Bank Reconciliation Statement

BANK RECONCILIATION STATEMENT

Meaning-:

Bank reconciliation statement is a statement which reconciles the bank balance as per cash book with the balance as per passbook by showing all causes of difference between the two.

Importance of bank Reconciliation statement -:

·         Bring out any errors that may have been committed either in the cash book or pass book.

·         Helpful in detecting errors, frauds at the time of passing entries in the cash book or pass book

·         Any undue delay in the clearance of cheques will be shown up by the reconciliation

·         Helpful for finding out the actual position of the bank balance.

Causes of difference between bank balance shown by cash book and that shown by passbook -:

1. Cheques issued but not presented for any payment-:   The entry in the cash book is made immediately on issue of cheque but naturally entry will be made by the bank only when the cheque is presented for payment. There will thus be a gap of some days between the entry in the cash book and in the pass book.
2. Cheques deposited for collection but not yet collected-: The client debits bank column of cash book as soon as he deposits cheques with the bank for collection, but the bank credits client’s account only when it has collected cash on the chaques so deposited. It results in the bank balance as per cash book being higher than the balance as per pass book.
3.  Bank charges not entered in the cash book -: As soon as these charge (incidental charge, collection charge) are made, the bank debits the customer’s account in its own books and this reduces the bank balance. But the customer will know such charges only when he received a statement of account from the bank, until than, bank balance as per passbook will be less then bank balance as per cash book.
4. Interest credited or debited by bank, not entered in the cash book -: when bank allow interest to a customer, it will credit customer‘s account and his bank balance as per pass book will increase. But the customer will not pass the entry in cash book. Simultaneously till he knew the fact, thus the balance will differ. Likewise, interest on overdraft is debited to the customer’s account and till the same is not entered in the cash book.  
5.  Direct collections on behalf of customers -:A banker may receive amounts due to the customer by way of dividends, rent, interests etc. directly from the persons concerned on account of standing instructions of the customer to such persons. Similarly, debtors may also deposit the amounts directly to the bank. The bank credits the account of the customer for such collections as soon as it gets such payments. But same will be entered in the cash book only when customer receives the statement from the bank. Thus the balances differ.
6.  Direct payment by bank-: Usually, the bank is given standing instructions for certain payments to be made, such as payment of insurance premium, interest on loan, electricity bill etc. Bank, while making payments, debits pass book but the customer has no information of the same till he is informed. It results in a difference in balances.
7.  Dishonour of cheques/bills-: When cheque or bill of exchange discounted with the bank is dishonoured, the same is debited in the pass book but not given effect in the cash book until the intimation is received. It will cause a difference in the two balances.
8. Cheques received and entered in the cash book but omitted to be deposited into the bank-: When cheque is received, the same is entered in the cash book but it may not be deposited into the bank immediately. This will cause a difference in the two balances.
9.  Errors-:There may be errors in the accounts maintained by the customer or/ and by the bank. A wrong debit or credit given by the customer or the bank leads to a difference in the balances.

Significance of BRS -:

1. It highlights the causes of difference between the bank balance as per cash book and the balance as per pass book. Necessary adjustments can, therefore, be carried out at an early date.
2. It reduces the chance of fraud by the staff dealing with cash and cash bring.
3. It acts as a moral check on the staff of the organization to keep the cash records always up to date.
4.  Bank balance as per cash book cannot be accepted as final unless it is supported by statement of passbook. When these two balances do not tally, reconciliation becomes essential to determine the correct bank balance that can be used while finalizing the accounts.
5. It helps in finding out actual position of the bank balance.

PROCEDURE OF PREPARING BRS-:

A bank reconciliation statement is prepared as on a particular date for a particular period to reconcile the bank balance as per cash book with balance as per pass book by showing causes of difference between the two. The statement starts with bank balance as per cash book and then additions to and subtractions from this balance are made to arrive at the balance as per pass book. Alternate procedure is to start with bank balance as per pass book and to end up with bank balance as per cash book.

Steps for preparing a bank reconciliation statement-:

1. The cash book should be completed and the balance as per bank column on a particular date should be found out covering the period for which the statement has to be prepared.
2. The bank should be requested to complete and send to the firm the bank pass book.
3. Check the entries of the debit and credit sides of the bank columns of the cash book with corresponding entries on the credit and debit sides of the pass book relating to the same period.
4. The items not tallying should be classified into common groups according to their characteristics.
5. The balance as shown by any one book (i.e. the cash book or the bank pass book) should be taken as the base. This is, as a matter of fact, the starting point for determining the balance as shown by the other book after making suitable adjustments taking into account the causes of difference.
6. The effect of the particular cause of difference on the balance shown by the other book should be noted.
7. In case, the cause has resulted in an increase in the balance shown by the other book, the amount of such increase should be added to the balance as per the former book which has been taken as the base.
8. In case, the cause has resulted in a decrease in balance shown by the other book, the amount of such decrease should be deducted from the balance as per the former book which has been taken as the base.

                                                                                               

                                                                                               

SPECIMEN OF BANK RECONCILIATION STATEMENT

(From Balance as per Cash Book)

Bank Reconciliation Statement as on....1

Note: If the reconciliation statement has been started with balance, as per the pass book, to arrive at balance as per cash book the entries made above should be reversed i.e. all added items should be deducted and deducted items should be added.

PREPARATION OF BRS WHEN OVERDRAFT BALANCES ARE GIVEN-:

In case the books show an adverse balance i.e. an overdraft, the procedure is just the reverse of that which has been discussed in the case of a favorable balance. Overdraft means overdrawing of a bank account. The customer is allowed to draw from his account over and above his balance subject to a limit agreed upon. The bank pass book will show a debit balance in the account of the customer and similarly there will be a credit balance in the bank column of the cash book.

SPECIMEN OF BANK RECONCILIATION STATEMENT

(From overdraft balances)

Bank Reconciliation Statement as on....

Note: If the reconciliation statement has been started with overdraft as per the pass book to arrive at overdraftas per the cash book the entries made above should be reversed i.e. all added items should be deducted and all deducted items should be added.

Alternative Method is to keep two columns ‘Plus’ and ‘Minus’. All additions are to be shown in ‘plus’ column while all deductions in the ‘minus’ column. Balance is to be shown in ‘plus’ column while overdraft is shown in ‘minus’ column.

 PREPARATION OF BRS WHEN EXTRACTS OF CASH BOOK AND PASS BOOK ARE GIVEN-:OK AND PASS BOOK ARE GIVEN

In some instances, students are given extracts from the cash book and the pass book and are required to find out causes of differences and prepare a bank reconciliation statement. In solving such a problem, the following points should be noted:

1.          Heading of the pass book, and
2.        Period for which cash book and pass book are given.     

Heading of the pass book can be given in two ways:

1.              Party in account with bank: It means pass book is a copy of party’s account in the books of bank.Generally, pass book is written in this form. The student should compare debit side of the cash book with credit side/column of the pass book and also compare credit side of the cash book with debit side of the pass book.
2.             Bank in account with party: It means pass book is the copy of bank’s account (so far as it relates to the party) in the books of bank. In this form the student should compare debit side of the cash book with the debit side/ column of the pass book and credit side with credit side/column.

Practically in such situations, upto date bank statement is obtained and the cash book is amended by

incorporating only those transactions in respect of which entries have been made in the pass book. The errors in the cash book are also rectified by suitable entries and thus the upto date bank balance as per cash book is obtained. This balance appears in the balance sheet.

For examination purpose, a reconciliation statement may be prepared after amending the cash book

especially if it is mentioned or when the firm prepares reconciliation statement on the date of closing the books of account.