In this article you will learn:
Business entities prepare a cash book to keep record of cash and bank transactions undertaken on day to day basis. Accordingly, cash book records both the cash account and bank account and therefore, reflects the balances of both the accounts at the end of a given period.
Once the cash book is prepared, the cash and bank items recorded in the cash book of the business entity are matched with the entity’s bank transactions maintained by its bank.
This is undertaken by preparing a Bank Reconciliation Statement. To prepare a bank reconciliation statement, the business entity or the accounting professional on its behalf makes sure that:
- the cash book is prepared until the present day and
- a bank statement or passbook is acquired from the bank
A bank statement or passbook is nothing but a record kept by the bank for the entity’s bank transactions.
This article talks about bank reconciliation statement meaning, bank reconciliation purpose, preparation of reconciliation statement, rules and format.
Bank Reconciliation Statement Meaning
A bank reconciliation statement is a document that is prepared to match or reconcile the balances as shown in the cashbook with the balances reflected in the passbook of a business entity at a given period.
It reflects the items or transactions that are identified to cause the differences in the balances as per cash book and bank pass book. Reconciling bank statements with the cash book balances helps a business entity to ascertain the causes of differences. Hence, he can make the necessary accounting changes in the entity’s books to ensure accuracy.
Bank Reconciliation Purpose
As mentioned above, a business entity prepares a cash book that records its cash and bank transactions. As per the rules of accounting, all the cash and bank receipts are recorded on the debit side. Whereas all the withdrawals are recorded on the credit side of the cash book.
Now, the bank of the business entity too keeps a record of the bank transactions undertaken by the business entity. This helps the business entity to keep a track of its funds in the bank and match bank transactions with its own books of accounts.
The balances reflected in the passbook must match with the balance so calculated in the cashbook. But typically, these balances tend to vary. These differences between cash book and passbook arise either due to timing differences in recording transactions in respect of payments and receipts or errors on the part of business entity or bank in recording transactions.
Therefore, it becomes necessary to locate the causes for such differences and make necessary accounting adjustments in the cash book to ensure accuracy.
Further, it must be noted that in a bank passbook, all the deposits are reflected in the credit column and all the withdrawals are shown in the debit column of the passbook. Accordingly, if deposits are more than withdrawals, passbook shows a credit balance. On the other hand, if withdrawals are more than deposits, it shows a debit balance.
Preparation of Bank Reconciliation Statement
Once the causes of differences are ascertained, a bank reconciliation statement, also known as a BRS statement, is prepared in the following two ways:
- without adjusting cash book balance
- after adjusting cash book balance
Typically, a bank reconciliation statement is prepared after adjusting the balance in the cash book of the business entity. Therefore, we will discuss this method in detail in this article.
Bank Reconciliation Statement Rules
Determine Adjusted Balance as per Cash Book
Unadjusted Balance as per Cash Book
The first step in preparation of bank reconciliation statement is to start with the balance as per cash book or pass book of the business entity. It must be noted that the debit balance in cash book means that these are the amount of deposits of the business entity in its bank account.
This debit balance as per cash book would be credit balance as per passbook. Accordingly, such a balance indicates that the deposits made by the business entity in its bank account are more than the amount of withdrawals. Therefore, such a balance reflects a positive or favorable balance in cash book and passbook.
On the contrary, credit balance in cash book showcases that the amount of withdrawals made is more than the amount of deposits by the business entity. Therefore, credit balance as per cash book showcases bank overdraft. Accordingly, such a balance is called an unfavorable balance in cash book or unfavorable balance as per passbook.
Make Necessary Adjustments in the Balance as per Cash Book
Now, there are a number of items that cause the difference between cashbook and passbook balances. Such items mainly reflect in the passbook only. These could be charges in respect of interest on overdraft, dishonored bills and cheques, payment by bank on standing instructions and debited by bank in passbook but not in cash book etc.
Therefore, before going ahead, it’s better to first record these items in the cashbook so as to determine adjusted balance as per cash book. Adjusting the cash book balance prior to preparing the bank reconciliation statement reduces the number of items that cause the difference in cash book and passbook balances, thereby helping in determining balance as per bank that goes into balance sheet.
Ideally, adjusting the cash book balance for passbook items before the preparation of bank reconciliation statement is the common approach adopted by businesses while preparing BRS. As a result, only the items that cause the difference on account of time gap while recording appear in the bank reconciliation statement. These include:
- cheques issued but not yet presented
- cheques deposited but not yet collected
- items that occur as a result of an error in the passbook
Adjust the Items Causing Differences Due to Time Gap in Adjusted Balance as per Cash Book
Once you have the adjusted balance as per cash book, the next step is to adjust this balance with items that cause the difference on account of time gap in recording such transactions. Accordingly:
- cheques issued but not yet presented are added back to the adjusted balance as per cash book
- cheques deposited but not yet collected are deducted from the adjusted balance as per cash book
- errors in the passbook are deducted from or added back to (as the case may be) the adjusted balance as per cash book.
Determine Net Balance as per Cash Book
Once the adjusted balance as per cash book is further adjusted for the above items, what you get is net balance as per cash book. Needless to say, this balance must match with the balance as per pass book.
Other Points to Remember
- As per rules mentioned above, balance as per cash book is the starting point for preparing bank reconciliation statements. However, you can also start with balance as per pass book for preparing BRS. In case you do so, the treatment for all the items mentioned above shall be reversed. Accordingly:
- cheques issued but not yet presented are deducted from the balance as per passbook
- cheques deposited but not yet collected are added back to the balance as per passbook
- dishonored bills and cheques are added back to balance as per passbook
charges in respect of interest on overdraft are added back to balance as per passbook
- There can be four different scenarios while preparing a bank reconciliation statement. These include:
- debit balance or favorable balance as per cash book is given and balance as per pass book needs to be determined
- credit balance or unfavorable balance as per cash book is given and balance as per pass book needs to be determined
- credit balance or favorable balance as per pass book is given and balance as per cash book needs to be determined
- debit balance or unfavorable balance as per pass book is given and balance as per cash book needs to be determined
Bank Reconciliation Statement Example
The cash book reflects an overdraft balance of Rs. 1,8000. Calculate the adjusted cash balance from the following details and prepare bank reconciliation statement.
- unpresented cheques – Rs. 6,000
- uncleared cheques – Rs. 3,400
- bank interest debited in the passbook only – Rs. 1,000
- bills collected and credited in the passbook only – Rs. 1,600
- cheque of pixel technologies dishonored – Rs. 1,000
- cheque issued to Khosla Pvt Ltd but not yet entered in the cash book – Rs. 600
Adjusted Cash Book (Bank Column)
|Date||Receipts||Amount (Rs.)||Date||Payments||Amount (Rs.)|
|Bills collected as per pass book||1,600.00||Balance b/d||18,000.00|
|Cheque dishonored (Pixel Technologies)||1,000.00|
|Cheque issued to Khosla Pvt Ltd||600.00|
Bank Reconciliation Statement as on December 31, 2019
|Bank overdraft as per cash book||19,000|
|Bank overdraft as per passbook||16,400|