Chapter 5 — Bank Reconciliation Statement

Chapter 5 covers the Bank Reconciliation Statement — its meaning, the need for its preparation, the causes of difference between the cash book and passbook balances, and the methods of preparing the statement under both favourable balance and overdraft situations.

A Bank Reconciliation Statement is a statement prepared to reconcile the bank balance as per the cash book with the balance as per the passbook or bank statement, by showing the items of difference between the two accounts.

It is prepared because the bank balance shown in a firm's cash book and the balance shown in the bank passbook usually differ. The BRS helps ascertain the causes of such differences and reconcile the two balances.

The differences are caused by timing differences in recording transactions (such as unpresented cheques, uncollected deposits, direct bank debits or credits) and by errors committed by the business firm or by the bank.

When cheques are issued, they are immediately recorded on the credit side of the cash book, but the bank debits the firm's account only when the cheques are actually paid. Until then, the cash book balance is lower than the passbook balance by the amount of such unpresented cheques.

Cheques received from customers are recorded on the debit side of the cash book immediately, increasing the cash book balance. However, the bank credits the account only after realisation, so the passbook balance remains lower than the cash book balance until collection.

Direct debits are amounts deducted by the bank from the firm's account for services such as cheque collection charges, incidental charges, interest on overdraft, or stopped/bounced cheques, without the firm's prior knowledge. These reduce the passbook balance below the cash book balance.

A favourable balance means deposits exceed withdrawals — shown as a debit balance in the cash book and a credit balance in the passbook. An overdraft (unfavourable balance) means withdrawals exceed deposits — shown as a credit balance in the cash book and a debit balance in the passbook.

When the bank collects interest or dividends on behalf of the customer and credits the account, the firm records this in its cash book only upon receiving the bank statement. Until then, the passbook balance is higher than the cash book balance by this amount, so it is added when starting from the cash book balance.

These are payments made by the bank regularly on behalf of the customer — such as telephone bills, insurance premiums, rent, and taxes — as per standing instructions. They are debited to the firm's passbook but not immediately recorded in the cash book, making the passbook balance lower than the cash book balance.

If a cheque deposited by the firm is dishonoured, the bank debits the customer's account. Since the firm may not know about the dishonour immediately, no entry is made in the cash book, making the passbook balance lower than the cash book balance until the entry is recorded.

The BRS can be prepared without adjusting the cash book balance (starting directly from either the cash book or passbook balance and listing the differences) or after adjusting the cash book balance to arrive at the correct balance before reconciling.

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