Bank Reconciliation Statement

A firm records its bank dealings in the bank column of the cash book; the bank records the same dealings in the firm's account, shown in the pass book (bank statement). In theory the two balances should match. In practice, on any given date they often differ. A Bank Reconciliation Statement (BRS) is a statement prepared to reconcile (explain and tie together) the two balances by listing the items causing the difference.

Note that the two books look at the account from opposite sides: a deposit is a debit in the firm's cash book but a credit in the bank's pass book (because the firm is the bank's creditor). Keeping this mirror image in mind is the key to the whole chapter.

The usual causes of difference are:

• Cheques issued but not yet presented for payment — we have credited (reduced) our cash book, but the bank has not yet paid, so the pass book balance is higher.
• Cheques deposited but not yet cleared/collected — we have debited (increased) our cash book, but the bank has not yet credited it.
• Bank charges, interest on overdraft, or direct debits charged by the bank but not yet entered by us.
• Interest, dividends or amounts directly collected by the bank on our behalf, not yet entered by us.
• Errors in either the cash book or the pass book.

None of these means anything is wrong — they are mostly timing differences. The BRS simply shows why the two balances differ and proves both records are reliable.

A favourable balance means money in the bank: a debit balance in the cash book, or a credit balance in the pass book. The BRS starts from one balance and adjusts, item by item, to arrive at the other.

The reliable method is to ask, for each item, "does it make the balance we are going TO higher or lower?" Starting from the cash book (favourable) balance, the standard treatment is:

Worked example. Cash book (Dr) balance Rs 25,000. (i) Cheques issued but not presented Rs 8,000. (ii) Cheques deposited but not cleared Rs 5,000. (iii) Bank charges Rs 200. (iv) Interest collected by bank Rs 1,200.

• Start: 25,000
• Add cheques issued not presented: + 8,000 → 33,000
• Less cheques deposited not cleared: − 5,000 → 28,000
• Less bank charges: − 200 → 27,800
• Add interest collected: + 1,200 → 29,000

So the pass book balance is Rs 29,000. The golden rule: every item that the bank has recorded but we have not (or vice-versa) is added or subtracted depending on its direction. Reverse all the signs if you start from the pass book instead.

Sometimes a firm draws more than it has in the bank — an overdraft. An overdraft is a credit balance in the cash book (the bank column) and a debit balance in the pass book — the exact opposite of a favourable balance. When preparing a BRS from an overdraft, the same logic applies but it is safest to treat the overdraft as a negative figure and apply the same add/less rules, watching the sign carefully.

A neater, increasingly preferred approach is the Adjusted Cash Book method. Instead of (or before) preparing the BRS, the firm first corrects its own cash book for items that it should have recorded but had not:

• Add to the cash book: amounts the bank collected for us (interest, dividends, direct credits) and any income we forgot.
• Subtract from the cash book: bank charges, interest on overdraft, direct debits, and dishonoured cheques.

After these adjustments we get a corrected (adjusted) cash book balance. The BRS is then prepared from this adjusted balance, and only the pure timing items remain to be reconciled — cheques issued but not presented (added) and cheques deposited but not cleared (subtracted). These two cannot be entered in our books because they depend on the bank's action.

The adjusted cash book method has a real advantage: it forces the firm to update its own records for charges and collections it had missed, so the cash book then shows the true bank balance. The remaining BRS is short and clean. This is why most modern textbooks and businesses favour it. With BRS mastered, the books and the bank finally speak the same language.