Bank Reconciliation Statement (Class 11 Accountancy Notes)
Introduction
Businesses regularly deposit money into banks and make payments through cheques, online transfers, and other banking methods. These transactions are recorded in the Cash Book by the business and in the bank’s records. Ideally, both records should show the same balance. However, differences often arise because some transactions are recorded at different times or due to errors.
To identify and explain these differences, a Bank Reconciliation Statement (BRS) is prepared.
What is a Bank Reconciliation Statement?
A Bank Reconciliation Statement is a statement prepared to compare and reconcile the bank balance shown in the Cash Book with the balance shown in the Passbook or Bank Statement.
Its purpose is to explain the reasons for any difference between the two balances and determine the correct bank balance.
What is a Passbook?
A Passbook or Bank Statement is a copy of a customer’s bank account maintained by the bank.
It records:
- Deposits made into the bank
- Withdrawals from the bank
- Bank charges
- Interest credited or debited
- Other banking transactions
From the bank’s point of view:
- Deposits are shown on the credit side.
- Withdrawals are shown on the debit side.
Need for Bank Reconciliation
A Bank Reconciliation Statement is prepared because the balance in the Cash Book and the balance in the Passbook often do not match.
Importance of BRS
- Helps verify bank transactions.
- Detects mistakes in records.
- Identifies omitted entries.
- Ensures accuracy of accounts.
- Helps find the correct bank balance.
- Improves financial control.
Main Causes of Difference
Differences generally arise due to:
- Timing differences
- Errors
Timing Differences
Timing differences occur when a transaction is recorded in one book before it is recorded in the other.
1. Cheques Issued but Not Presented for Payment
When a business issues a cheque:
- It immediately records the payment in the Cash Book.
- The bank records it only when the cheque is presented for payment.
Result:
- Cash Book balance becomes lower.
- Passbook balance remains higher until presentation.
2. Cheques Deposited but Not Yet Collected
When a cheque is deposited:
- The business records it immediately in the Cash Book.
- The bank records it only after collection.
Result:
- Cash Book balance becomes higher.
- Passbook balance remains lower until collection.
3. Bank Charges Debited by Bank
Banks may deduct:
- Service charges
- Collection charges
- Interest on overdraft
The business often learns about these charges later.
Result:
- Passbook balance decreases.
- Cash Book balance remains unchanged until updated.
4. Direct Deposits by Customers
Sometimes customers deposit money directly into the firm’s bank account.
Result:
- Bank records the transaction immediately.
- Business records it later.
Therefore, the Passbook balance becomes higher.
5. Interest or Dividend Collected by Bank
Banks may collect:
- Interest
- Dividends
on behalf of customers.
Result:
- Passbook balance increases first.
- Cash Book is updated later.
6. Direct Payments by Bank
The bank may make payments under standing instructions such as:
- Insurance premium
- Electricity bills
- Telephone bills
- Rent
- Taxes
Result:
- Passbook balance decreases.
- Cash Book remains unchanged until information is received.
7. Dishonoured Cheques
If a deposited cheque is dishonoured:
- Bank debits the amount.
- Business may not know immediately.
Result:
- Passbook balance decreases.
- Cash Book remains unchanged initially.
Errors Causing Differences
Apart from timing differences, errors may also create differences.
Errors in Cash Book
Examples:
- Wrong amount recorded
- Omitted entries
- Incorrect balancing
- Posting mistakes
Errors in Passbook
Examples:
- Wrong entries by bank
- Incorrect totals
- Omission of transactions
Types of Bank Balances
Favourable Balance
A favourable balance exists when deposits are greater than withdrawals.
In Cash Book
- Bank column shows a Debit Balance.
In Passbook
- Account shows a Credit Balance.
Unfavourable Balance (Bank Overdraft)
An unfavourable balance exists when withdrawals exceed deposits.
In Cash Book
- Bank column shows a Credit Balance.
In Passbook
- Account shows a Debit Balance.
This situation is called Bank Overdraft.
Bank Overdraft
A Bank Overdraft occurs when a customer withdraws more money than the amount available in the bank account.
The extra amount withdrawn is effectively a short-term loan from the bank.
Preparation of Bank Reconciliation Statement
The statement can be prepared:
- Using Cash Book balance as the starting point.
- Using Passbook balance as the starting point.
General Rules (Starting with Cash Book Balance)
Add:
- Cheques issued but not presented
- Direct deposits by customers
- Interest collected by bank
- Dividend collected by bank
Less:
- Cheques deposited but not collected
- Bank charges
- Insurance premium paid by bank
- Dishonoured cheques
- Interest on overdraft
General Rules (Starting with Passbook Balance)
The treatment becomes the opposite of the above rules.
Advantages of Bank Reconciliation Statement
- Detects errors quickly.
- Ensures correctness of accounts.
- Helps prevent fraud.
- Improves financial accuracy.
- Confirms actual bank balance.
- Strengthens internal control.
Key Terms
Bank Reconciliation Statement (BRS)
Statement prepared to reconcile Cash Book and Passbook balances.
Passbook
Record of a customer’s bank account maintained by the bank.
Favourable Balance
Situation where deposits exceed withdrawals.
Unfavourable Balance
Situation where withdrawals exceed deposits.
Bank Overdraft
Amount withdrawn beyond the available bank balance.
Dishonoured Cheque
A cheque that the bank refuses to pay.
Standing Instructions
Instructions given to a bank to make regular payments automatically.
Quick Revision
- BRS reconciles Cash Book and Passbook balances.
- Differences arise mainly due to timing differences and errors.
- Cheques issued but not presented increase passbook balance compared to cash book.
- Cheques deposited but not collected increase cash book balance compared to passbook.
- Direct deposits by customers increase passbook balance.
- Bank charges decrease passbook balance.
- A debit balance in the bank column of Cash Book indicates favourable balance.
- A credit balance in the bank column of Cash Book indicates overdraft.
- Bank Overdraft means withdrawals exceed deposits.
- BRS helps determine the correct bank balance and improve accuracy.