cmabdtheblogger: Financial Accounting - Bank Reconciliation Statement

FINANCIAL ACCOUNTING

Bank Reconciliation Statement

(Abbreviation: BRS)

Part A: Discussion of basic theories explaining different reasons for the differences between the cash book balance and the pass book balance and also explaining the different formats of Bank Reconciliation Statement.

Part B: Six Illustrations with Solutions.

Part A

Introduction

In any business concern a number of cheques are issued and a number of cheques are received and deposited into bank in course of the business with respect to different cash transactions. These issues and receipts of cheques are recorded in the cash book of the business concern as well as in the pass book issued to the business concern by the bank in which the business concern maintains its bank account (which is usually a current account).

At the end of each month balances are drawn both in the Cash Book as well as in the pass book. In most cases, these two balances are not same or equal. The reasons for such differences between these two balances may be genuine and unavoidable, but in some cases these differences may be due to the mistakes committed by the bank personnel or by the persons responsible to maintain the cash book.

Therefore, at the end of every month the reasons for such differences are analysed and identified and, if necessary, appropriate corrective measures are taken. The statement prepared at the end of every month for such analysis and identification of the reasons of differences between the cash book balance and the pass book balance is known as Bank Reconciliation Statement (BRS). In other words, bank reconciliation statement is a statement which contains a complete and satisfactory explanation of the differences in balances as per the cash book and the pass book.

Format of a Pass Book

Date	Particulars	Dr. (Withdrawal) (Rs)	Cr. (Deposit) (Rs)	Balance (Rs)

Reasons for differences

The reasons for differences between the cash book balance and the pass book balance are:

1. Cheques deposited but not yet collected

In this case cheques received are entered in the debit side of the cash book and deposited into the bank. The bank, however, takes some time in collecting the cheques, and credits the customer’s account only when the amount has been realised. Until the cheque has been collected, the balance appearing in the pass book would be less than the balance appearing in the cash book.

2. Cheques issued but not yet presented for payment

In this case cheques issued are immediately entered in the credit side of the cash book. But the receiving party may not present the cheque to the bank for payment immediately. The bank debits the customer’s account only when the cheque has been presented and paid for. So long as the cheque has not been presented and paid for, the balance shown in the pass book would be more than the balance shown in the cash book.

3. Bank charges debited by bank not entered in the cash book

In this case bank charges are debited by the bank in the pass book. But the same may not be credited in the cash book until the intimation of such bank charges is received by the customer through bank statement. Therefore, until the same is credited in the cash book, the bank balance as per the pass book would be less than the bank balance as per the cash book.

4. Interest credited by bank not entered in the cash book

In this case interest is credited by the bank in the pass book. But the same may not be debited in the cash book until the intimation of such interest is received by the customer through bank statement. Therefore, until the same is debited in the cash book, the bank balance as per the pass book would be more than the bank balance as per the cash book.

5. Amount directly deposited into bank by the debtors

In this case deposit by a debtor is immediately credited by the bank in the pass book. But the same is debited by the creditor in the cash book only after he receives advice from his bank. Until then, the balance as per the pass book would be more than the balance as per the cash book.

6. Amount directly received by bank on behalf of the customer

In this case rent, dividend, interest from investments etc. directly received by bank on behalf of the customer are credited by the bank in the pass book immediately on receipt of such payments. But the same are debited by the customer in the cash book only after he receives advice from his bank. Until then, the bank balance as per the pass book would be more than the bank balance as per the cash book.

7. Payments made by bank under a standing order

In this case all regular payments (like, insurance premium, electricity bills, telephone bills, staff salaries, etc.) made by bank under a standing order (a standing order is an instruction to the bank by the customer to make certain payments regularly on or before their respective due dates.) are debited by the bank in the pass book immediately after such payments. But the same are credited by the customer in the cash book only after he receives advice from his bank. Until then, the bank balance as per the pass book would be less than the bank balance as per the cash book.

8. Cheques deposited but dishonoured and the entry for dishonour has not been made in the cash book

In this case, the bank balance as per the pass book would be less than the bank balance as per the cash book.

9. Cheques issued but dishonoured and the entry for dishonour has not been made in the cash book

In this case, the bank balance as per the pass book would be more than the bank balance as per the cash book.

10. Debit side of the bank column in the cash book is undercast

In this case, the bank balance as per the pass book would be more than the bank balance as per the cash book.

11. Credit side of the bank column in the cash book is undercast

In this case, the bank balance as per the pass book would be less than the bank balance as per the cash book.

12. Debit side of the bank column in the cash book is overcast

In this case, the bank balance as per the pass book would be less than the bank balance as per the cash book.

13. Credit side of the bank column in the cash book is overcast

In this case, the bank balance as per the pass book would be more than the bank balance as per the cash book.

14. Errors and/or omissions either in the pass book or in the cash book or in both the pass book and the cash book

In this case, either the bank balance as per the pass book would be more than the bank balance as per the cash book or vice versa in accordance with the type and nature of the errors and/or omission.

Formats of bank reconciliation statement

A. WHEN STARTED WITH FAVOURABLE BALANCE AS PER CASH BOOK

Bank reconciliation statement as on........ [Usually last day of a month]

Particulars	Rs	Rs
Favourable (Debit) balance as per cash book		×××
ADD:
(i) Cheques issued but not yet presented for payment	×××
(ii) Interest credited by bank not entered in the cash book	×××
(iii) Direct deposit by customer into bank account not yet recorded in the cash book	×××
(iv) Dividend/interest directly received by bank not yet recorded in the cash book	×××
(v) Cheques issued but dishonoured and the entry for dishonour has not been made in the cash book	×××
(vi) Debit side of bank column in the cash book is undercast	×××
(vii) Credit side of bank column in the cash book is overcast	×××	×××
		×××
LESS:
(i) Cheques deposited but not yet collected	×××
(ii) Bank charges debited by bank not entered in the cash book	×××
(iii) Payments made by bank under a standing order not yet recorded in the cash book	×××
(iv) Cheques deposited but dishonoured and the entry for dishonour has not been made in the cash book	×××
(v) Debit side of bank column in the cash book is overcast	×××
(vi) Credit side of bank column in the cash book is undercast	×××	×××
Favourable (Credit) balance as per pass book		××× (1)

(1) If this is a negative figure, this is overdraft (debit) balance as per pass book.

B. WHEN STARTED WITH FAVOURABLE BALANCE AS PER PASS BOOK

Bank reconciliation statement as on........ [Usually last day of a month]

Particulars	Rs	Rs
Favourable (Credit) balance as per pass book		×××
ADD:
(i) Cheques deposited but not yet collected	×××
(ii) Bank charges debited by bank not entered in the cash book	×××
(iii) Payments made by bank under a standing order not yet recorded in the cash book	×××
(iv) Cheques deposited but dishonoured and the entry for dishonour has not been made in the cash book	×××
(v) Debit side of bank column in the cash book is overcast	×××
(vi) Credit side of bank column in the cash book is undercast	×××	×××
		×××
LESS:
(i) Cheques issued but not yet presented for payment	×××
(ii) Interest credited by bank not entered in the cash book	×××
(iii) Direct deposit by customer into bank account not yet recorded in the cash book	×××
(iv) Dividend/interest directly received by bank not yet recorded in the cash book	×××
(v) Cheques issued but dishonoured and the entry for dishonour has not been made in the cash book	×××
(vi) Debit side of bank column in the cash book is undercast	×××
(vii) Credit side of bank column in the cash book is overcast	×××	×××
Favourable (Debit) balance as per cash book		××× (2)

(2) If this is a negative figure, this is overdraft (credit) balance as per cash book.

C. WHEN STARTED WITH OVERDRAFT BALANCE AS PER CASH BOOK

Bank reconciliation statement as on........ [Usually last day of a month]

Particulars	Rs	Rs
Overdraft (Credit) balance as per cash book		×××
ADD:
(i) Cheques deposited but not yet collected	×××
(ii) Bank charges debited by bank not entered in the cash book	×××
(iii) Payments made by bank under a standing order not yet recorded in the cash book	×××
(iv) Cheques deposited but dishonoured and the entry for dishonour has not been made in the cash book	×××
(v) Debit side of bank column in the cash book is overcast	×××
(vi) Credit side of bank column in the cash book is undercast	×××	×××
		×××
LESS:
(i) Cheques issued but not yet presented for payment	×××
(ii) Interest credited by bank not entered in the cash book	×××
(iii) Direct deposit by customer into bank account not yet recorded in the cash book	×××
(iv) Dividend/interest directly received by bank not yet recorded in the cash book	×××
(v) Cheques issued but dishonoured and the entry for dishonour has not been made in the cash book	×××
(vi) Debit side of bank column in the cash book is undercast	×××
(vii) Credit side of bank column in the cash book is overcast	×××	×××
Overdraft (Debit) balance as per pass book		××× (3)

(3) If this is a negative figure, this is favourable (credit) balance as per pass book.

D. WHEN STARTED WITH OVERDRAFT BALANCE AS PER PASS BOOK

Bank reconciliation statement as on........ [Usually last day of a month]

Particulars	Rs	Rs
Overdraft (Debit) balance as per pass book		×××
ADD:
(i) Cheques issued but not yet presented for payment	×××
(ii) Interest credited by bank not entered in the cash book	×××
(iii) Direct deposit by customer into bank account not yet recorded in the cash book	×××
(iv) Dividend/interest directly received by bank not yet recorded in the cash book	×××
(v) Cheques issued but dishonoured and the entry for dishonour has not been made in the cash book	×××
(vi) Debit side of bank column in the cash book is undercast	×××
(vii) Credit side of bank column in the cash book is overcast	×××	×××
		×××
LESS:
(i) Cheques deposited but not yet collected	×××
(ii) Bank charges debited by bank not entered in the cash book	×××
(iii) Payments made by bank under a standing order not yet recorded in the cash book	×××
(iv) Cheques deposited but dishonoured and the entry for dishonour has not been made in the cash book	×××
(v) Debit side of bank column in the cash book is overcast	×××
(vi) Credit side of bank column in the cash book is undercast	×××	×××
Overdraft (Credit) balance as per cash book		××× (4)

(4) If this is a negative figure, this is favourable (debit) balance as per cash book.

Preparation of bank reconciliation statement after amending the cash book

Sometimes, it is asked to prepare the bank reconciliation statement after making necessary amendments/adjustments in the cash book. In such cases, the bank reconciliation statement will be prepared taking the amended cash book balance arrived at after the respective adjustments are made in the cash book. The necessary adjustments, in this regard, to be made in the cash book are as follows:

(i) Record all such transactions in the cash book which have been recorded in the pass book but not yet have been recorded in the cash book. [But the cash book will not be amended for the mistakes/errors committed in the pass book.]

(ii) Make entries in the cash book with respect to all the errors and mistakes committed in the cash book in order to rectify them before the process of bank reconciliation is carried out.

Sometimes, bank balance (favourable or overdraft) as per the pass book is given instead of the bank balance as per the cash book, and the bank reconciliation statement is required to be prepared after amending the cash book. In such cases, first of all, the unadjusted cash book balance will have to be determined by preparing a memorandum bank reconciliation statement using the available relevant information. After that, this unadjusted cash book balance will be amended/adjusted in the light of given information, and then the required bank reconciliation statement will be prepared in the usual manner as stated in the previous paragraph.

Part B

Financial Accounting

Bank Reconciliation Statement

Selected Problems

Illustration: 1

On 31.12.14, P. Roy’s Bank Balance as shown by the Cash Book was Rs 75,000. On receipt of Bank Statement it was found that:

(i) Three cheques of Rs 3,000, Rs 4,000 and Rs 1,500 drawn in favour of suppliers respectively on 28^th , 29^th and 30^th December, 2014 had been debited in the Bank Statement on 2^nd January 2015.

(ii) The Bank had credited Rs 8,000 on 30^th December, 2014, in respect of collection made by Bank directly from a customer, the intimation not having yet been received.

(iii) Two cheques of Rs 5,000 and Rs 6,000 deposited into Bank on 30^th December, 2014 had been credited in the Bank statement on 4^th January, 2015.

(iv) The Bank had debited Rs 30 as incidental charges on 30^th December, 2014 but not entered in the Cash Book.

Show the reconciliation of the Bank Balance as per Cash Book with the Bank Balance as per Bank Statement as on 31^st December, 2014.

Click here for Solution: 1 in PDF

Illustration: 2

On 31-12-2015 your pass book showed a credit balance of Rs 5,000. Before that date you had issued cheques worth Rs 1,000 of which cheques worth Rs 300 were not yet cashed. On 26^th December, you deposited a cheque for Rs 150 in the bank but you did not enter it in cash book. The pass book showed a credit of Rs 40 for interest and a debit of Rs 10 for bank charges and the cash book had no corresponding entries for them. A cheque for Rs 1,200 deposited in your account No. 2 was wrongly credited by the bank to this account. An amount of Rs 500 for a Dishonoured bill was debited in the pass book only. Cheques for Rs 700 paid in to the bank were not yet credited in the pass book. A wrong debit of Rs 100 appears in the pass book. A cheque of Rs 150 received from a customer was entered in the cash book in December, 2015 but the same was omitted to be paid in to the bank.

Determine the balance as per cash book as on 31-12-2015.

Click here for Solution: 2 in PDF

Illustration: 3

From the following particulars of M/s Suresh enterprises prepare a Bank reconciliation statement:

(1) Bank overdraft as per Pass Book as on 31^st March 2015 was Rs 8,800.

(2) Cheques deposited in Bank for Rs 5,800 but only Rs 2,000 were cleared till 31^st March

(3) Cheques issued were Rs 2,500, Rs 3,800 and Rs 2,000 during the month. The cheque of Rs 5,800 is still with supplier.

(4) Dividend collected by Bank Rs 1,250 was wrongly entered as Rs 1,520 in Cash Book.

(5) Amount transferred from fixed deposit A/c into the current A/c Rs 2,000 appeared only in Pass Book

(6) Interest on overdraft Rs 930 was debited by Bank in Pass Book and the information was received only on 3^rd April 2015.

(7) Direct deposit by M/s Rajesh Traders Rs 400 not entered in Cash Book.

(8) Corporation tax Rs 1,200 paid by Bank as per standing instruction appears in PB only.

Click here for Solution: 3 in PDF

Illustration: 4

The following is a summary from Cash Book of M/s Adarsh Trading for the month of September, 2015

	(Rs)		(Rs)
Balance b/d	1,407	Payments	15,520
Receipts	15,073	Balance c/d	960
	16,480		16,480

On investigation it was found that

(a) Bank charges of Rs 35 were not entered in the Cash Book.

(b) A cheque of Rs 47 issued to supplier was entered by mistake as a receipt in the Cash Book.

(d) The balance brought forward in September, 2015 should have been Rs 1,470.

(e) Cheques paid to suppliers Rs 214, Rs 370 and Rs 30 have not been presented for payment.

(f) Deposits of Rs 1542 on 30^th Sept were cleared by the Bank on 2^nd October.

(g) The Bank charged a cheque wrongly to Adarsh trading Rs 72.

(h) Bank statement shows overdraft of Rs 124 as on 30^th September, 2015.

Make the necessary adjustments in the Cash Book and after that prepare a Bank reconciliation statement as on 30-09-2015.

Click here for Solution: 4 in PDF

Illustration: 5

On comparing the Cash Book of Saksham with the Bank Pass Book for the year ended 31st March, 2022, following discrepancies were noticed:

(a) Out of Rs 82,000 paid in by cheques into the bank on 25th March, cheques amounting to Rs 30,000 were collected on 5th April.

(b) Out of cheques drawn amounting to Rs 31,200 on 28th March a cheque for Rs 10,000 was presented on 3rd April.

(d) A cheque for Rs 2,400 deposited into bank but omitted to be recorded in Cash Book and was collected by the bank on 29th March.

(e) A bill receivable for Rs 2,080 previously discounted (discount Rs 80) with the bank had been dishonoured but advice was received on 3rd April.

(f) A bill for Rs 40,000 was retired (i.e. paid) by the bank under a rebate of Rs 600 but the full amount of the bill was credited in the bank column of the Cash Book.

(g) A cheque of Rs 10,000 wrongly credited in the Pass Book on 29th March was reversed on 2nd April.

(h) Bank had wrongly debited Rs 20,000 in the account on 31st March and reversed it on 10th April, 2022.

(i) A cheque of Rs 800 drawn on the Savings Account has been shown as drawn on Current Account in Cash Book.

Prepare a Bank Reconciliation Statement as on 31st March, 2022, if the Balance as per Cash Book on 31st March was Rs 1, 58,280.

Click here for Solution: 5 in PDF

Illustration: 6

On 31st January, 2022, Sethi’s cash book showed a bank overdraft of Rs 2, 50,000. On comparing with the pass book, the following differences were noted.

(a) Cash and cheques amounting to Rs 26,800 were sent to the bank on 27th January, but cheques worth Rs 4,600 were credited on 2nd February and one cheque for Rs 900 was returned by them as dishonoured on 4th February.

(b) During the month of January, Sethi issued cheques worth Rs 33,400 to his creditors. Out of these, cheques worth Rs 27,400 were presented for payment on 5th February.

(i) Life insurance premium Rs 3,840

(ii) Television license fee Rs 2,400

(d) Sethi’s bankers have collected Rs 3,000 as dividend on his shares.

(e) Interest charged by the bank Rs 2,500. A bill receivable of Rs 2,000 discounted with the bank in December, 2021, was dishonoured on 31st January, 2022.

You are required to:

(a) Ascertain the amended cash book balance as on 31st January, 2022.

(b) Prepare a Bank Reconciliation Statement from the amended cash book as on 31st January 2022.

Click here for Solution: 6 in PDF

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Friday, October 21, 2022

Financial Accounting - Bank Reconciliation Statement

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