Home > Topics > Foundation – Paper 1 – Accounting > Bank Reconciliation Statement - Introduction
← PreviousNext →

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

Timing Differences
↓
Items in Bank Statement Only
↓
Items in Cash Book Only
↓
Errors

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

CauseCash Book BalanceBank Statement Balance
Cheques issued not yet presentedLowerHigher
Cheques deposited not yet clearedHigherLower
Bank chargesHigherLower
Interest creditedLowerHigher
Direct deposit by customerLowerHigher
Dishonor of chequeHigherLower

Favorable vs Unfavorable Balance

Note

Terminology:

  • Favorable Balance (as per Cash Book): Debit balance = Money in bank (Asset for us).
  • Unfavorable Balance (Overdraft): Credit balance = Bank loan (Liability for us).

From Bank's Perspective:

  • Our deposit is their LIABILITY → They credit our account.
  • Our overdraft is their ASSET → They debit our account.

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:

  1. Cheque issued ₹10,000 (not yet presented).
  2. Bank charges ₹500 (not recorded in cash book).
  3. Interest credited ₹2,000 (not recorded in cash book).
  4. Cheque deposited ₹8,000 (not yet cleared).

To reconcile: We prepare a BRS showing these items.

Steps to Prepare BRS (Next Lesson)

  1. Start with one balance (Cash Book or Bank Statement)
  2. Add/subtract items that cause difference
  3. Arrive at the other balance

We'll learn the detailed preparation methods in the next lesson!

Quiz: BRS Introduction

Test Your Knowledge

Question 1 of 5

1. If a cheque issued by you is not yet presented to the bank, then:

Cash Book balance > Bank Statement balance
Cash Book balance < Bank Statement balance
Both are equal
Cash Book balance = 0
← PreviousNext →