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Agenda
Module - —
Bank Reconciliation Statements
What is BRS?
Need for BRS
Reasons for differences bank statement and bank book
Forms of BRS
BRS Process
Practical Case Questions
A company's bank account contains a record of the transactions including, among others,
• Cheques written, and
• Cheques received from customers, etc.
Similarly the bank also creates a record of company's bank balance after processing the
company's cheques, deposits, service charges, and other items
Typically a bank would mail a bank statement to the company at the end of each month which
contains:
• list of activity in the bank account during that month and
• the closing balance in the bank account
When the company receives its bank statement, the company verifies whether the amounts
mentioned in the bank statement are consistent with the amounts in the company's bank account
or not
This process of confirming the amounts is referred to as reconciling the bank statement or simply
bank statement reconciliation (BRS)
The amount of balance shown in the passbook or the bank statement must tally with the balance
as shown in the bank account as per company’s accounts; however these are usually found to be
different
Hence, the company would be interested to ascertain the causes for such difference
Bank reconciliation process explains the difference between:
• the bank balance shown in company’s bank statement, as supplied by the bank, and
• the corresponding amount shown in the company’s own accounting records at a particular point in time
Important Note
If an item appears on the bank statement but not on the company's books, the item is probably going
to be an adjustment to the Cash balance on (per) the company's books.
If an item is already in the company's Cash account, but has not yet appeared on the bank statement,
the item is probably an adjustment to the balance per the bank statement.
In an ideal scenario, there should not be any difference between the balance shown as per the
bank statement and company’s bank book; however this would happen only when all the entries
are recorded in both
BRS should be prepared regularly as part of the internal control system of the business:
• To check the accuracy of the bank book
• To check the accuracy of the bank statement
• To ensure that there is no undue delay between payments, receipts and their clearance by the bank
• To discover payments made and items received by the bank not entered in the bank book
• To detect and rectify any error committed in both the books
It is not mandatory to prepare BRS nor a date is fixed on which it is to be prepared. It is prepared
on a regular basis to check that all transactions relating to bank are properly recorded by the
company and by the bank as well
A common question relating to BRS is regarding the number of days after month-end when the
bank reconciliation should be done
Ideally the bank reconciliation should be done within a couple of days after the month-end since
it would ensure that:
• Cash balance as per company’s books depicts the right balance, and
• Company’s financial statements for the month include all of the transactions and nothing is missed out
The bank reconciliation, in all cases, should be done before closing the monthly books. This is
helpful on account of the following reasons:
• It may reveal that some receipts were recorded in the bank account but were not yet recorded in the
company’s records
• Similarly, there might be some payments that were deducted from the bank account, but were not yet
entered into the company's books
• Also, the reconciliation may highlight some errors in the transactions recorded in the company's books
As part of internal control exercise, the reconciliation must be performed by someone other than
the person writing the cheques or recording amounts in the books
Whenever bank reconciliation needs to be done, one must first ascertain the possible reasons for
such differences
These differences could be on account of following two reasons:
Reasons of differences
When the same entry is recorded in the either of the book earlier and in the other book later , it is
termed as the timing difference
Company maintains some cash balance in bank and hence bank pays Rs.50,000 as interest on such cash
balance lying in bank
The bank would increase the balance in the pass book of the customer as soon as it credits such amount of
Rs.50,000
The customer would come to know about it only at a later stage and hence company would increase its
bank balance in its books afterwards
Similar to interest income for company, interest expense on overdraft and other bank charges are booked by
company when it would come to know about it
The company has taken a fire insurance for its building and mandated bank to electronically pay annual
premium of Rs.50,000 to insurance company
Bank would book this expense as soon as this payment is made and accordingly balance in pass book would
reduce by Rs.50,000
The customer would come to know about it only at a later stage and hence company would decrease its
bank balance in its books afterwards
A customer of company had bought goods worth Rs.50,000 on credit some time back and later on
deposited this cash directly in the bank account of company
The bank would immediately increase the balance in company’s pass book
The customer would come to know about it only at a later stage and hence company would increase its
bank balance in its books afterwards
The balances as per cash book and pass book of ABC Ltd are Rs.1,00,000
ABC Ltd has got a cheque from one of its debtors for Rs.40,000
ABC Ltd deposits this cheque in bank and immediately increase the balance in its cash book to Rs.1,40,000
The bank finds after 5 days that the cheque is dishonored for non payment and charges Rs.1,000 towards
such dishonor; hence the balance in pass book would become Rs.99,000
As such, ABC Ltd would reduce balance in cash book once it comes to know about it and accordingly it
would deduct the amount of dishonored cheque of Rs.40,000 and Rs.1,000 bank charges
3 Interest allowed by the bank When entry is posted in pass book At the time of allowance/ credit to
the account
4 Interest and expense charged by the When entry is posted in pass book At the time of charging/ debit to
bank the account
5 Interest and dividends collected by the When entry is posted in pass book On collection
bank
6 Direct payments by the bank When entry is posted in pass book At the time of payment
7 Direct payments into the bank by the When entry is posted in pass book At the time of receipts by bank
customer
8 Dishonour of a bill discounted with the When entry is posted in pass book At the time of dishonour of cheque
bank
Source: ICAI
Sometimes the difference between the two balances may be accounted for by an error on the
part of the bank or an error in the bank book of the business.
This causes difference between the bank balance shown by the bank book and the balance shown
by the bank statement.
Omission or wrong recording of transactions relating to cheques issued, cheques deposited and wrong
totalling, etc. committed by the firm while recording entries in the bank book cause difference between the
bank book and the passbook balance
Omission or wrong recording of transactions relating to cheques deposited and wrong totalling, etc. committed
by the bank while posting entries in the passbook also cause differences between the passbook and the bank
book balance
• Both the bank balance and the balance per depositor’s records are reconciled to a correct
balance
Illustration:
The bank book of M/s XYZ showed a balance at the bank of Rs.570 in hand on 31 January 2013. At
the same date, the bank statement balance of M/s XYZ’ account was Rs.446 overdrawn. The
difference was accounted for as follows:
a) Cheques for Rs.1,555 sent to creditors on 30 January were not paid by the bank until 8 February.
b) Cheques amounting to Rs.2,520 paid into the bank on 31 January were not credited by the bank
until 1 February.
c) A standing order for a charitable subscription of Rs.60 had been paid by the bank on 21 January
but no entry had been made in the bank book.
d) A cheque paid by M/s XYZ for rent on 15 January for Rs.345 had been entered in his bank book as
Rs.354.
1 2
Adjusting the Balance Adjusting the Balance
per Bank per Books
4 3
Preparing Journal Comparing the
Entries Adjusted Balances
After required adjustment, balances as per bank and as per company’s books are compared and
journal entries are passed, if required to amend any errors or omissions
• Bank Errors
Deposits in Transit
These are amounts already received and recorded by the company, but are not yet recorded by the bank
For example, a store deposits its cash receipts of June 30 into the bank's night depository at 11:00 p.m. on
June 30. The bank will process this deposit on the morning of July 1. As of June 30 (the bank statement
date) this is a deposit in transit
Because deposits in transit are already included in the company's Cash account, there is no need to adjust
the company's records
However, deposits in transit are not yet on the bank statement. Therefore, they need to be listed on the
bank reconciliation as an increase to the balance per bank in order to report the true amount of cash
Outstanding Cheques
These are cheques that have been written and recorded in the company's bank account, but have not yet
cleared the bank account
Cheques written during the last few days of the month plus a few older cheques are likely to be among the
outstanding cheques
Because all cheques that have been written are immediately recorded in the company's bank account, there
is no need to adjust the company's records for the outstanding cheques
However, the outstanding cheques have not yet reached the bank and the bank statement; so outstanding
cheques are listed on the bank reconciliation as a decrease in the balance per bank
Bank Errors
These are mistakes made by the bank which could include the bank:
• recording an incorrect amount,
• entering an amount that does not belong on a company's bank statement, or
• omitting an amount from a company's bank statement
The company should notify the bank of its errors. Depending on the error, the correction could increase or
decrease the balance shown on the bank statement.
These are the charges levied by the bank for providing various services like:
• demand drafts,
• issuing cheque books,
• overdraft charges,
• bank fee for processing a stop payment order on a company's cheque, etc.
Since these charges have already been recorded in bank, no adjustments are required in the bank book
However, these needs to be adjusted (decrease) the balance as per books
Interest Earned
These will appear on the bank statement when a bank gives a company interest on its account balances
The amount is added to account balance and there is no need to adjust the balance per bank statement
However, the amount of interest earned will increase the balance in company's bank account on its books
Bills receivable are assets of a company. When notes come due, the company might ask its bank to collect
the bills receivable
For this service the bank will charge a fee
The bank will:
• increase the company's account for the amount it collected (principal and interest) and
• decrease the account by the collection fee it charges
Since these amounts are already on the bank statement, no adjustment required
However, balance as per company account needs to be adjusted.
Whenever a bills receivable by bank has been dishonored, that is debited by the bank to the account along
with the dishonor charges
This is required to be adjusted in the company’s books as well
From the following particulars of XYZ, prepare bank reconciliation statement as on March 31, 2014.
1. Bank balance as per cash book Rs. 75,000.
2. Cheques issued but not presented for payment Rs. 12,000.
3. The bank had directly collected dividend of Rs. 4,000 and credited to bank account but was not
entered in the cash book.
4. Bank charges of Rs.600 were not entered in the cash book.
5. A cheque for Rs.16,000 was deposited but not collected by the bank.
6. Balance as per pass book is Rs.74,400
From the following particulars of XYZ, prepare bank reconciliation statement as on March 31, 2014.
1. Balance as per the cash book Rs. 80,000.
2. Cheques for Rs. 10,000 is deposited in the bank but not yet collected by the bank.
3. Rs.500 bank incidental charges debited to XYZ account, which is not recorded in cash book.
4. A cheque for Rs. 15,000 is issued by XYZ not presented for payment.
5. Balance as per pass book is Rs.84,500
From the following particulars of XYZ, prepare bank reconciliation statement as on March 31, 2014.
1. The bank passbook of XYZ showed a balance of Rs. 1,05,000
2. Cheques issued before month end amounting to Rs. 35,000 had not been presented for
encashment
3. Two cheques of Rs. 10,000 and Rs. 15,000 were deposited into the bank on last day of month
but the bank gave credit for this in next month
4. There was also a debit in the passbook of Rs. 5,000 in respect of a cheque dishonoured on last
day of the month
5. The balance as per cash book is Rs1,00,000
From the following particulars of XYZ, prepare bank reconciliation statement as on March 31, 2014.
1. Bank overdraft as per cash book – Rs.2,00,000
2. Bills for collection credited by the bank but no advice received by the company – Rs.50,000
3. Transport subsidy received from the State Govt directly by the bank but not advised to the
company – Rs15,000
4. Amount wrongly debited to company account by the bank, for which no details are available –
Rs.25,000
5. Draft deposited in the bank but not credited till last date of the month – Rs.5,000
6. Interest debited by bank but no advice received – Rs.20,000
7. Cheque issued but not yet presented to bank – Rs.5,000
8. Overdraft as per bank statement – Rs.1,80,000
From the following particulars of XYZ, prepare bank reconciliation statement as on March 31, 2014.
1. XYZ received bank statement showing a favorable balance of Rs.50,000; however this did not tie
back to balance in the cash book
2. A deposit of Rs.7,500 paid during the month had not been credited by the bank until first day of
next month
3. During the month, the company had entered into hire purchase agreement to pay by bank order
Rs.25,000 on 15th of each month; however no entries were made in cash book in this month
4. A customer of the firm who received a cash discount of 5% on his account of Rs.20,000 paid the
firm a cheque during the month; however the cashier erroneously entered the gross amount in
the bank column of cash book
5. Bank charges amounting to Rs.125 not been entered in cash book
6. A customer directly deposited Rs.45,500 in the bank but no entry was made in cash book
7. Rs.5,500 paid into bank had been entered twice in the cash book
8. A debit of Rs.11,375 appeared in the bank statement for an unpaid cheque, which had been
returned marked ‘out of date’. The cheque had been re-dated by the customer and paid into the
bank again on 7th of next month
From the following particulars of XYZ, prepare bank reconciliation statement as on March 31, 2014.
1. The cash book showed an overdraft of Rs.40,000; however the bank statement showed a credit
balance of Rs.45,000
2. Interest on term loan Rs.3,500 debited by bank but not accounted in XYZ’s book
3. Bank charges Rs.75 was debited by bank in the current month but accounted in XYZ’s books in
next month
4. Rs.67,500 representing collection of PQR’s cheque was wrongly credited to the account of XYZ
by the bank in their bank statement
5. Cheque deposited but not collected by bank – Rs.6,500
6. Cheque issued but not presented for payment – Rs.27,575
From the following particulars of XYZ, prepare bank reconciliation statement as on March 31, 2014.
1. The pass book of XYZ showed a credit balance of Rs.10,500, while the cash book of XYZ showed
a debit balance of Rs.5,025
2. Bank charged Rs.100 for bank charges
3. Interest allowed by bank Rs.75
4. Two cheques, one from RIL for Rs.5,000 and another from HUL for Rs.2,500, were collected in
the following month although they were banked in the current month
5. Cheques issued to ITC for Rs.2,000 and to HP for Rs.3,500 were not yet presented for payment
6. Dabur Ltd directly deposited Rs.7,500 into the bank account which was not entered in the cash
book
From the following particulars of XYZ, prepare bank reconciliation statement as on March 31, 2014.
1. Overdraft as per passbook - Rs.1,00,000
2. Interest on overdraft - Rs.15,000
3. Cheque deposited but not yet cleared - Rs.40,000
4. Cheque issued but not presented for payment - Rs.20,000
5. Insurance Premium paid by the bank - Rs.10,000
6. Wrongly debited by the bank - Rs.5,500
7. Overdraft as per cash book – Rs.49,500
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© EduPristine For [Certificate in Accounting and Compliance]