Bank Reconciliation Statement
The statement which is prepared for verifying and reconciling the bank balances, shown by the cash book and pass book on a certain date and incorporates the reasons of disagreement between them is called a bank reconciliation statement.
Utility of B.R.S
a) It gives an authentic proof of the accuracy of the cash and pass book balances.
b) Entries in both the book are automatically checked.
c) The cash book may be made up- to-date by recording some hitherto unknown entries.
d) It helps to detect any mistake in the cash book and pass book
Need and importance for Bank Reconciliation statement: The bank reconciliation statement is needed and also important because of the following:-
a) The bank reconciliation will bring out only errors that may have been committed either in the cash book or in the pass book.
b) Any undue delay in the clearance of cheques will be shown up by the reconciliation.
c) A regular reconciliation discourages the staff of the customer or even that of the bank form embezzlement. There have been many cases when the cashiers merely made entries in the cash in the bank they were able to get away with it only because of lack of reconciliation.
d) Reconciliation helps the management check the accuracy of entries made in the cash book and keeps track of cheques.
Causes of difference between balance as par cash book and pass book
a) Cheques issued but not presented for payment: - when cheques are issued, the entry in the cash book is made immediately. But if the cheques issued are not presented to bank for payment till the date of preparing reconciliation statement, it will be a causes of disagreement between AB and CB balances.
b) Cheques paid into the bank but not yet cleared: - As soon as the cheques are deposited in to the bank, the entry is passed on the debit side of the bank column in the cash book. But cheques deposited may not be collected and credited by bank till date.
c) Interest allowed by the bank: - Bank might have credited the account of the customer with the interest and have made entry in the pass book. But such entry may not be recorded in the cash book.
d) Interest and bank charges debited by bank: - The bank debits the customers account with the interest due on bank overdraft. It also debits the account of the customers for the incidental and collection charges. The bank debits the customers account, but there entries are not made in cash book till date of preparation of B.R.S
e) Interest, dividend etc collected by bank: - Sometime interest on government securities or dividend on share is collected by the bank and is credited to the customers account. If these items are not recorded in the cash book till the date of preparation of the reconciliation statement the balance will differ
How to Prepare Bank Reconciliation Statement: The following steps are taken to prepare the bank reconciliation statement:
(i) Favourable balances: When debit balance as per cash book is given:
(a) Take balance as a starting point say Balance as per Cash Book.
(b) Add all transactions that have resulted in increasing the balance of the pass book.
(c) Deduct all transactions that have resulted in decreasing the balance of pass book.
(d) Extract the net balance shown by the statement which should be the same as shown in the pass book.
In case balance as per pass book is taken as starting point all transactions that have resulted in increasing the balance of the Cash book will be added and all transactions that have resulted in decreasing the balance of Cash book will be deducted. Now extract the net balance shown by the statement which should be the same as per the Cash book.
(ii) Unfavorable Balances: When Credit balance as per cash book/Debit balance as per Pass Book is given:
Overdraft balance is to be shown in the minus column of statement as the starting point. The other steps shall remain same as mentioned above.
Journal entries which are to be passed at the time of bank reconciliation statement: At the time of preparing bank reconciliation for those transactions which are not recorded in our book. These entries can be passed as following:
(i) In the case of bank charges:
Bank charges A/c Dr.
To Bank A/c
(Being bank charges charged by the bank as shown in the passbook)
(ii) On the collection of interest and dividend by the bank
Bank A/c Dr.
To interest and dividend A/c
(Being amount of interest and dividend collected by bank)
(iii) On direct deposit in the bank by the Customers:
Bank A/c Dr.
To Customer’s personal A/c
(Being amount deposited into bank by customer)
(iv) In the case of dishonour of cheque:
Customer’s personal A/c Dr.
To Bank A/c
(Being cheque dishonored by customer’s bank)
Balance shown in the Balance Sheet?
The balance sheet of any organisation is a statement of ledger account balances which have not been closed (Personal a/c's, Real a/c's and some Nominal a/c's) and have been transferred to the next accounting periods.
The Balance Sheet of the organisation contains the ledger account balances in its books. Therefore, the Bank a/c balance as shown by the Cash Book should appear in the balance sheet. The Reconciliation statement is an additional statement that is prepared to explain the reasons for difference in balance as shown by the cash book and pass book and not for adjusting the figure in the balance sheet or the ledger account.
If we consider the Balance sheet of the bank, they would consider the balance as shown by the pass book to be presented in the balance sheet.
When is BRS prepared?
Bank Reconciliation Statement (BRS) is prepared as and when needed. The need for preparation of BRS arises only when there is a difference in the bank a/c balance as revealed by the Cash Book and the Bank Pass Book. In simple terms BRS can be taken to be a statement that explains the difference.
Generally we prepare a BRS at the end of the accounting period, to explain the difference between the Bank a/c balance as shown in the Balance Sheet and the balance as revealed by the pass book.