Bank Reconciliation Statement - Introduction
"Your cash book says ₹50,000, but the bank statement shows ₹45,000. Who's right?"
A Bank Reconciliation Statement (BRS) is a statement prepared to reconcile (match) the bank balance as per Cash Book with the bank balance as per Bank Statement on a specific date.
The Puzzle: Why Don't They Match?
You maintain a Cash Book recording all bank transactions.
The bank maintains a Bank Statement (Pass Book) for your account.
Ideally: Both should show the same balance.
Reality: They rarely match!
What is Bank Reconciliation Statement?
Definition: A statement showing causes of difference between the bank balance as per Cash Book and Bank Statement, and reconciling them.
Purpose:
- Verify accuracy of both records
- Detect errors (in cash book or bank statement)
- Identify outstanding items (cheques not yet cleared)
- Update cash book for items recorded by bank but not in our books
Sources of Difference
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Common Causes of Difference
1. Cheques Issued but Not Yet Presented
What it means: You issued a cheque to a supplier, recorded it in your cash book, but the supplier hasn't deposited it yet.
Example:
- Jan 28: You issue cheque ₹10,000 to supplier.
- Your Cash Book: Reduced by ₹10,000 (on Jan 28).
- Bank Statement: Still shows higher balance (bank hasn't paid yet).
Effect: Cash Book balance < Bank Statement balance.
2. Cheques Deposited but Not Yet Cleared/Credited
What it means: You deposited a cheque from a customer, but it hasn't been cleared by the bank yet.
Example:
- Jan 30: You deposit customer's cheque for ₹15,000.
- Your Cash Book: Increased by ₹15,000 (on Jan 30).
- Bank Statement: Not yet credited (clearance takes 2-3 days).
Effect: Cash Book balance > Bank Statement balance.
3. Bank Charges
What it means: Bank deducts service charges, but you don't know until you receive the bank statement.
Example:
- Bank deducted ₹500 as account maintenance charges.
- Your Cash Book: Not yet recorded.
- Bank Statement: Already deducted.
Effect: Cash Book balance > Bank Statement balance.
4. Interest Credited by Bank
What it means: Bank credits interest on your deposit, but you record it only after seeing the statement.
Example:
- Bank credited ₹2,000 as interest.
- Your Cash Book: Not yet recorded.
- Bank Statement: Already credited.
Effect: Cash Book balance < Bank Statement balance.
5. Direct Deposits/Payments
What it means: Someone directly deposits money into your account, or bank makes automated payments (EMI, insurance premium).
Example:
- Customer directly deposited ₹20,000 in your account.
- Your Cash Book: Not yet recorded.
- Bank Statement: Shows the deposit.
Effect: Cash Book balance < Bank Statement balance.
6. Dishonor of Cheques
What it means: A cheque you deposited bounced (insufficient funds in drawer's account).
Example:
- You deposited ₹10,000 cheque on Jan 25.
- Cheque bounced on Jan 28.
- Your Cash Book: Shows ₹10,000 (you haven't updated).
- Bank Statement: Debited ₹10,000 back.
Effect: Cash Book balance > Bank Statement balance.
Summary of Causes
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Favorable vs Unfavorable Balance
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Real-World Example
ABC Company - January 31st
- Cash Book Balance: ₹1,00,000 (Dr.)
- Bank Statement Balance: ₹95,000 (Cr. in our favor)
Causes of Difference:
- Cheque issued ₹10,000 (not yet presented).
- Bank charges ₹500 (not recorded in cash book).
- Interest credited ₹2,000 (not recorded in cash book).
- Cheque deposited ₹8,000 (not yet cleared).
To reconcile: We prepare a BRS showing these items.
Steps to Prepare BRS (Next Lesson)
- Start with one balance (Cash Book or Bank Statement)
- Add/subtract items that cause difference
- Arrive at the other balance
We'll learn the detailed preparation methods in the next lesson!
Quiz: BRS Introduction
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