Definition: Bank Reconciliation Statement (BRS) refers to a statement which an entity prepares on a particular date to match the bank balance indicated in the cash book with the balance shown by the bank’s passbook, by displaying the reasons for differences between the two.
The entity can prepare BRS any time during the financial period, as per the requirement.
Significance of Bank Reconciliation Statement
- It is a useful mechanism for internal control of an entity’s cash inflows and outflows, that facilitates the identification of frauds and errors, if any, occurred while entering the transaction in the cash book or the passbook.
- It helps to ascertain any unnecessary delays in the cheque clearance.
- It helps to know the exact position of the bank account.
- It also prevents cash embezzlement, as there are instances when the cashiers only pass entries in the books but don’t deposit the money in the bank. Thus, with the help of BRS, it is always easy to keep a check on such acts.
As the bank prepares the passbook, all the transactions are recorded from the purview of the bank, but at the same time, in the cash book, the transactions are recorded from the customer’s point of view, i.e. the entity’s standpoint. However, the bank column of the cash book and bank statement, i.e. passbook, keeps a track of the deposits and withdrawals made by the entity.
Therefore, the cash book and passbook are expected to tally, but practically, this happens rarely due to the time gap between the entries made. That is why, the preparation of Bank Reconciliation Statement is vital, to find out the causes of differences in the two and eliminating them.
Reasons for Difference
- Timing: When there is timing difference in recording the transactions in cash book and passbook, then also they will not tally.
Example: Alpha Ltd. issued a cheque to Beta Ltd. recorded immediately in the bank column of cash book, but the bank will enter the transaction in the passbook only when the cheque is presented by the Beta Ltd. in the bank.
- Transactions: The bank undertakes some transactions without notifying the customer.
Example: Interest Credited by bank, Locker rent charged by the bank, Bank Charges debited by the bank, etc. In such cases, the bank credits or debits the account immediately, but the entry is made to the cash book when it comes to the knowledge of the customer.
- Errors: If there is any error or omission while preparing the account, either by the bank or the client, may also lead to disagreement.
Nevertheless, the primary reason for the variance in the balance of the two is items appearing in the cash book but not in the passbook and items showing up in passbook but not in the cash book.
Rules for Addition and Subtraction
|When the reconciliation begins with||Debit (favorable) balance as per cash book||Credit (unfavorable) balance or overdraft as per cash book||Credit (Favorable) balance as per passbook||Debit (Unfavorable) balance or overdraft as per passbook|
|Cheque deposited in bank but not cleared||Subtract||Add||Add||Subtract|
|Cheque directly deposited by customer||Add||Subtract||Subtract||Add|
|Cheque issued but not yet presented||Add||Subtract||Subtract||Add|
|Interest income collected by bank||Add||Subtract||Subtract||Add|
|Expenses paid by bank||Subtract||Add||Add||Subtract|
|Bank charges charged by bank||Subtract||Add||Add||Subtract|
|Locker rent charged by bank||Subtract||Add||Add||Subtract|
|Bank charges recorded twice in Cash book||Add||Subtract||Subtract||Add|
|Deposits recorded twice or excess amount recorded in cash book||Subtract||Add||Add||Subtract|
|Bill discounted and dishonored||Subtract||Add||Add||Subtract|
|Bills receivables collected by bank directly||Add||Subtract||Subtract||Add|
|Interest on bank overdraft charged by bank||Subtract||Add||Add||Subtract|
|Amount withdrawn from bank but not recorded in cash book||Subtract||Add||Add||Subtract|
|Wrong debit in passbook||Subtract||Add||Add||Subtract|
|Wrong credit in passbook||Add||Subtract||Subtract||Add|
|Wrong debit in cash book||Subtract||Add||Add||Subtract|
|Wrong credit in cash book||Add||Subtract||Subtract||Add|
|Undercasting of debit side of the bank column in cash book||Add||Subtract||Subtract||Add|
|Overcasting of debit side of the bank column in cash book||Subtract||Add||Add||Subtract|
|Undercasting of credit side of the bank column in cash book||Subtract||Add||Add||Subtract|
|Overcasting of credit side of the bank column in cash book||Add||Subtract||Subtract||Add|
|Final Balance||When answer is positive then it is considered as favorable (Cr.) balance as per passbook, but if it is not then it is regarded as unfavorable (Dr.) balance as per pass book.||When answer is positive then it is considered as unfavorable (Dr.) balance as per passbook, but if it is not then it is regarded as favorable (Cr.) balance as per passbook.||When answer is positive then it is considered as favorable (Dr.) balance as per cash book, but if it is not then it is regarded as unfavorable (Cr.) balance as per cash book.||When answer is positive then it is considered as unfavorable (Cr.) balance as per cash book, but if it is not then it is regarded as favorable (Dr.) balance as per cash book.|
So, the Bank Reconciliation Statement is mainly used to locate the reasons for discrepancies and errors (if any) in the two books. Furthermore, it is used to identify and prevent frauds and cash embezzlement by the staff, while recording the transactions.