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Chapter 3: Bank Reconciliation Statement

Meaning and Need

A Bank Reconciliation Statement (BRS) is a statement prepared to reconcile the difference between the bank balance shown by the Cash Book (bank column) and the bank balance shown by the Bank Pass Book (or Bank Statement) on a particular date.

Need for Preparation

  • It brings to light any errors that may have been committed either in the Cash Book or in the Pass Book.
  • It highlights clearance delays of cheques deposited.
  • It helps in preventing fraud and embezzlement.
  • It helps in keeping track of original bank balances.

Causes of Difference

The differences generally arise due to:

  1. Timing Differences:
    • Cheques issued by the firm but not yet presented for payment.
    • Cheques deposited into the bank but not yet collected/cleared.
    • Direct deposits by customers into the bank account.
  2. Transactions Recorded by Bank but Not in Cash Book:
    • Bank charges, interest on overdraft.
    • Interest and dividends collected by the bank.
    • Direct payments made by the bank on behalf of the customer.
    • Dishonor of a cheque or bill discounted.
  3. Errors:
    • Errors committed in recording transactions in the Cash Book.
    • Errors committed by the bank.

Preparation of Bank Reconciliation Statement

BRS can be prepared by starting with either the Cash Book balance or the Pass Book balance. Note: A Debit Balance in Cash Book means a favorable balance (asset), while a Credit Balance in Pass Book means a favorable balance.

Format of Bank Reconciliation Statement

Particulars Plus Items (₹) Minus Items (₹) Balance as per Cash Book (Dr.) xxxxx Add: Cheques issued but not yet presented xxxxx Add: Interest allowed by bank xxxxx Less: Cheques deposited but not cleared xxxxx Less: Bank charges not recorded in Cash Book xxxxx Balance as per Pass Book (Cr.) XXXXX

Competency-Based Questions

Q1. A firm receives a bank statement showing a credit balance of ₹50,000. However, the Cash Book shows a debit balance of ₹48,000. On investigation, it is found that a cheque of ₹2,000 issued to a supplier, Mr. Gupta, was not presented for payment. Which balance should the firm report as its actual Cash at Bank in the Balance Sheet?

Solution: The firm should report the balance as per its Cash Book (₹48,000) in the Balance Sheet (provided it’s correct after adjusting errors in the Cash Book). The cheque issued is already deducted from the cash book and the liability is settled. The difference is merely a timing difference and not an actual asset of ₹50,000 available to the firm.

Q2. Your company deposited a cheque of ₹15,000 on March 30, but the bank cleared it on April 2. The financial year closes on March 31. Explain the effect of this transaction on the Bank Reconciliation Statement prepared as on March 31, assuming starting balance is as per Cash Book (favorable).

Solution: The balance as per Cash Book is higher by ₹15,000 on March 31 because the deposit was recorded immediately in the Cash Book. To reconcile with the Pass Book (which has a lower balance because the cheque isn’t cleared yet), you must deduct ₹15,000 from the Cash Book balance in the BRS.

Q3. A customer directly deposited ₹10,000 into the bank account of the firm, but no intimation was received before preparing the BRS. The firm starts fixing the BRS using the Pass Book overdraft balance. Should this amount be added or deducted?

Solution: A direct deposit increases the bank balance (reduces the overdraft). Thus, the Pass Book overdraft balance is lower than the Cash Book overdraft balance. To reconcile (moving from Pass Book to Cash Book), the ₹10,000 must be added back to the Pass Book overdraft balance to match the higher overdraft shown in the Cash Book.

Q4. A bank charged ₹500 for services but reversed it due to a complaint two days later, all within the same month. How will this appear in the BRS at the end of the month?

Solution: Since the charge and its reversal both occurred within the same month, and assuming neither was entered in the Cash Book, the net effect on the Pass Book by the end of the month is zero. Hence, it will not appear in the BRS, as it causes no difference on the date of reconciliation.