asCHANAKYA NATIONAL LAW UNIVERSITY
Final Draft for fulfillment of project of
Principles of Accounting & Audit
ON
“Bank Reconciliation Statement- A Practical Legal
Approach”
Submitted to: - Submitted by: -
Mr. Ashok Kumar Sharma Sanya Suman Roll No 2632
(Assistant Professor of Management) 1st Year, B.B.A. L.L.B.(Hons)
BANK RECONCILIATION STATEMENT – A PRACTICAL
LEGAL APPROACH
TABLE OF CONTENTS
1. Acknowledgement………………………………………….. 3
2. Introduction…………………………………………………. 4
3. Definition and purpose of Bank Reconciliation Statement…. 8
4. Importance of Bank Reconciliation Statement……………… 10
5. Method of Preparation of Bank Reconciliation Statement….. 12
6. Errors and other issues………………………………………. 18
7. Conclusion/Suggestion……………………………………… 20
Bibliography
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BANK RECONCILIATION STATEMENT – A PRACTICAL
LEGAL APPROACH
ACKNOWLEDGEMENT
I wish to my sincere gratitude to Mr. Ashok Kumar Sharma Sir, Assistant
Professor of Management for providing me an opportunity to make a project
work on “Bank Reconciliation Statement – A Practical Legal Approach”
without the kind support of whom and help the completion of the project
would have been a herculean task for me.
I acknowledge my family and friends who gave their valuable and
meticulous advice which was very useful and could not be ignored in
writing the project. I want to convey my most sincere thanks to my faculties
for helping me throughout the project.
Thereafter, I would also like to express my gratitude towards our seniors
who played a vital role in the completion of this research work.
I would also like to express my gratitude towards the library staff of my
college which assisted me in acquiring the sources necessary for the
completion of my project.
Last but not the least, I would like to thank almighty for obvious reasons.
Sanya Suman
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BANK RECONCILIATION STATEMENT – A PRACTICAL
LEGAL APPROACH
INTRODUCTION
Accounting is the process of recording, classifying, summarizing and
interpreting the transaction after communicating result to the parties.
Accounting plays a vital role in running a business because it helps us track
income and expenditures, ensure statutory compliance and provide investors,
management and government with qualitative financial information which can
be used in making business decisions.
Accounting consists of various process and one of the process of accounting is
Reconciliation. Reconciliation is an accounting process that compares two sets
of records to check that figures are correct and in agreement. It is an accounting
process that ensures that the actual amount of money spent matches the amount
shown leaving an account at the end of a fiscal period. Reconciliation is
important activity for businesses and individuals because it is an opportunity to
check for fraudulent activity and to prevent financial statement errors.
Reconciliation is typically done at regular intervals such as monthly or quarterly
as part of normal accounting procedures.
Business entities maintain cash books to record both cash as well as bank
transactions. A cashbook has a column that shows cash available with the
business and a bank column that shows cash at the bank. Banks also keep an
account for every customer in their books. All deposits are recorded on the
credit side of the customer’s account and withdrawls are on the debit side of the
account. But, sometimes the bank balances as per the bank statement and cash
book does not match. In case the balance available in the passbook doesn’t
match the bank column of the cash book, the business should identify the
reasons for the same. It is important to reconcile the differences. For reconciling
the statements as shown in the passbook and cashbook a reconciliation
statement is prepared known as Bank Reconciliation Statement.
BANK RECONCILIATION STATEMENT or BRS
Bank reconciliation statement is a report or statement prepared by the business
to match the bank transactions recorded in the books of accounts with the bank
statement. The bank reconciliation statement helps to check the correctness of
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BANK RECONCILIATION STATEMENT – A PRACTICAL
LEGAL APPROACH
the entries recorded in the books of accounts and thereby, ensures the accuracy
of bank balances.
BRS is prepared on a periodical basis for checking that bank related transactions
are recorded properly in the cash book’s bank column and also by the bank in
their books. BRS helps to detect errors in recording transactions and
determining the exact bank balance as on a specified date.
Benefits of preparing BRS
• Detecting errors
• Tracking interest and fee
• Detecting Fraud
• Tracking receivables
Pass Book:
A Pass Book or a Bank Statement is a summary of all financial transaction
occurring over a given period of time on a deposit account, a credit card, or any
other type of account offered by a financial institution.
Bank statements are typically printed on one or several pieces of paper and
either mailed directly to the account holder’s address, or kept at the financial
institution’s local branch for pick-up. Certain ATMs offer the possibility to
print, at any time, a condensed version of a bank statement.
Depending on the financial institution, bank statements may include certain
features such as cancelled cheques that cleared through the account during the
statement period, promotional inserts or important notices about changes in fees
or interest rate.
Cash Book:
Cashbooks are simple accounting books that are used to record basic
information about cash receipts and payments. Cash transactions are
straightaway recorded in the cash book and on the basis of such a record, ledger
accounts are prepared. Therefore, the cash book is a subsidiary book. But the
cash book itself serves as the cash account and the bank account; the balances
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BANK RECONCILIATION STATEMENT – A PRACTICAL
LEGAL APPROACH
are entered in the trial balance directly. The Cash Book, therefore, is part of the
ledger also. Hence, it has to be treated as the principal book. The cashbook is
thus both a subsidiary book and a principal book.1
RESEARCH METHODOLOGY
The researcher has chosen to follow the doctrinal type of research. While doing
this project, the researcher consulted various journals and online articles. The
doctrinal type of research allows the researcher to read, analyze, and compare
all that is written or present on the aforementioned topic.
2.1) Aims and objective
1. Define and explain Bank Reconciliation Statement.
2. Discuss the legal approach Bank Reconciliation Statement.
3. Find out importance of Bank Reconciliation in quality accounting data.
2.2) Hypotheses
The researcher hypothesizes that Reconciliation helps organisations to spot
discrepancies and show where they need to investigate any payment which
could have been made erroneously or fraudulently.
2.3) Scope and Limitation
The researcher will simultaneously engage in this study with other academic
work. This consequently will cut down on the time devoted to the research
work. The scope of this project has been narrowed down vastly for
enhancing quality of the research.
1
https://www.investopedia.com/terms/c/cash-book.asp
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BANK RECONCILIATION STATEMENT – A PRACTICAL
LEGAL APPROACH
Research Questions
I. What is Reconciliation and Bank Reconciliation Statement?
II. How do we legally approach a BRS?
III. What is the practical importance of Bank Reconciliation Statement?
Sources of data
● Books
● Blogs
● Articles
● Websites
Mode of Citation
The mode of citation used is Bluebook Citation Edition 20th.
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BANK RECONCILIATION STATEMENT – A PRACTICAL
LEGAL APPROACH
Definition and Purpose of Bank Reconciliation Statement
Bank Reconciliation Statement or BRS is a report or statement prepared by
business entity to match the bank transactions recorded in the books of accounts
to match the bank statement. The BRS helps in checking the correctness of
entries books of accounts thereby ensuring accuracy of bank balances.
Purpose of Bank Reconciliation
►Identify and rectify differences
The purpose of bank reconciliation process is to identify and rectify differences
between bank balance and book balance in order to process necessary
adjustments or corrections.
►Preventing overspending by keeping strict accounts of cash outflows
Bank reconciliation prevents overspending by keeping strict accounts of cash
outflows. They also check for any overcharging of fees, done on the bank’s
side.
►Correction of Bank Errors
Bank reconciliation helps in tracking and correcting employee errors. The also
check duplication of transactions.
►Active check on the embezzlement of money
Bank Reconciliation process put an active check on the embezzlement of money
and ensures responsible accounting.
►Help in reaching the correct account balance
Bank Reconciliation helps in reaching the correct account balance figures and
this provides external auditors with easily verifiable documentation.2
2
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reconciliation-and-prepare-a-bank-reconciliation-and-its-associated-journal-entries/
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BANK RECONCILIATION STATEMENT – A PRACTICAL
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►Reduce Accounting Errors
If a bank reconciliation process is done regularly, it can reduce accounting
errors drastically and make the finding of missing purchase and sales invoices,
easy in the accounting system.
So, Basically, the purpose of bank reconciliation is to introduce efficiency and
transparency into the business accounting system. It is highly worthwhile to
take time and do them as it helps in situations like errors, mismatch etc.
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BANK RECONCILIATION STATEMENT – A PRACTICAL
LEGAL APPROACH
IMPORTANCE OF BANK RECONCILIATION
Reconciliation is a fundamental accounting process that checks the money
earned or spent an account matches the money leaving or entering an account in
a fiscal period.
Bank Reconciliation process is important for business entity and individuals to
check for fraudulent activity and prevent financial statement errors.
Key Importance of Bank Reconciliation
► Helps in managing and monitoring cash flow of individuals and business
entity
► Validating Data Entry: Reconciliation helps in to identify any irregularities,
such as entering wrong amounts, duplicate data entry, and other data entry
errors.
►Identify Fraud: Identifying signs of fraud must be our first priority while
reconciling process as it helps in answering questions like3
Were legitimate checks that you issued duplicated or changed?
Were checks issued without authorization?
Were there unauthorized transfers out of the account?
Does the account have any missing deposits?
►Accurate tax reporting: Reconciling bank statements help to generate an
accurate tax return
►For the completion of cashbook: Business enterprises get information about
bank charges, cheques dishonoured, direct payments, direct deposits, etc from
the bank statement only. Entries of the same are made in the Cashbook on the
3
https://www.investopedia.com/ask/answers/041515/why-reconciliation-important-accounting.asp
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BANK RECONCILIATION STATEMENT – A PRACTICAL
LEGAL APPROACH
basis of bank statement. Thus, to complete the cashbook, comparison and
reconciliation of cashbook is important.
►Bank Statement Reconciliation helps uncover irregularities and and eliminate
them.
►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.
Some Advantages of Bank Reconciliation Are:
1. Requirement of less man power
2. Easy identification of errors
3. Chances of embezzlements are Reduced
4. Makes it easy to identify whether accounting errors are actual or errors of
a timing mismatch.
5. Makes it possible to keep track of checks that are cashed, separate from
those that are outstanding or in transit.
pg. 11
BANK RECONCILIATION STATEMENT – A PRACTICAL
LEGAL APPROACH
PREPARATION OF A BANK RECONCILIATION
STATEMANT
Steps in preparation of Bank Reconciliation Statement4
Step 1: First of all, we compare the opening balances of both the bank
column of the cash book as well as the bank statement. The two can
be different in terms of uncleared dues like un-presented or un-
credited cheques from the previous month.
Step 2: Compare debit and credit sides
We start by comparing the debit side to the credit side of the bank
statement. Also, compare the debit side to the credit side of the cash
book. The two must be equal in both documents. We tick mark the
columns if we do not find any error.
Step 3: Analyse the entries in the bank column of the cash book as
well as cheque book. Then, we look for records that have been missed
to be posted in the bank column of the cashbook. We make a separate
list of those items and list them in cashbook.
Step 4: Correct the errors present in the cashbook if any,
Step 5: Revise the entries: Calculate the balance after revising the updated
cash book’s bank column.
Step 6: Make BRS accordingly
Step 7: Add unpresented cheques and deduct un-credited cheques
Step 8: Make all the final adjustments and check for bank errors in the bank
statement and the firm’s errors in the cash book. During heavy transaction days,
firms or banks may make mistakes in noting entries.
Step 9: Left hand side must be equal to right hand side.
4
https://www.toppr.com/guides/principles-and-practices-of-accounting/bank-reconciliation-statement/
preparation-of-bank-reconciliation-statement/
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BANK RECONCILIATION STATEMENT – A PRACTICAL
LEGAL APPROACH
The results from both the documents i.e. bank statement and cash
book must match with each other.
Format of Bank Reconciliation Statement
PARTICULARS AMOUNT
Balance at bank as per cash book XXXX
Add:
(i) Cheques issued but not yet presented XX
(ii) Interest allowed by bank XX
(iii) Divided corrected directly by bank XX
(iv) Direct payment into bank by customer XX (+) XX
Less:
(i) Cheques deposited but not yet cleared XX
(ii) Interest & Charges charged by bank XX
(iii) Standing instruction for payment XX
(iv) Dishonour of bill discounted XX (-) XX
Balance as per Pass Book
Mechanism of preparation of BRS
There are two ways to prepare Bank Reconciliation Statement:
1. To reconcile the bank statement with the corrected cash book.
2. To reconcile the bank statement with the unadjusted cash book.
1. To reconcile the bank statement with the corrected cash book:
There are three steps to prepare Bank reconciliation statement by
reconciling the bank statement with corrected cash book.
• Check the Bank statement with the Cash book to identify items which
have been omitted. Compare the cash receipts book to the receipts shown
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BANK RECONCILIATION STATEMENT – A PRACTICAL
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on the bank statement (the credits on the bank statement) – for each
receipt that agrees, tick the item in both the cashbook and bank statement.
•Update the cash book with any omission and errors made by the firm
itself.
Any un-ticked items on the bank statement (other than rare errors made
by the bank) will be the items that should have been entered into the cash
books, but have been omitted for some reason – these should be entered
into the cashbook and then the amended balance on the cashbook can be
found. To find the correct cashbook balance a ledger account is used for
the bank with the original cashbook balance shown as the brought
forward balance and any additional payments shown as credits and
receipts as debits.
•Prepare the Bank reconciliation statement
Finally, any unticked items in the cashbook will be the timing differences
– unpresented cheques and outstanding lodgements – these will be used
to reconcile the bank statement closing balance to the corrected cash book
closing balance.
Example:
Question:
Cash Book (Bank Column)
2021 Amt. 2021 Amt.
Aug 2 By bal b/d 2800 Aug 8 R Singh 1600
3 A Singh 1000 20 C cork 700
11 Mad 2000 29 M Tang 100
30 S Sin 1400 31 To bal c/d 4800
------------ ---------------
7200 7200
Bank Statement
2021 Dr. Cr. Balance
Aug 1 Balance 2800
3 cheque deposit 1000 3800
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BANK RECONCILIATION STATEMENT – A PRACTICAL
LEGAL APPROACH
8 cheque 1600 2200
10 cheque deposit 2000 4200
11 cheque dishonored 2000 2200
11 service charge 30 2170
12 auto pay rent 250 1920
20 cheque 700 1220
31 bank interest 50 1270
31 credit transfer 300 1570
commission received
31 balance 1570
Answer:
Cash book (bank column)
2021 2021
Aug 31 to bal b/d 4800 Aug 31 Dishonoured cheque
31 Commission Rec. 300 2000
31 Bank Interest 50 31 bank charges 30
31 Rent 250
---------------------------- 31 by bal c/d 2870
5,150 --------------------------------
5,150
Bank Reconciliation Statement as at 31 Aug 2021
Particulars Amount
Balance as per Pass Book 2870
Add: Unpresented Cheques 100
2970
Less: Bank deposits not yet entered on Bank 1400
Statement
Balance as per Cash Book 1570
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BANK RECONCILIATION STATEMENT – A PRACTICAL
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2. To reconcile the bank statement with the unadjusted cash
book
There are two steps in reconciling the bank statement with the unadjusted
cash book:
• Check the bank statement and the cash book to identify the items which
have been omitted.
Check opening balances of both Cash Book and Bank Statement to
ascertain whether the two balances are the same; Compare the Cash
Book’s Dr Column (receipts) with the Cr column of Bank statement, tick
all common items. Compare the Cash Book’s Cr columns (payments)
with the Dr column of Bank Statement, tick all common items.
• Prepare the bank reconciliation statement
All items unticked in the bank statement will be adjusted in the cash book
and all items unticked in the cash book will be recorded in the bank
reconciliation statement.
Example:
Cash Book (Bank Column)
2021 2021
Aug 1 bal b/d 2800 Aug 8 K wong 1600
3 W lee 1000 20 C cork 700
10 T Cheung 2000 29 M tang 100
30 S Sin 1400 31 bal c/f 4800
--------- ---------
7200 7200
Bank Statement
2021 Dr. Cr. Balance
Aug 1 balance 2800
3 cheque deposit 1000 3800
8 cheque 1600 2200
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BANK RECONCILIATION STATEMENT – A PRACTICAL
LEGAL APPROACH
10 cheque deposit 2000 4200
11 cheque dishonoured 2000 2200
11 service charges 30 2170
12 auto pay rent 250 1920
20 cheque 700 1220
31 bank interest 50 1270
31 credit transfer 300 1570
communication received
31 balance 1570
Answer: The facts are same as previous example but cash book is not
updated.
Bank Reconciliation Statement as at 31 Dec 1996
Particulars Amount
Balance as per cash 4800
book
Add: Credit 300
transfers
Bank Interest 50 450
Unpresented 100
Cheques
5250
Less: Bank Charges 30
Dishonoured cheques 2000
Bank deposits not yet entered on bank
statement 1400 (3680)
Direct Debit 250
Balance as per pass book 1570
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BANK RECONCILIATION STATEMENT – A PRACTICAL
LEGAL APPROACH
ERRORS AND OTHER ISSUES
In some cases errors like mismatching of both the balance of the cash book and
the pass book may be identified. Reasons for those errors are:
1. Unpresented cheques:
Cheques issued but not presented for payment. When cheques are issued,
the entry in the cash book is made immediately but, in the books of the
bank, the entry is made only when the cheque is presented for payment. It
is possible that at the time when the balance of the two books are
compared, some of the cheques might have been issued but might not
have been presented for payment thus causing a disagreement between
two balances.
2. Uncollected cheques:
Cheques paid into the bank but not yet cleared. As soon as the cheques
are deposited into the bank, the entry is passed on the debit side of the
bank column in the cash book. The customer’s account is credited by the
bank only when the cash book is compared with pass book some of the
cheques deposited may be uncollected.
3. Interest received:
Interest and bank charges debited by bank. The bank debits the account of
the customer by way of interest on overdraft. It also debts the account of
the customer by way of incidental charges and collection charges. As
soon as these charges are made, the bank debits the customer’s account.
But, the entries in the cash book are made by the customer only when he
receives the bank statement or the pass book.
4. Interest Allowed:
Interest allowed by the bank. Bank might have credited the account of the
customer with the interest and may have made the entry in the pass book.
It is possible that entry respect of such interest may not have been made
by the customer in the bank column of the cash book thus causing a
disagreement between two balances.
5. Interest collected by the bank:
Interest dividend etc. collected by the bank. Sometimes interest on
government securities or dividend on shares is collected by the bank and
is credited to customer account. If the entry for these do not appear
in the cash book, the balance will differ.
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BANK RECONCILIATION STATEMENT – A PRACTICAL
LEGAL APPROACH
6. Direct payment by the bank:
Direct payment by the bank sometimes under standing instructions from
the client, certain payments like insurance premium, club fees etc. are
made by the bank. The entry in the bank column of the cashbook is only
made when the necessary intimation to that effect is received from the
bank by the client. The entries in the cash bool and pass book may be on
different dates.
7. Direct payment into the bank:
Direct payment into the bank by a customer. Sometimes customers
deposit money direct into the account in the bank, the corresponding
entry for which may not appear in cash book, due to delay in necessary
instructions by the customers.
8. Dishonour of bill:
Dishonour of bill discounted with the bank. Sometimes customers get
their bills discounted with the bank. If the bank is not able to get payment
of these bills together with the noting charges, if any. The customer will
pass the entry in his book on receipt of the information from the bank.
9. Errors on the part of customer:
Besides the reasons stated above, there may be certain errors from
customer’s side like posting in the wrong column, calculation error,
unrecorded transaction, etc. In such cases also, there would be a
difference between the balances of pass book and cash book.
10.Error committed by bank:
Bank may also commit certain errors causing difference in the pass book
and cash book by giving wrong debit or credit to customers account.
A reconciliation statement is therefore, prepared at periodical intervals
with a view to indicate the items which cause such agreement between
the balance as shown by the bank column of the cash book and the bank
pass book on any given date.5
CONCLUSION
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BANK RECONCILIATION STATEMENT – A PRACTICAL
LEGAL APPROACH
A business entity prepares a cash book of its own that records cash and bank
transactions. As per the rules of accounting, all the cash and bank receipts are
recorded on the debit side and withdrawals are recorded on the credit side.
Bank of the business entity too keeps a record of the bank transactions
undertaken by the entity to make sure it keeps a track on its funds in the bank
and match with bank transaction of its own books of accounts.
Balance reflected in the passbook must match the balance reflected in the cash
book but many a times they do not match due to various reasons like difference
in timing in recording transactions, error in recording either on part of business
entity or the bank. To ensure accuracy, it becomes necessary to locate the
causes and ensure accuracy.
The purpose of Bank Reconciliation Statement is to carry out, uncover and
correct any errors in the recording of payments made from the bank account and
amounts lodged to the bank account. It will also highlight any transactions
initiated by the bank which have not yet been recorded in the business
accounting records.
The bank reconciliation statement constitutes a comparison between the
cashbook and independent bank statement. Non agreement of the two indicates
an error which can be corrected. Agreement of the two adjusted balance
provides completeness of the pass book.
x
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BANK RECONCILIATION STATEMENT – A PRACTICAL
LEGAL APPROACH
BIBLIOGRAPHY
• T S Grewal’s Double Entry Book Keeping: Financial Accounting, Sultan
Chand
• Foundation Course, Principles of Accounting, ICAI (Module 1 to 2)
• https://www.investopedia.com/ask/answers/041515/why-reconciliation-
important-accounting.asp
• https://www.investopedia.com/terms/a/account-reconcilement.asp
• https://cleartax.in/s/bank-reconciliation-statement
• https://leverageedu.com/blog/bank-reconciliation-statement/
• https://www.investopedia.com/terms/r/reconciliation.asp
• https://opentextbc.ca/principlesofaccountingv1openstax/chapter/define-the-
purpose-of-a-bank-reconciliation-and-prepare-a-bank-reconciliation-and-its-
associated-journal-entries/
pg. 21
