Bank Reconciliation Statement

Preparation of Bank Reconciliation Statement

Have you ever noticed a situation where the balances appearing in the passbook and cash book of a company or a firm, do not match? If so, you would have encountered a classic example of a condition which indicates the necessity for preparing a Bank Reconciliation Statement.

A BRS helps in devising target reasons and amounts with which a passbook and cash book might not tally. A firm or a company which has the habit of preparing regular Bank Reconciliation Statement finds itself in a better financial position. Let us see what a bank reconciliation is and understand its preparation.

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The Meaning of a Bank Reconciliation Statement (BRS)

Bank Reconciliation Statement

Every entity has to prepare a bank reconciliation statement. This statement indicates the differences between the passbook and the cash book of the entity. By reconciling the differences that exist between the two, a Bank Reconciliation Statement helps in arriving at the exact value of the amount of bank balance held on a particular date.

It is quite important to prepare such a statement for reconciliation for any reason that might lead to a difference in the value of passbook and cash book balance.

Preparation of a Bank Reconciliation Statement

Preparing a Bank Reconciliation Statement is quite simple. At first, it can appear quite cumbersome and tedious to prepare the statement but in reality, all it needs is a little time and patience. Before preparing the Bank Reconciliation Statement, an accountant should have access to all the relevant values related to the cash book and pass book.

Thus, an accountant can start reconciling the differences in the cash book and passbook by taking the balance available in either. After this, the accountant’s job is to find out all the entries or transactions that are giving rise to a difference in the balance of passbook and cash book. By giving effect to the nature of such entries, the accountant would have to add or subtract the amount of such entry from the initial balance of the passbook or cash book.

By doing so, he will be able to arrive at the value of balance in the other book. This balance is imperative to arrive at, for the purpose of preparing the accounts.

Reasons for Differences in Balances of Cashbook and Passbook

The passbook and cash book of an entity may not show the exact balance of the bank on a given date. This difference mainly arises due to a few reasons. The correction of these reasons helps us arrive at the proper bank balance. One of the main reasons for the difference in the two balances is the time lag between the recording of a transaction in the bank passbook and the cash book.

Consider a situation where a cheque goes to the bank for deposit. It would get recorded in the cash book right away as an entry for deposit of a cheque but when it comes to the passbook, there may be a delay in the date on which the cheque is actually deposited in the bank. Also, the time that it takes to clear the cheque may give rise to a condition when the amount deposited may reflect at a later date than the date on which entry in the cash book comes.

Hence, on the preparation of a Bank Reconciliation Statement in the interim, there will be a difference in the amounts of bank balances between the two books. Similarly, where you deposit or withdraw a certain amount from the bank, the same entry gets recorded promptly in the cash book but take time to reflect in the passbook. Hence, it becomes another reason why the cash book and passbook may not tally.

Is it Mandatory to Maintain a BRS?

As per the laws, preparation of a Bank Reconciliation Statement is not mandatory. Hence, whether to maintain it or not, is a decision of the accounting department of the entity.

Solved Question for You

Question: Give an example of various reasons which will cast a difference in the bank balance in cash book and passbook.

Answer: One example is Entries relating to interest earned and bank charges. Transactions get immediately recorded in the passbook of the bank in such cases. However, the same gets recorded in the cash book of the entity only when the bank statement comes to the accounting personnel of the entity. Here, the balance isn’t equal in the cash book and passbook.

This happens because of the difference that was seen in the bank balance. As a result, a difference comes in the balances of cash book and passbook. For elimination of balance, a BRS comes in handy.

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