CHAPTER 8- BANK RECONCILIATION STATEMENT

At the end of this chapter you will be conversant with:

8.1 Meaning of BRS
8.2 Reasons for difference between Bank Balances as per Cashbook and Passbook
8.3 Advantages of Bank Reconciliation Statement
8.4 Steps in Preparation of BRS

8.1 MEANING:

The Bank Reconciliation Statement is an aid used to ensure the accuracy of transactions
appearing in the bank columns of the Cashbook. Such transactions can be verified through
an external record, namely, the bank statement received periodically from the banker. While
the business keeps a record of its transactions through the bank columns in the Cashbook,
the banker in turn maintains the banks transactions with the business in his ledger. An
extract from this ledger showing details of the transactions during a specified period is sent
at frequent intervals by the bank to the business and this extract is referred to as a bank
statement.
8.2 REASONS FOR DIFFERENCE BETWEEN BANK BALANCES AS PER CASHBOOK
AND PASSBOOK:
The relationship between the customer and the banker is that of a creditor and a debtor.
So, if the bank column of the Cashbook shows a debit balance as on a specified date the
bank statement should show an equal amount of credit balance as on that date and vice
versa. However, the balances shown by the two independent records may not always agree
due to the following:
1.

Cheques issued by the business to its suppliers or other parties may not have
been presented for payment.

2.

Cheques received from customers and deposited may not have been collected
by the banker.

3.

Deposits may have been directly made by the customers into the bank account
of the enterprise.

4.

Collection charges, service charges and interest on overdraft are charged by the
banker. The business can ascertain the exact amount of charges and record
them in the Cashbook only after the receipt of the bank statement.

5.

Interest credited by bank for the balance maintained with it and any other
income such as interest on securities, dividend, etc. collected by the bank on
behalf of the business can be ascertained only from the bank statement.

6.

Wrong entries made by the business in the Cashbook or errors committed by

the bank in its ledger.

7.

Omission of entries in the two sets of books.

8. Dishonor of customers cheques deposited in the bank account

8.3 Advantages of Bank Reconciliation Statement

(1) Error Detection:

It helps in detection of errors of omission of transactions or wrong recording of
transactions either by the bank or the business enterprises. Errors identified in the
books by preparing BRS can be rectified.

(ii) Delay in Collection Revealed:

The delay in the collection of cheques, bills, etc., if any, is revealed, when BRS is
prepared. The matter can be pursued to avoid unnecessary delays in collection. It also
helps the management to keep track of the cheques and bills sent for collection.
(iii) Completion of Cashbook:
Business enterprises get information about bank charges, cheques dishonored, direct
payments, direct deposits, etc. from the bank statement only. Entries of the same are
made in the Cashbook on the basis of bank statement. Thus to complete the Cashbook,
comparison and reconciliation of Cashbook and bank book is essential.
(iv) Chances of Embezzlements are Reduced:
Periodical comparison of Cashbook and passbook keeps a check on the office staff. For
example, entry for cash deposit is appearing in the Cashbook but not in the passbook,
indicates fraud being committed by the staff. This type of frauds come to light when
Bank Reconciliation Statement is prepared.
8.4 Steps in Preparation of BRS
(1) Take the Cashbook or passbook balance as starting point. The following points have
to be noted while taking the opening balance.
1.

Dr. balance as per Cashbook indicates favorable balance.

2.

Cr. balance as per Cashbook means overdraft or unfavorable balance.

3.

Dr. balance as per passbook means overdraft or unfavorable balance.

4.

Cr. Balance as per passbook means favorable balance.

If the starting point denotes a favorable balance as per Cashbook or passbook, take it
as a positive figure. However, if the starting point denotes negative unfavorable
balance, take it as a negative figure.
(2) Adjust the starting point amount as per the information given and analyze its
impact on the other balances.
(3) After adjusting all the differences or errors, the balance as per the other book is
obtained. If the final balance is positive, it denotes favorable balance (Dr. balance as
per Cashbook or credit balance as per the passbook). However, if the final balance is
negative, it denotes the unfavorable balance or overdraft. (Cr. balance as per Cashbook
or debit balance as per passbook).
The following table summarizes the impact of various differences and errors on the
starting balance.
Bank Reconciliation Statement (BRS)

Items
Bank Balance as per Cashbook

Rs

Rs

Or

xxxx

Overdraft balance as per Passbook

Add:
1
2
3
4
5

Cheques issued but not presented for payment

Direct payments made by customers
Amount collected by bank (rent, dividends, interest on
investments, etc.)
Cheques deposited but omitted to be recorded in
Cashbook

xxxx

Wrong credit on the credit side of Passbook

xxxx

xxxx
xxxx
xxxx

xxxx
1

xxxx

Less:
Cheques deposited but not collected
Cheques paid into the bank but dishonored
Bank charges and interest charges
Payments made by the banker on behalf of the trader
Cheques issued but not recorded in the Cashbook

Wrong entry on the debit side of the passbook

xxxx

2
3
4

xxxx
xxxx
xxxx
xxxx
Xxxx

Balance as per other book

xxxx

Illustration:
On March 31, 2001, the bank column of Cashbook of Prithvi Limited showed a bank
balance (debit) of Rs.48,500. However, the bank statement showed a credit balance of
Rs.53,900 as on the same date. A detailed comparison of entries revealed the following:
1.

Customers cheques amounting to Rs.8,450 had not been collected by the

bank as on 31.3.2001.

2.

Certain cheques amounting to Rs.8,850 had not been presented for payment
as on 31.3.2001.

3.

Bank charges of Rs.1,000 and interest on investments of Rs.2,500 collected

by the banker appear only in the bank statement.

4.

On 30.3.2001, there was a wrong credit of Rs.2,500 in the bank statement.

5.

Swaroop Limited, a customer, had paid into the bank directly a sum of
Rs.3,000 on March 29, 2001. This has not been recorded in the Cashbook.

6.

A cheque for Rs.2,000 received from Excel Limited, a customer, which was
deposited had been returned unpaid. The dishonor of this cheque has not
been entered in the Cashbook.

Solution:

Prithvi Limited will first pass the necessary rectification entries in the Cashbook and then
prepare a reconciliation statement
Cashbook of Prithvi Limited (Bank Columns only)

Date

Receipts

Bank

Date

Payments

Bank

Rs.
2001

Rs.
2001

March,31

To Balance b/d

48,500 March,31

By Bank Charges

1,000

March,31

To InterestReceived

2,500

March,31

By Excel Limited

2,000

March,31

To SwaroopLimited

3,000

March,31

By Balance c/d

54,000

51,000

54,000

Bank Reconciliation Statement as on March 31, 2001

Particulars

Rs.

Rs.

Bank balance as per Cashbook

Add: Cheques issued but not presented for payment
Wrong credit in the bank statement
Less: Cheques deposited and remained uncollected
Bank balance as per bank statement

51,000
8,850
2,500

11,350
62,350
8,450

53,900

Test Questions:
Problem 1. From the following particulars, prepare a Bank Reconciliation Statement as on 31st
December, 2007:
Balance as per Cash book Rs 5,800.
Cheques issued but not presented for payment RS 2,000.

Cheques sent for collection but not collected up to 31st December,2007 rs 1500.
The bank had wrongly debited the account of the firm by Rs200, which was rectified by them
after 31st December.
Balance as per Pass book is Rs 6,100.
Problem 2: Prepare a Bank reconciliation Statement from the following particulars. You are required to
ascertain the bank balance as it would appear in the cash book of Shri Gobind as on 31 st December, 1995.
(a) The bank pass book showed an overdraft of Rs 9500 on 31st December, 1995.
(b) Interest of Rs 250 on overdraft for six month ending 31 st December, 1995 is debited in the pass
book, but is not entered in the bank column of cash book.
(c) Cheques issued but not cashed, prior to 31st December, 1995 amounted to Rs 1500.
(d) Club bill for Rs 2700 was directly debited to his bank account and not yet reflected in the cash
book.
(e) Cheques paid into bank, but not cleared and credited before 31 st December, 1995 amounted to Rs
2500.
(f) Interest on investments collected by the Bankers and credited in the pass book amounted to Rs
1800.
Shri Govind issued a cheque of Rs 900 for his LIC premium, which was returned as the amount
mentioned in figure and in words did not tally. Shri Govind, therefore paid the premium by cash but this
was not reflected in his books of account.
Problem 3: on 30th November 1997, the cash book of Mrs P Ali showed an overdrawn position of

Rs 3630 although her bank statement showed different balance. Detailed examination of the two
records revealed the following:
1. The debit side of the cash book had been undercast by Rs 300.
2. (A cheque for Rs 1560 in favour of X suppliers Ltd had been omitted by the bank from its
statement, the cheque having been debited to another customerss account.
3. A cheque fro Rs 182 drawn for payemnet of telephone bill had been enetered in the cash
book at Rs 128 but was shown correctly in the bank st.
4. A cheque of Rs 210 from A banerjee having been paid into bank was dishonoured and
shown as such on the bank st, although no entry relating to the dishpnoted chqque had
been made in the cash book
5. The bank had debited a cheque for Rs 126 to Mrs Alis account in error; it should have
been debited by them to Mr Kalis account
6. A dividend of RS 90 had been collcted ny the bank, but not recorded in the cash book
7. Cheques totaling Rs 1260 drawn on Nov, had not been presented for payment.
8. Cheque of Rs 1080 deposited on 30th Nov, had not been credited by the bank.
9. Int amounting to Rs 228, had been debited by the bank, but noy entered in the cash book.
You are required to prepare a BRS on 30th Nov 1997