Chapter 6: Bank Reconciliation Statement

6.1 Concept and Need of Bank Reconciliation Statement

When a business opens a bank account, every banking transaction is recorded in two separate books maintained by two different parties:

1. Cash Book (Bank Column): Maintained by the business/office (Deposits are recorded on the Debit/Dr. side; Withdrawals/Cheques issued are recorded on the Credit/Cr. side).
2. Pass Book / Bank Statement: Maintained by the bank (Customer’s deposits are a liability for the bank and recorded on the Credit/Cr. side; Customer’s withdrawals are recorded on the Debit/Dr. side).

Theoretically, the Debit Balance of the Cash Book should equal the Credit Balance of the Pass Book on any given date. However, due to timing gaps in cheque clearance, direct bank entries, and clerical errors, the two balances frequently disagree.

• Definition: A Bank Reconciliation Statement (BRS) is a periodic statement prepared by an account holder (business or government office) on a specific date to identify and reconcile the causes of difference between the bank balance shown by the Cash Book and the balance shown by the Pass Book (Bank Statement).

Objectives and Importance of Preparing BRS

1. Locating Causes of Disagreement: Identifies exact reasons why the Cash Book and Pass Book balances differ.
2. Detecting Errors and Fraud: Reveals arithmetic or posting errors committed either by the office accountant or by bank staff, and prevents embezzlement of cash.
3. Tracking Unpresented and Uncredited Cheques: Shows which cheques deposited have not yet been cleared and which cheques issued have not yet been presented by payees.
4. Updating the Cash Book: Informs the business about direct deposits, bank charges, interest credited, or dishonored cheques recorded in the Pass Book.

6.2 Causes of Disagreement Between Cash Book and Pass Book Balances

All differences arise from three main categories of causes:

A. Timing Differences

1. Cheques issued but not yet presented for payment: The business immediately credits (reduces) its Cash Book when a cheque is issued, but the Pass Book balance remains higher until the payee actually presents the cheque at the bank.
   • Effect: Cash Book Balance < Pass Book Balance.
2. Cheques deposited/paid into bank but not yet collected/credited: The business immediately debits (increases) its Cash Book when a cheque is sent to the bank, but the Pass Book balance remains lower until the bank collects the funds through clearing.
   • Effect: Cash Book Balance > Pass Book Balance.

B. Transactions Recorded by the Bank First without Immediate Intimation to the Business

3. Bank charges, commission, or interest on overdraft debited by the bank: The bank deducts (debits) service charges or SMS/locker fees directly in the Pass Book, reducing the Pass Book balance before the business records it.
   • Effect: Cash Book Balance > Pass Book Balance.
4. Interest credited by the bank or dividends collected directly by the bank: The bank credits (increases) the Pass Book directly, making the Pass Book balance higher than the Cash Book.
   • Effect: Cash Book Balance < Pass Book Balance.
5. Direct deposit by a customer into the bank account: Increases the Pass Book balance while the Cash Book remains lower until notified.
   • Effect: Cash Book Balance < Pass Book Balance.
6. Direct payment made by the bank as per Standing Order: Reduces the Pass Book balance while the Cash Book remains higher.
   • Effect: Cash Book Balance > Pass Book Balance.
7. Dishonor of a deposited cheque or discounted bill: The business had added it in the Cash Book, but the bank did not credit (or debited back) the Pass Book.
   • Effect: Cash Book Balance > Pass Book Balance.

C. Errors Committed in Cash Book or Pass Book

8. Under-casting or Over-casting of the Debit or Credit side of the Cash Book.
9. Wrong recording or omission of a cheque deposited/issued in the Cash Book or Pass Book.

6.3 Master Rule Table for Preparing BRS (Without Overdraft)

Golden Rule of BRS: Treat the Starting Book as the book that changes and the Target Book (the book whose balance you want to find) as the fixed benchmark. Ask yourself: “Is the Target Book higher or lower because of this transaction?” If the Target Book is higher, ADD (+); if it is lower, DEDUCT (−).

6.4 Step-by-Step Solved SEE Numerical Problems (5 Marks Each)

Solved Problem 1: Starting with Balance as per Cash Book

Question: From the following particulars of Himalayan Traders, prepare a Bank Reconciliation Statement as on 30th Chaitra 2082:

1. Bank balance as per Cash Book on 30th Chaitra 2082: Rs. 65,000.
2. Cheques issued for Rs. 25,000, out of which cheques of Rs. 15,000 only were presented for payment in Chaitra.
3. Cheques of Rs. 18,000 were deposited into the bank, but a cheque of Rs. 6,000 was credited by the bank only on 5th Baishakh 2083.
4. A customer directly deposited Rs. 12,000 into the bank account without informing the trader.
5. Bank credited Rs. 1,500 as interest on deposit and debited Rs. 500 as bank charges in the Pass Book.
6. Insurance premium of Rs. 4,000 was paid directly by the bank according to standing order.

Solution:

• Working Note on Item 2: Issued Rs. 25,000, presented Rs. 15,000 → Unpresented amount = Rs. 10,000 (reconcile only the unpresented portion!).
• Working Note on Item 3: Deposited Rs. 18,000, cleared in Baishakh Rs. 6,000 → Uncredited amount on 30th Chaitra = Rs. 6,000.

Himalayan Traders
Bank Reconciliation Statement
As on 30th Chaitra 2082

Solved Problem 2: Starting with Balance as per Pass Book

Question: Prepare a Bank Reconciliation Statement as on 31st Ashadh 2083 from the following details:

1. Credit balance as per Pass Book on 31st Ashadh: Rs. 90,000.
2. Cheques deposited into the bank for Rs. 30,000, but cheques for Rs. 22,000 only were collected by the bank up to 31st Ashadh.
3. Cheques issued for Rs. 14,000 were not presented for payment.
4. A cheque of Rs. 5,000 deposited into the bank was dishonored, of which no entry was made in the Cash Book.
5. Bank debited Rs. 800 for service charges and credited Rs. 3,200 for dividend collected on shares.
6. The payment (credit) side of the Cash Book was undercast by Rs. 1,000.

Solution: Note: Since we start with Pass Book Balance, our Target Book is the Cash Book. When the Payment (Cr.) side of the Cash Book is undercast by Rs. 1,000, fewer payments were subtracted in the Cash Book, so the Cash Book balance is higher by Rs. 1,000 (hence Add when starting from Pass Book).

Bank Reconciliation Statement
As on 31st Ashadh 2083

6.5 CDC Textbook Exercises & SEE Practice Questions

Group A: Very Short Answer Questions (1 Mark Each)

1. What is a Bank Reconciliation Statement?
2. State any two causes of disagreement between the Cash Book and Pass Book balances.

Group B: Short Answer Numerical Questions (5 Marks Each)

1. Practice Problem 1: On 30th Chaitra, the Cash Book of Everest Enterprises showed a bank balance of Rs. 50,000. On comparing with the Pass Book, the following differences were noted:
   • (a) Cheques issued for Rs. 12,000 were not presented for payment.
   • (b) Cheques sent for collection amounting to Rs. 15,000 were not credited by the bank up to 30th Chaitra.
   • (c) Bank charges of Rs. 400 and electricity bill of Rs. 2,600 paid by the bank were not recorded in the Cash Book.
   • (d) A debtor directly deposited Rs. 8,000 into the bank account.
   • (e) Bank credited Rs. 1,000 as interest in the Pass Book.
   • Required: Bank Reconciliation Statement (Answer: Balance as per Pass Book = Rs. 53,000).

Worked answers to these exercises are in Chapter 6 Solutions.