Bank Reconciliation - Bank Reconciliation Statement (BRS)

What is Bank Reconciliation Statement

The bank and depositor keep independent records of depositor’s account balances. For this bank prepares pass book and depositor prepares Cash Book. Every month the bank provides statement of depositor’s account to depositor and this statement is called bank statement. Due to timely differences or errors or mistakes, there may be possible that the balance of cash book does not equal to the balance of Pass Book. Hence, there is disagreement between two balances.

Every month (if there is no difference then the depositor does not prepare statement but it is very rare), the depositor prepares a statement to provide the information about the causes of differences and give recommendation for reconciliation of the two balances. This statement of explanation is called Bank Reconciliation Statement.

Causes Of Differences And Types of Errors In Bank Reconciliation Statement (BRS)

There are two main reasons due to which discrepancies occur

1.   Timely Differences

2.   Errors and Mistakes

1.   Timely Differences

There are possibilities that some transactions are recorded in Cash Book but not recorded in Pass book by bank and vice versa. Such discrepancy occurs due to time difference in recording transactions in two books.

Examples of These Timely Differences

ü Cheques issued but presented to bank

ü Cheques Enchased

ü Bank Charges

ü Income

Disagreement due to Errors or Mistakes

o  Cash Book will under cast and over cast due to errors

o  Wrongly debited or credited the amount

o  Omission of the transactions

Now the question is what are the steps necessary to reconcile a bank statement. So, here are the Important Points for preparing Bank Reconciliation Statement:

   1. Cheques issued but yet not paid by bank to depositor should be added to Bank Balance as per Cash Book while preparing BRS. Because we credit it in our cash book but it is not recorded in pass book of bank, so cash book shows less balance.

   2. Cheques deposited but not collected by bank should be deducted from BRS as we debit it in our cash book but is not added in pass book of bank, so deduct it.

   3. Bank Charges deducted by bank decrease depositor’s balance but we not recorded it in our cash book we our cash book shows more balance. In order to reconcile deduct it from the cash book.

   4. Income credited by the bank in depositor’s balance shows more balance than the balance of cash book, so we add it in BRS to reconcile cash book balance with balance of pass book.

   5. Any under cast, overcast, omission, wrongly debited or credited of the amount in cash book or in pass book should be deal accordingly to reconcile the two balances. For example, we debit the balance in cash book with double amount, i.e., instead of recording Rs.300 we record with Rs.600 then we should deduct the Rs.300 extra from the balance of cash book, so we credit the amount with Rs300 to reconcile the balances with pass book.

Conclusion

We conclude that the Bank Reconciliation Statement (BRS) is prepared to reconcile balances of cash book and pass book when these balances are in disagreement either due to timely differences or errors and mistakes.