Chapter 5: Bank Reconciliation Statement (BRS) — Study Notes

1. Meaning and Need for BRS

A Bank Reconciliation Statement (BRS) is a statement prepared to reconcile the difference between the bank balance shown by the Cash Book and the bank balance shown by the Bank Pass Book (Bank Statement) on a particular date. - Need for BRS: It helps in identifying errors or omissions in the Cash Book or Pass Book, detects frauds or delays in clearing cheques, and ensures that the Cash Book reflects the true bank balance.

2. Cash Book vs. Pass Book

• Cash Book (Bank Column): Maintained by the business.
• Debit Balance = Favorable (Asset).
• Credit Balance = Overdraft (Liability).
• Pass Book: Maintained by the bank. It is a copy of the customer's account in the bank's ledger.
• Credit Balance = Favorable (Liability for the bank, Asset for the customer).
• Debit Balance = Overdraft (Asset for the bank, Liability for the customer).

3. Causes of Difference

Differences arise due to two main reasons: Time Gap and Errors.

A. Differences due to Time Gap:

1. Cheques issued but not yet presented for payment: (Decreases Cash Book, Pass Book remains higher).
2. Cheques deposited but not yet cleared/collected: (Increases Cash Book, Pass Book remains lower).

B. Transactions recorded only in the Pass Book (until reconciliation):

1. Interest allowed by bank: (Increases Pass Book).
2. Bank charges & interest on overdraft charged by bank: (Decreases Pass Book).
3. Direct deposits by customers into the bank account: (Increases Pass Book).
4. Direct payments made by the bank on behalf of the customer (Standing Instructions): (Decreases Pass Book).
5. Dishonour of a cheque/bill discounted with the bank: (Decreases Pass Book).

C. Errors and Omissions:

1. Errors committed in recording by the business in the Cash Book (e.g., wrong casting, omission of entry).
2. Errors committed by the bank in the Pass Book (e.g., crediting another customer's deposit into our account).

4. Preparation of Bank Reconciliation Statement

To prepare a BRS, you start with the balance as per one book and add or deduct items to arrive at the balance of the other book.

Rule of Thumb (Starting with Cash Book Favorable Balance): Objective: Match the Pass Book. If a transaction increased the Pass Book (relative to Cash Book), Add it. If it decreased the Pass Book, Deduct it.

Note: If starting with an Overdraft balance, reverse the Add/Less signs, or treat the starting balance as a negative figure.

5. Amended / Adjusted Cash Book

Sometimes, before preparing the BRS, the Cash Book is adjusted by recording transactions that are already in the Pass Book but missing in the Cash Book (e.g., bank charges, direct deposits, dishonour of cheques). After passing these entries in the Amended Cash Book, the revised Cash Book balance is used to prepare the BRS. Note: Cheques issued but not presented and cheques deposited but not cleared are NEVER recorded in the Amended Cash Book; they are only shown in the BRS.