Chapter 3 - Bank Reconciliation Statement

A Bank, apart from receiving deposits and handling cash transactions on behalf of its
customers & lending funds, renders some other useful services as indicated below:
(i) The bank discounts promissory notes or hundies.
(ii) The bank allows overdraft to its good customers so that they can make
payments even when they do not have sufficient balance in the bank. The
facility is generally secured and must be cleared later.
(iii) The bank grants different types of loans (e.g. Working capital, term loan)
for a specific period to its customers for smooth functioning of their
operations in case lack of self – funding available with customers.
(iv) The bank on behalf of the customer collects the amount of dividend
warrants or interest on securities, etc.
(v) On instruction of the customer, the bank makes payments of insurance
premium, rent etc. on the due dates.
(vi) The bank sells and purchases shares, debentures or government
securities on behalf of its customers.
(vii) Money can be remitted to another place or persons through the bank at a
low cost.
(viii) The bank in return, for a consideration, furnishes security or guarantee
for its customers whose credit is good.
(ix) The bank also issues letter of credit or travellers’ cheque to facilitate
commerce or travel.
(x) The bank also provides international banking services such as currency
exchange, remittance from abroad, cross country payments, foreign letters of
credit, export and import credit, etc.

Bank passbook: It is merely a copy of the customer’s account in the books of a

bank, where all deposits and withdrawals made by the customer during the
particular period is recorded. It is the customer’s duty to check the entries and
immediately inform the bank of any error that he may notice.
Business houses should also obtain at the end of the year a certificate from the
bank duly stamped and signed, showing the balance which, the firm carries with
the bank as of date.

The credit balance as per pass book is deposit made by customer and the debit
balance as per
pass book is the overdraft balance for customer (i.e. customer owes to bank).
The debit balance in the pass book represents the credit balance as per
the cash book and vice-versa.
The form of the pass book is given below:

Messers.........................................
in account with
Punjab National
Bank
Daryaganj, New Delhi-
110002 Account number
– Transaction Period -
Date Particulars Cheque Withdraw Deposits Balance
/ No. als
Cr.
Transactio
Dr.
n
Dr. or Cr.

Bank Reconciliation Statement (BRS)

To reconcile means to identify the difference between two different sources and
eliminating that difference. Whenever we deposit or withdraws money from banks,
it is recorded at two places:-

1. Bank column of the cash book (in customer books)

2. Bank statement (passbook, i.e. in the bank books)

For e.g.:- if Mr. A deposited Rs.1,00,000 in his bank account it will be recorded on
the Dr. side of his cash book (bank column), but for the bank it’s a receipt so it
will be recorded as a Cr. Entry in the bank statement or the pass book.
The statement which reconciles bank balance as per cash book with balance as
per pass book by showing all the causes of difference is known as “BANK
RECONCILIATION STATEMENT”.
Salient features of bank reconciliation statement:
(i) The reconciliation will bring out any errors that may have been committed
either in the cash book or in the pass book;
(ii) Any undue delay in the clearance of cheques will be shown up by the
reconciliation;
(iii) A regular reconciliation discourages the accountant of the bank from
embezzlement of funds. There have been many cases when the
cashiers merely made entries in the cash book but never deposited the
cash in the bank; they were able to get away with it only because of lack of
reconciliation.
(iv) It helps in finding out the actual or true position of the bank balance by
incorporating the effect of any uncleared funds as well.
(v) It will ensure accounting of all the financial transactions incurred by
the company during a particular financial year.
Causes of Differences:
1. TIMING:- When a transaction is recorded at two different times in cash book and
the pass book.
E.g. Mr. A issued cheque to Mr. B, now it will be recorded in his cash book
immediately but bank will recognize this transaction only when the same cheque
will be presented to it by Mr. B.

2. TRANSACTIONS:- Transactions which bank carries out by itself without

intimating the customer.
E.g. Interest received on Savings bank account.
3. ERRORS:- Errors made in preparing the accounts either by the bank or the
customer can result in disagreement of the two statements.
E.g. Omission of cheque issued.

The students can be required to start reconciliation from any of the following four
balances as may be given in the question:

Causes of differences Favourab Unfavourab Favourabl Unfavourab

le le balance e balance le balance
balance (Cr.) as per (Cr.) as (Dr.) as per
(Dr.) as cash- book per pass- pass- book
per cash- book
book
Cheque deposited but Subtract Add Add Subtract
not cleared

Cheque issued but Add Subtract Subtract Add

not presented to
bank
Cheque directly deposited Add Subtract Subtract Add
in bank by a customer
Income (e.g., interest from Add Subtract Subtract Add
UTI) directly received by
bank
 Expenses (e.g., telephone Subtract Add Add Subtract
bills, Insurance charges)
directly paid by bank on
standing instructions
Bank charges/locker rent Subtract Add Add Subtract
levied by bank
Wrong debit in the cash Subtract Add Add Subtract
book
Wrong credit in the cash Add Subtract Subtract Add
book
Wrong debit in the pass book Subtract Add Add Subtract

Wrong credit in pass book Add Subtract Subtract Add

Undercasting of Dr. side of Add Subtract Subtract Add

bank account in the cash
book
Overcasting of Dr. side of Subtract Add Add Subtract
bank account in cash book
Undercasting of Cr. side of Subtract Add Add Subtract
bank account in cash book
Overcasting of Cr. side of Add Subtract Subtract Add
bank account in cash book
Bill receivable collected Add Subtract Subtract Add
directly by bank
Interest on bank overdraft Subtract Add Add Subtract
charged
Final Balance (important) If answer is If answer If answer is If answer is
positive, is positive, positive,
then positive, then then
favourable then favourable Unfavourabl
balance Unfavourabl balance e balance
(Cr.) as per e balance (Dr.) as per (Cr.) as per
pass- book (Dr.) as per cash- book cash-book
and if pass-book and if and if
negative and if negative negative
then negative then then
unfavourab then unfavourabl Favourable
le balance Favourable e balance balance (Dr.)
(Dr.) as per balance (Cr.) (Cr.) as per as per cash-
pass- book. as per pass- cash- book book
book

While reconciling, the following types of problems can be given:

When causes of differences are known then students can start reconciliation
by taking any of the balance stated above and proceed further with the causes.
But if causes of differences are not known then one has to compare the debit
entries of cash book with the credit entries of the passbook and vice-versa. The
entries, which do not tally in the course, are the causes of difference in the
balances of both the books. Once the causes are located, their effects on both the
books are analyzed and then reconciliation statement is prepared to arrive at the
actual bank balance.
In this procedure, students should take care whether opening balance of both
the books tallies or not. If not, then unticked items are divided into two categories
i.e., one relating to reconciliation of opening balance and other relating to
reconciliation of closing balance.

Methods Of Bank Reconciliation

1. Without preparation of adjusted Cash-Book
Reconciliation statement may be prepared as follows:
 ‘Balance’ presentation.
 ‘Plus & Minus’ presentation.

2. After preparation of adjusted Cash-Book

When the balance in cash book is first adjusted for certain adjustments before
taking it to the BRS, then it is known as adjusted cash book balance.
Optional- if reconciliation is done during different months.
Mandatory- if reconciliation is done at the end of accounting or financial year.

While adjusting the cash-book, following adjustments are considered:

 All errors (e.g. incorrect amount recorded in cash-book, entry posted twice in
cash-book, over/undercasting of the balance, etc.) and
 Omissions (e.g. bank charges recorded in pass-book only, interest debited by
the bank, direct receipt or payment by the bank, dishonour of cheques/bills
etc.)
by the cash-book (not passbook) are taken into care.

This adjusted cash-book balance is taken to bank reconciliation statement.

Note:
1. Errors occurring in the pass-book are not to be adjusted in the cash
book.
2. All the adjustments considered in the adjusted cash-book are not
carried again to the BRS.
My Notes:

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