5.1 Need for Reconciliation

A business maintains a cash book to record its bank transactions. Similarly, banks maintain an account for their customers and provide a bank statement (or passbook) as a record. Ideally, the bank balance in the cash book should match the balance in the passbook. However, due to various reasons, differences arise. To reconcile these differences, a Bank Reconciliation Statement (BRS) is prepared.

5.2 Causes of Differences Between Cash Book and Passbook

The main reasons for discrepancies between the cash book and passbook balances include:

5.2.1 Timing Differences

1. Cheques Issued but Not Presented: When a business issues a cheque, it immediately records it in the cash book. However, if the cheque is not presented for payment by the recipient, the bank does not record it, causing a mismatch.
2. Cheques Deposited but Not Collected: A business may record a cheque deposit in the cash book, but the bank credits the amount only when it is cleared, leading to temporary differences.
3. Direct Debits by the Bank: The bank may deduct charges, interest on overdrafts, or payments as per standing instructions, which the business may not record immediately.
4. Direct Deposits into the Bank: Customers may deposit money directly into the business’s bank account, which gets credited in the passbook but remains unrecorded in the cash book until noticed.
5. Interest and Dividends Collected by the Bank: The bank may credit interest or dividends on behalf of the business, leading to a temporary difference.
6. Dishonoured Cheques: If a cheque deposited into the bank bounces, the bank debits the amount, but the business may not record it until later.

5.2.2 Errors in Recording Transactions

1. Errors by the Business: Incorrect recording of amounts, omission of transactions, or wrong entries in the cash book can lead to discrepancies.
2. Errors by the Bank: The bank may also commit errors, such as posting incorrect amounts or omitting transactions, causing a mismatch.

5.3 Preparation of Bank Reconciliation Statement

There are two methods to prepare a BRS:

1. Without Adjusting the Cash Book: The reconciliation statement is prepared based on the available cash book and bank statement balances.
2. After Adjusting the Cash Book: Necessary adjustments are made to update the cash book before preparing the reconciliation statement.

5.3.1 Format of Bank Reconciliation Statement

Bank Reconciliation Statement as on [Date]

Particulars                        | Amount (₹)  | Amount (₹)

—————————————————

Balance as per Cash Book           | XXXX       |

Add: Cheques Issued but Not Presented  | XXXX   |

     Interest Credited by Bank        | XXXX   |

Less: Cheques Deposited but Not Collected | XXXX |

     Bank Charges Not Recorded        | XXXX   |

—————————————————

Balance as per Passbook              | XXXX   |

5.3.2 Dealing with Overdrafts

If the business has withdrawn more than its balance (overdraft), the passbook shows a negative balance. The reconciliation process follows the same principles, but additions and deductions are adjusted accordingly.

Key Takeaways

1. A Bank Reconciliation Statement helps match cash book and bank statement balances.
2. Timing Differences occur due to cheque processing delays, direct debits, and credits.
3. Errors by the Business or the Bank can cause discrepancies.
4. BRS Helps Identify Errors and Prevent Fraud, ensuring accurate financial reporting.

By regularly preparing a bank reconciliation statement, businesses maintain transparency and accurate financial records, enabling better decision-making.