Learning Objectives
- Understand the need and meaning of Bank Reconciliation Statement (BRS)
- Identify the causes of differences between the cash book and pass book balances
- Learn to prepare BRS starting from cash book balance or pass book balance
- Understand the treatment of timing differences and errors
- Differentiate between favourable and unfavourable balances
Key Concepts
Meaning and Need of BRS
A Bank Reconciliation Statement (BRS) is a statement prepared to reconcile the difference between the balance shown in the Cash Book (Bank Column) maintained by the business and the balance shown in the Pass Book (Bank Statement) maintained by the bank, on a given date. The BRS is not a part of the double-entry system; it is a verification tool.
The need for BRS arises because the cash book and pass book may show different balances due to timing differences, errors, or omissions in either book.
Causes of Differences
The differences between cash book and pass book balances can be categorised as follows:
- Cheques Issued but Not Yet Presented: The business has recorded the payment in the cash book, but the cheque has not yet been encashed by the payee. This reduces the cash book balance but not the pass book balance.
- Cheques Deposited but Not Yet Collected (Cleared): The business has deposited cheques and recorded them in the cash book, but the bank has not yet credited the amount. This increases the cash book balance but not yet the pass book balance.
- Direct Deposits by Third Parties: Amounts credited directly to the bank account (e.g., dividend, interest) that the business has not yet recorded in the cash book.
- Direct Payments by the Bank: Amounts debited by the bank for standing instructions (e.g., insurance premium, loan EMI) not yet recorded in the cash book.
- Bank Charges and Interest: Bank charges debited or interest credited by the bank, not yet recorded in the cash book.
- Errors in Cash Book or Pass Book: Mistakes in recording amounts, wrong entries, or omissions in either book.
- Dishonour of Cheques: A cheque deposited by the business is returned unpaid by the bank but the cash book has not been updated.
Preparation of BRS
BRS can be prepared starting from either the Cash Book balance or the Pass Book balance. The key principle is:
- If starting from the Cash Book (Debit) Balance: Add items that increase the pass book balance relative to the cash book, and subtract items that decrease it, to arrive at the pass book balance.
- If starting from the Pass Book (Credit) Balance: Add items that increase the cash book balance relative to the pass book, and subtract items that decrease it, to arrive at the cash book balance.
An overdraft (negative balance) in the cash book means the credit side of the bank column exceeds the debit side. In the pass book, an overdraft is shown as a debit balance.
Treatment of Common Items
Starting from favourable Cash Book balance to arrive at Pass Book balance:
- Cheques issued but not presented: Add
- Cheques deposited but not collected: Subtract
- Direct deposits credited by bank: Add
- Direct payments debited by bank: Subtract
- Bank charges debited by bank: Subtract
- Interest credited by bank: Add
- Dishonour of cheque not recorded in cash book: Subtract
Summary
The Bank Reconciliation Statement is a tool to explain the difference between the cash book (bank column) balance and the pass book balance on a given date. The main causes of difference are timing issues (cheques issued but not presented, cheques deposited but not cleared), direct entries by the bank (deposits, payments, charges, interest), dishonoured cheques, and errors. BRS can be prepared from either balance. Understanding whether to add or subtract each item depends on its effect on the balance being compared. BRS helps in detecting errors, preventing fraud, and ensuring accuracy of bank-related records.
Important Terms
- Bank Reconciliation Statement
- A statement prepared to reconcile the difference between the cash book bank balance and the pass book balance.
- Pass Book
- A book maintained by the bank showing all transactions in the customer's account from the bank's perspective.
- Cheques in Transit
- Cheques deposited by the business but not yet collected and credited by the bank.
- Unpresented Cheques
- Cheques issued by the business but not yet presented to the bank for payment by the payee.
- Overdraft
- A situation where the bank account has a negative balance, meaning the business has withdrawn more than the available balance.
- Standing Instructions
- Permanent orders given to the bank for regular payments like insurance, loan instalments, etc.
Quick Revision
- BRS reconciles the cash book (bank column) balance with the pass book balance.
- Main causes: timing differences (cheques issued/deposited), bank charges, direct deposits, errors.
- A favourable balance in the cash book means a credit balance in the pass book.
- An overdraft in the cash book means a debit balance in the pass book.
- Cheques issued but not presented: Add to cash book balance to get pass book balance.
- Cheques deposited but not cleared: Subtract from cash book balance to get pass book balance.
- BRS is not part of double-entry; it is an external verification statement.
Practice Tips
- Always identify whether you are starting from the Cash Book or Pass Book balance before preparing BRS.
- Create a simple rule chart: for each cause, note whether to ADD or SUBTRACT for both starting points.
- Practice BRS problems with overdraft balances separately -- the rules reverse.
- In exams, read each item carefully and determine whether it has been recorded in one book but not the other.