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Bank Reconciliation Statement:

Bank Reconciliation Statement, in short BRS – One of the dreaded chapters by even toppers, is actually not very tough! Although it is a bit tricky at some points, but this is what makes it even more fascinating.

Before starting off, let’s begin with a very basic discussion. What actually is a Bank Statement? A bank issues a pass book on periodical terms i.e. at year end mostly. Now this pass book is actually a cash book maintained by the bank. This cash book contains all records related your account and it’s transactions in a general accounting format. So you can now deduce that bank statement or pass book is nothing but a cash book showing the journal entries or simply, the effect of our transactions on the bank financially. Now let’s dig in to what is Reconciliation actually. It in its most simple sense, it means making anything compatible or consistent with another. So combining the two ideas, we get that BRS is basically making bank’s or our records compatible with the other one. Hence, our cash book and bank’s cash book (pass book) should match or be equal. We begin with a comprehensive definition of Bank Reconciliation Statement.

Bank Reconciliation Statement – Basics:

In bookkeeping, a bank reconciliation statement is a process that explains the difference on a specified date between the bank balance shown in an organization’s bank statement, as supplied by the bank, and the corresponding amount shown in the organization’s own accounting records

Now, we have understood that the cash and pass book don’t tally. But there ought to be a reason for this. Yes! We have it.

The difference in passbook & cashbook arises because of various reasons, viz.:

  • Time gap between recording of entries (Say, delay in information flow)
  • Errors & Omissions

To illustrate:-

  • Cheques issued but not presented
  • Cheque deposited but not cleared
  • Bank Interest received (charged in case of overdraft balance) but no entry passed in cash book
  • Bank charges unrecorded
  • ECS debited or direct payment but not recorded in cash book
  • Automatic credit in the bank account (interest, dividend, etc.) & no information received in that regards.
  • Wrong amount recorded in cash book
  • Posted in another account
  • Dishonour of a bill discounted with the bank
  • Bills collected by the bank on behalf of customer

Now since we have fully understood the concept of Bank Reconciliation Statement, we now begin its preparation. The one success mantra for all students is to always brainstorm or ponder over the reason given for the difference between cash book and pass book. In this you can visualize the situation and devise a way (add or subtract) the required amount to match the balances.

Problems on Bank Reconciliation Statement:

Now here’s the way to solve the problems related to Bank Reconciliation Statement:

We may have the following different situations with regard to balances while preparing the Bank Reconciliation statement. These are:

  1. Favourable balances

(a) Debit balance as per cash book is given and the balance as per pass book is to be ascertained.

(b) Credit balance as per pass book is given and the balance as per cash book is to be ascertained.

  1. Unfavourable balance/overdraft balance

(a) Credit balance as per cash book (i.e. overdraft) is given and the balance as per pass book is to be ascertained.

(b) Debit balance as per pass book (i.e. overdraft) is given and the balance as per cash book is to be ascertained

Let’s start going specifically one by one to all cases

(i) Favourable balances : When debit balance as per cash book or credit balance as per pass book is given :

(a) Take balance as a starting point say Balance as per Cash Book.

(b) Add all transactions that have resulted in increasing the balance of the pass book.

(c) Deduct all transactions that have resulted in decreasing the balance of pass book.

(d) Extract the net balance shown by the statement which should be the same as shown in the pass book.

Credit balance as per cash book/Debit balance as per Pass Book.

Overdraft balance is to be shown in the minus column of statement as the starting point. The other steps shall remain same

Now here’s the simplest way to solve a question.

Follow this step by step and you will think it is very easy and simple.

Balance as per Pass Book is Rs10,000

Adjustments:

  • Cheque issued worth Rs. 5000 but not cleared/presented till the closing date of the financial year.
  • Cheques deposited but not credited worth Rs.2000
  • Bank Interest received unrecorded in cash book, Rs.50
  • Bank charges Rs. 10

Calculate balance as per Cash Book.

In the above question, we need to concentrate on the balance that is present in CASH BOOK. However remember the catch. Always think from the point of view of the book you need to change. This means you need to change the PASS BOOK. So think how can you make the balances equal by adding or subtracting in the BANK PASS BOOK

Adj. 1) Let’s see this case. It means that the account holder has subtracted from his cash book Rs.5000 but bank hasn’t done this. So to make both books equal we simply subtract.

I hope you get that? If not follow on to read the second adjustment & you’ll get the catch slowly with practice.

Adj. 2) Again, this is similar to the 1st entry as well. In this case the account holder has added or put in Rs.2000 into the bank account, however bank hasn’t done anything like this. So to tally the balances we simply add.

Hence we need to add Rs.2000 in Pass Book Balance to get balance as per Cash Book.

Yeah! Sounds Interesting!

Adj. 3) In case of bank interest, we aren’t that active that we’ll know the interest that bank will pay us before we have even received it, so the 1st entry point is in Pass Book.

Here, Bank interest received has not yet been recorded in cash book so it shows lesser balance compared to Passbook. We’ll less from the balance given in passbook to derive balance in Cash Book.

Adj. 4) When a bank charges miscellaneous expenses, balance as per Pass Book diminishes. But we haven’t recorded the entry in Cash Book which has excess balance. So we need to add Rs. 10 to balance as per Pass Book to derive balance as per Cash Book.

In Short:

PARTICULARS AMOUNT (Rs)
Balance as per Pass Book (Cr) (Positive) (Favourable) 10,000
Add:      2)  Cheques deposited but not credited

4)  Bank charges unrecorded

2,000

10

 

2,010

 

Less:   1) Cheque issued but not cleared

3) Bank Interest received unrecorded in cash book

5,000

50

12,010

 

5,050

Calculate balance as per Cash Book (Dr) (Positive) (Favourable) 6,960

Amended Cashbook and Bank Reconciliation Statement

Sometimes you may be asked to first amend or rectify the cashbook and then prepare BRS using balance from amended Cashbook. While amending Cashbook we record the entries which have been passed in Passbook but left to be recorded in Cashbook (say – bank interest, dividend directly credited, etc.). If some entry is recorded with an incorrect amount we make necessary changes

With this we come to the end of this article. Hopefully you would have understood all the concepts related to Bank Reconciliation Statement. Follow the steps and this chapter would surely be a cakewalk for you.

Here are some tips to ace your CBSE Commerce Class 12 exams by our experts. Stay tuned here to keep gaining such useful insights!

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