A bank reconciliation statement (BRS) refers to a statement which a firm prepares to reconcile the causes of difference between Bank Balance as per Cash Book and Bank Balance as per Pass Book or Bank Statement. A PassBook is a book which the bank issues to the account holder for the purpose of recording such transactions. However, in the case of Current Account, the bank issues a Bank Statement and not a Pass Book. Let us understand the Features of BRS in detail.
Features of BRS
An individual or a firm records the deposits into a Bank account on the debit side of the Bank column in the Cashbook and withdrawals on the credit side of the Bank column in the Cashbook.
Similarly, the bank also records these transactions in its books. However, bank records the deposits by a customer on the credit side and withdrawals on the debit side in its books.
Features of a Bank Reconciliation Statement
The features of a Bank Reconciliation statement are:
- BRS, as the name suggests is a statement.
- It is not an account and thus, does not form a part of the process of Accounts.
- A firm or an individual prepares it to reconcile the causes of difference between the Bank balance as per Cash Book and the Bank balance as per Pass Book.
- A firm may prepare it at any time during the financial year, as and when required.
- It is prepared on a particular date.
Reasons for Differences between Cash Book and Pass Book
The causes of difference are basically of two types:
- Items appearing in Cash Book but not appearing in Pass Book
- Items appearing in Pass Book but not appearing in the Cash Book
I. Items appearing in Cash Book but not appearing in Bank Pass Book:
- Cheques issued but not debited by the Bank: The reason for this may be that the payee did not bank these cheques or they may still be under clearance. We make the entry in Cash Book immediately when we issue the cheques thereby reducing the Bank balance in the books. Hence, Bank balance as per Cash Book will be less, but as per Bank Pass Book, it will be more.
- Cheques deposited but not credited by the Bank: The business may deposit the cheque into the Bank for collecting the payment but the bank may not clear it immediately. But, the firm shall make an entry in the books immediately thereby increasing the balance. Thus, Bank balance as per Cash Book will be more than the balance as per Bank Passbook.
- Errors: The Bank may by mistake miss out any entry which results in the difference.
- Standing Instructions: The customer may give standing instructions to the Bank to make certain regular payments like telephone bills, insurance premium, loan repayment installment, transfer of funds, etc. The firm will make the entry regarding these immediately but the bank shall make an entry on after the payment.
II. Items not appearing in the Cash Book but appearing in the Pass Book:
- Bank interest, Bank charges, etc.: The Bank charges interest on the overdraft, charges for services, issue of demand draft, pay orders, etc. Similarly, the Bank also credits interest on fixed deposits. Here, the Bank records the transactions in the Pass Book immediately. But, these may be entered in business books at a later date.
- Direct deposits in Bank account: Sometimes customers or others directly deposit an amount in the Bank. The Bank enters it immediately, but the entry in Cash Book appears later.
- Bills for collection: The Bank collects the payment and credits the same in the passbook relating to any bills sent for collection. But, this is entered in Cash Book only after receipt of information from the Bank.
- Errors: The book-keeper or the accountant may miss any entry in the Cash Book by mistake.
Solved Example on Features of BRS
What is the need for a Bank Reconciliation Statement?
The need to prepare a BRS arises due to the following reasons:
- To understand the actual Bank balance.
- Identification of the mistakes in the Cash Book and the Pass Book.
- To detect and prevent frauds and errors in recording the Banking transactions.
- To incorporate certain expenditures/income that is debited or credited by Bank in the books of accounts.