Bank Reconciliation Statement

Chapter Notes

▪ In the books of a business, funds paid into and out of the bank are entered into the bank columns of the
Cash Book.
▪ At the same time, the bank will also be recording the flows of funds into and out of the business. Such
statement made by bank is called bank account statement or Pass book.
▪ Ideally both accounts should be same but these should be opposite in signs i.e. (mirror image)
▪ The difference arises when anyone miss something or does something wrong.
▪ Where there is a difference there should be a reconciliation.
▪ Types of balances in cash book (bank column)
- Debit balance, Favorable balance, Normal Balance
- Credit balance, unfavorable balance, Overdrawn balance

Reasons for Difference in both balances

Timing Differences no ones fault BRS

Reason for Differences

by business ACB
Errors
by bank BRS

by business ACB
Omissions
by bank BRS

Format of question of BRS

1) Make adjusted Cash book (ACB).
2) Make BRS
3) The Closing balance of both should match.
Differences in both balances to be adjusted in Adjusted Cash Book
Difference Reason
Bank charges Normally bank charges are directly deducted from the bank account. Bank send a Debit
Interest Expenses advise to business (stating that it has debited the business) however if the debit advise is
not sent then this issue is generated
Dividend/interest Normally interest or dividend is directly deposited by the bank/investee company, Bank
received: send a Credit Advise to business (stating that it has credited the business bank account)
however if the credited advise is not sent then this issue is generated
Standing orders This is an instruction by account-holder to its bank to pay/transfer a same amount at
regular intervals to another party’s (the payee’s) account.
Direct debits In this method, an account-holder allows another party to directly collect amounts on
regular basis from its bank, amount may be different in different periods. This method is
usually used for monthly utility bills or credit card bills.

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 Direct Credits These are amounts directly credited into accounts by another party. For example, a
customer deposits/transfers the amount due directly into the bank account of the
business. This should be recorded on receipt side of cash book
Errors in Cash book There may be casting errors, balancing errors, etc. in cash book. These need to be
adjusted on receipt side or payment side accordingly. When an item is incorrectly
included on the other side of cash book (debit instead of credit or vice versa), the
correction is made by adjusting twice the amount on correct side.

Correcting Errors in Cash Book

▪ Examples
▪ Errors of incorrect amount on opposite side
▪ Errors of correct amount on opposite side
▪ Under-casting and overcasting errors
▪ How to Resolve such errors
▪ Identify the Wrong entry that has been made and reverse it
▪ Identify the correct entry that should have been made and pass it.

Difference in both balances to be adjusted in BRS

Unpresented cheques (also This timing difference will come to an end when bank eventually records
called outstanding cheques) payment of the cheques. The amount to be reconciled in BRS must exclude post-
dated, cancelled and time-barred cheques.
Uncredited items (also called This timing difference will come to an end when the cheque is cleared/collected/
outstanding deposits or credited by the bank. The amount to be reconciled in BRS must exclude post-
lodgments): dated, cancelled, time-barred and dishonored cheques.
Error or omission by bank: The identified error is communicated to the bank for correction. The correction
process may take some time, meanwhile the error is mentioned in BRS as a
reconciling item

Types of Cheques
Cheque is the instrument of payment. With swift change in technology there is a considerable reduction in usage of
cheques for personal matters so you might not see a cheque in your personal life. However in the business scenario
cheques are still widely used due its being traceable, Verifiable, Authorization, need of written record etc.
Following terminologies are important for practical as well as examination point of view.
▪ When A party has to make a payment to B party. A will Draw a Cheque in the name of B.
▪ A will send/deliver/handover the cheque to B. Lets suppose the amount is Rs. 75,000. At the time of
delivery of cheque Both A and B will record the entry in their own records as follows.
Party A Buyer Party B Seller
Purchase A/c Bank A/c
Bank A/c Sales A/c

▪ It is jaw dropping interesting to see that the amount is not actually yet transferred from Bank of A to the
Bank of B but both parties has entered the amount in their respective good.
▪ The same cheque is unpresented cheque for Party A and uncredited cheque for Part B as long as the
payment is not transferred from Bank of A to Bank of B.
▪ Now the cheque is with Party B, B may go to his own bank and give the cheque to its bank. This is called
presenting the cheque. Bank of B will receive the cheque and handle the matters with bank of A at its
own.
▪ When the payments are actually received no entry is made.
There can be various variation in the above process flow as detailed below.
▪ Dishonored cheques : While the bank of B was collecting cash from Bank of A. There was not enough
money in the account of A. So the bank of a was not able to make the payment (honor the cheque). At such

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 situation Bank of B will return the cheques to B and mark it as Dishonored. B may settle its score with A as
it like.
These should be reversed in cash book. As when deposited, these are included on the receipt side, on
reversal, these are recorded on payment side.
▪ Time-barred cheques: A cheque becomes time-barred after six month have passed from the date
mentioned on it and the bank might not pay it anymore. Therefore, these are cancelled and reversal is to be
recorded.
▪ Cancelled cheques: A cheque may also be cancelled for other reasons, for example, incorrect name was
mentioned, the payment was made using another method, a replacement cheque has been issued and parties
intend to cancel the old one. In these cases, a reversal should be recorded in cash book.
▪ Post-dated cheques: means a cheque which will become payable on a future date. These cheques will be
recorded once the date on the cheque has arrived. If these have been included in cash book, a reversal
should be made.

Formats of Bank Reconciliation

There can be two formats of Making bank reconciliation
1) Starting BRS from the balance as per Bank
2) Starting BRS from the balance as per Cash book
Both of these methods give same results however the signs of each and every reconciling item will be reversed from
one format to another.
There are some conveniences of following format 1 in some cases and format 2 in other cases. However, you can
select and use one format fit for all. Using one format for all kind of data will be easy and more understandable.

Format
Bank Reconciliation Statement as at
Particulars Rs.
Balance as per bank statement (Dr) / Cr 500,000
Less: Unpresented cheques (40,000)
Add: Uncredited items 60,000
Less: Amounts incorrectly credited by bank (18,000)
Add: Amounts incorrectly debited by bank 10,000
Adjusted balance as per Cash Book Dr / (Cr) 512,000

Alternative Format
Bank Reconciliation Statement as at
Particulars Rs.
Adjusted balance as per Cash Book Dr / (Cr) 512,000
Add: Unpresented cheques 40,000
Less: Uncredited items (60,000)
Add: Amounts incorrectly credited by bank 18,000
Less: Amounts incorrectly debited by bank (10,000)
Balance as per bank statement (Dr) / Cr 500,000

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