difference arises. The reasons for difference in balance of the cash book and pass book are as under: 1.Cheques issued by the firm but not yet presented for payment When cheques are issued by the firm, these are immediately entered on the credit side of the bank column of the cash book. Sometimes, receiving person may present these cheques to the bank for payment on some later date. The bank will debit the firm’s account when these cheques are presented for payment. There is a time period between the issue of cheque and being presented in the bank for payment. This may cause difference to the balance of cash book and pass book. 2. Cheques deposited into bank but not yet collected When cheques are deposited into bank, the firm immediately enters it on the debit side of the bank column of cash book. It increases the bank balance as per the cash book. But, the bank credits the firm’s account after these cheques are actually realised. A few days are taken in clearing of local cheques and in case of outstation cheques few more days are taken. This may cause the difference between cash book and pass book balance. 3. Amount directly deposited in the bank account Sometimes, the debtors or the customers deposit the money directly into firm’s bank account, but the firm gets the information only when it receives the bank statement. In this case, the bank credits the firm’s account with the amount received but the same amount is not recorded in the cash book. As a result the balance in the cash book will be less than the balance shownin the Pass book. 4. Bank ChargesThe bank charge in the form of fees or commission is charged from timeto time for various services provided from the customers’ account withoutthe intimation to the firm. The firm records these charges after receivingthe bank intimation or statement. Example of such deductions is : Intereston overdraft balance, credit cards’ fees, outstation cheques, collectioncharges, etc. As a result, the balance of the cash book will be more thanthe balance of the pass book. 5. Interest and dividend received by the bankSometimes, the interest on debentures or dividends on shares held by theaccount holder is directly deposited by the company through ElectronicClearing System (ECS). But the firm does not get the information till itreceives the bank statement. As a consequence, the firm enters it in its cashbook on a date later than the date it is recorded by the bank. As a result,the balance as per cash book and pass book will differ. 6. Direct payments made by the bank on behalf of the customersSometimes, bank makes certain payments on behalf of the customer as perstanding instructions. Telephone bills, rent, insurance premium, taxes, etcare some of the expenses. These expenses are directly paid by the bank anddebited to the firm’s account immediately after their payment. but the firmwill record the same on receiving information from the bank in the formof Pass Book or bank statement. As a result, the balance of the pass bookis less than that of the balance shown in the bank column of the cash book. 7. Dishonour of Cheques/Bill discountedIf a cheque deposited by the firm or bill receivable discounted with the bankis dishonoured , the same is debited to firm’s account by the bank. But thefirm records the same when it receives the information from the bank. Asa result, the balance as per cash book and that of pass book will differ. 8. Errors committed in recording transactions by the firmThere may be certain errors from firm’s side, e.g., omission or wrongrecording of transactions relating to cheques deposited, cheques issued andwrong balancing etc. In this case, there would be a difference between thebalances as per Cash Book and as per Pass Book. 9. Errors committed in recording transactions by the BankSometimes, bank may also commit errors, e.g., omission or wrong recordingof transactions relating to cheques deposited etc. As a result, the balanceof the bank pass book and cash book will not agree
PREPARATION OF BANK RECONCILIATION STATEMENT To reconcile the bank balance as shown in the pass book with the balanceshown by the cash book, Bank Reconciliation Statement is prepared. Afteridentifying the reasons of difference, the Bank Reconciliation statement isprepared without making change in the cash book balance. We may have the following different situations with regard to balanceswhile preparing the Bank Reconciliation statement. These are: 1. Favourable balances (a) Debit balance as per cash book is given and the balance as per pass bookis to be ascertained. (b) Credit balance as per pass book is given and the balance as per cashbook is to be ascertained. 2. Unfavourable balance/overdraft balance (a) Credit balance as per cash book (i.e. overdraft) is given and the balanceas per pass book is to be ascertained. (b) Debit balance as per pass book (i.e. overdraft) is given and the balances per cash book is to be ascertained. The following steps are taken to prepare the bank reconciliation statement:(i) Favourable balances : When debit balance as per cash book or creditbalance as per pass book is given :(a) Take balance as a starting point say Balance as per Cash Book.(b) Add all transactions that have resulted in increasing the balanceof the pass book.(c) Deduct all transactions that have resulted in decreasing thebalance of pass book.(d) Extract the net balance shown by the statement which should bethe same as shown in the pass book.In case balance as per pass book is taken as starting point all transactionsthat have resulted in increasing the balance of the Cash book will be addedand all transactions that have resulted in decreasing the balance of Cashbook will be deducted. Now extract the net balance shown by the statementwhich should be the same as per the Cash book..