What is the meaning of BRS?
Bank
reconciliation statement is a report which compares the bank balance as per
company's accounting records with the balance stated in the bank statement. It
is normal for a company's bank balance as per accounting records to differ from
the balance as per bank statement due to timing differences.
MeanING; A Bank
reconciliation is a process
that explains the difference between the bankbalance
shown in an organization's bank
statement, as supplied by the bank,
and the corresponding amount shown in the organization's own [accounting]
records at a particular point in time.
CAUSES OF
DISAGREEMENT BETWEEN BANK STATEMENT AND CASH BOOK:
Usually the reasons for the
disagreement are:
1.
That our banker might have
allowed interest which have not yet been entered in our cash book.
2.
That our banker might have
debited our account for any such item as interest on overdraft, commission for collecting
cheque, incidental charges etc., which we have not entered in the cash book.
3.
That some of the cheque which
we drew and for which we credited our bank account prior to the date of
closing, were not presented at the bank and therefore, not debited in the bank
statement.
4.
That some cheques or drafts
which we have paid into bank for collection and for which we debited our bank
account, were not realised within the due date of closing and therefore, not
credited by the bank.
5.
The banker might have credited
our account with amount of a bill of exchange or any other direct payment
into bank and the same may not have been entered in the cash book.
6.
That cheques dishonoured might
have been debited in the bank statement but have not been given effect to in
our books.
HOW TO PREPARE A BANK
RECONCILIATION STATEMENT:
To prepare the bank
reconciliation statement, the following rules may be useful for the students:
1.
Check the cash book receipts
and payments against the bank statement.
2.
Items not ticked on either side
of the cash book will represent those which have not yet passed through the
bank statement.
3.
Make a list of these items.
4.
Items not ticked on either side
of the bank statement will represent those which have not yet been passed
through the cash book.
5.
Make a list of these items.
6.
Adjust the cash book by
recording therein those items which do not appear in it but which are found in
the bank statement, thus computing the correct balance of the cash book.
7.
Prepare the bank reconciliation
statement reconciling the bank statement balance with the correct cash book
balance in either of the following two ways:
(i) First method (Starting with the cash book
balance)
(ii) Second method (Starting with the bank statement balance)
(ii) Second method (Starting with the bank statement balance)
FIRST METHOD
(STARTING WITH THE CASH BOOK BALANCE):
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(a)
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If
the cash balance is a debit balance, deduct from it all cheques, drafts etc.,
paid into the bank but not collected and credited by the bank and added to it
all cheques drawn on the bank but not yet presented for payment. The new
balance will agree with bank statement.
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(b)
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If
the bank balance of the cash book is a credit balance (overdraft), add to it
all cheques, drafts, etc., paid into the bank but not collected by the bank
and deduct from it all cheques drawn on the bank but not yet presented for
payment. The new balance will then agree with the balance of the bank
statement.
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SECOND METHOD
(STARTING WITH THE BANK STATEMENT BALANCE):
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(a)
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If
the bank statement balance is a debit balance (an overdraft), deduct from it
all cheques, drafts, etc., paid into bank but not collected and credited by
the bank and add to it all cheques drawn on the bank but not yet presented
for payment. The new balance will then be agree with the balance of the cash
book.
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(b)
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If
the bank statement balance is a credit balance (in favor of the depositor),
add to it all cheques, drafts, etc., paid into the bank but not collected and
credited by the bank and deduct from it all cheques drawn on the bank but not
yet presented for payment. The new balance will agree
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What
are the important things to be remembered while preparing a bank reconciliation
statement?
1. Bank Reconciliation Statement is prepared either by starting with the Bank pass book balance or Cash book balance.
2. If the balance of the Cash book is taken as a starting point then Cash book balance is to be adjusted in accordance with the entries passed in the Bank pass book and vice versa. For example: If the balance is taken as per the Cash book then the following items will be added:
3.Cheques issued but not presented for payment;
4. Amount credited in Passbook but not in Cash book;
5. Deposits made in the bank directly;
6. Wrong credits given by bank;
7. Interest credited in the Passbook.
The following items will be subtracted:
1.Cheques deposited but not cleared;
2. Interest/Bank Charges debited by bank
3.Direct payments made by bank not entered in Cash book
4. Cheques dishonoured not recorded in cash book
5. Wrong debits given by bank
6. If it is prepared with the Bank balance as per the bank passbook, then the above procedure will be reversed i.e the items will be added to the pass book which were deducted from the cash book balance and those items will be deducted from the bank pass book balance which were added to the cash book balance.
OBJECTS/ADVANTAGES/NEEDS/IMPORTANCE/CAUSES
OF PREPARING OF BANK RECONCILIATION STATEMENT
Bank Reconciliation
statement is the basic document of the accounting. Preparation of it is not legally compulsory but by making it,
following objects/advantages/importance
are derived and is needed due to following causes :
(1) To know the accuracy of entries in the Cash Book andlhe Pass Book The
basic object of preparing
Bank Reconciliation Statement is to test the acuracy of causes of difference in
the Cash Book and the Pass Book. The trader tests the accuracy on the basis of
entries in the Cash Book and the Bank ori the
basis of its own transactions.
(2) To know the errors in Cash Book and Pass Book : Cash inflow and outflow must
tally asper, Cash
Book with the Bank Pass Book or,Bank Statement. This brings into focus
errors and irregularities in Cash Book and
Pass Book as well as in the business.
(3) Knowledge of cheques deposited for collection : Bank Reconciliation Statement
gives information about the position of
cheques deposited for collection e.g.,
(i) How many cheques were issued and not presented for payment
up to the date of reconciliation
(ii) How many cheques
were not credited up to the reconciliation time or were dishonored,
(iii) Cause of delay,
in clearance etc
(4) Check on the embezzlement of
cash.: The continuous comparison of Cash Book
with
the Pass
Book keeps check on employees trying to indulge in embezzlement and
misappropriation of funds. The cases of embezzlement of cash by
employees can be
detected easily.
(5) Verification of Bank Balance. The balance of
Bank can be known and it
becomes convenient for
issuing cheques on its basis in future.
(6) Mechanism of
Internal control
: The
preparation of Bank Reconciliation statement is
an important mechanism
of internal control on cash inflow and outflow. It checks
misappropriation of
cheques, bank drafts, malpractices of dishonest employees dealing with
cash and bank etc.
(7) Knowledge of interest allowed by bank or Commission and Interest charged by Bank
The
information regarding transaction of interest and other expenses (e.g.,
commission)
which are recorded by Bank, but
not recorded by customer in his Cash Book is received by
preparation of Bank Reconciliation Statement.
(8) Knowledge of Other
Facts :
(i) The
knowledge of wrong entries by bank;
(ii) The
correct position of cash and bank deposit;
(iii)
Dividend directly collected by bank;
(iv)
Direct deposit of cash or cheque by a debtor;
(v)
Payment made by the bank on
behalf of trader as per
standing instructions;
(vi)
Position of dishonor of bills receivable.
Preparing the Bank Reconciliation Statement (2 Methods)
Here
we detail about the two ways for preparing the bank reconciliation statement,
i.e., (i) Without Adjusting Cash book Balance.
(ii)
After Adjusted Cash Book Balance.
Now we shall move to study the steps taken in preparation of
bank reconciliation statement in each of the above cases.
(I) Preparation of Bank Reconciliation Statement without Adjusting
Cash Book Balance:
Under this approach, the following steps are
to be taken:
Step 1:
All
items appearing in the bank pass book should be checked and ticked with the
items appearing in cash book.
Step 2:
The
un-ticked items in both the books i.e. cash book and pass book are listed
according to their nature of difference.
Step 3:
Put the balance of cash book or pass book as the first
item in bank reconciliation statement. The favourable balance of cash book
(i.e., debit balance) or pass book (i.e., credit balance) is to be shown under
‘plus’ column and unfavourable/overdraft balance of cash book (i.e., credit
balance) or pass book (i.e., debit balance) is to be shown under ‘minus’ column
of the bank reconciliation statement.
Step 4:
All items which have caused the difference between the
balance as per cash book and balance as per pass book are to be examined and
analyzed. In this analysis, the impact of the transactions on the balance as
per cash book should be taken, if starting point is the balance as per pass
book. However, if starting point is the balance as per cash book then the
impact of all transactions on the balance as per pass book should be taken.
Step 5:
The impact of errors and omissions in both the books is
to be analyzed and their affects should be suitably noted in the bank
reconciliation statement. Such errors and omissions may cause decrease/increase
in the balance of cash book or increase/decrease in the balance of pass book.
Errors, that have caused decrease in the balance of cash
book, shall be added, if the starting point is the cash book and vice-versa,
when the starting point is pass book. Similarly, errors that have caused
increase in the balance of cash book shall be deducted, if the starting point
is the cash book and vice-versa when the starting point is the pass book.
Step 6:
The
‘plus’ and ‘minus’ columns are to be balanced.
Step 7:
Put the difference as ‘Balance as per Cash Book/Pass
Book’ or ‘Overdraft Balance as per Cash Book/Pass Book’ as the case may be.
In the above paragraphs, we have discussed the general
points that have to be kept in view while preparing the bank reconciliation
statement. Now, we shall move to discuss some additional and specific steps
required for preparing bank reconciliation statement when:
(A) The starting point is balance as per cash book
(favourable or unfavourable) and
(B) The starting point is balance as per pass book
(favourable or unfavourable).
(A)
When Starting Point Is Balance as Per Cash Book:
If bank reconciliation statement is prepared with the
favourable balance of cash book (i.e., debit balance of cash book) or
unfavourable balance/overdraft balance of cash book (i.e., credit balance of
cash book), the impact of all transactions on the pass book shall be examined.
The transactions shall be
recorded in the bank reconciliation statement as under:
(i) Add: All those transactions that have resulted in increasing the
balance of pass on book.
Example:
Cheque issued on 15th March, 2011 but
not presented for payment up to 31st March, 2011 Rs. 10,000.
Impact:
In this
case, the issue of cheque has been recorded in the cash book on the payment
side but it was not entered in the pass book. Therefore, bank balance as shown
by cash book would have been shown at lower than the balance as shown by the
pass book. In other words, the balance shown by the pass book would be higher
than the balance shown by cash book to the extent of that cheque.
(ii) Deduct: All those transactions that have resulted in decreasing
pass book:
Example:
A cheque of Rs. 23,500 received
from Ram Lal, deposited in the bank; however, the bank could not collect the
amount till 31st March, 2011.
Impact:
In this case, the deposit of cheque has been recorded in
the cash book on receipts side but it was not entered in the pass book
Therefore, bank balance as shown by cash book would have been shown at higher
than the balance as shown by the pass book. In other words, the balance shown
by the pass book would be lower than the balance shown by cash book to the
extent of that cheque.
Treatment:
(B)
When Starting Point Is Balance as Per Pass Book:
If bank reconciliation
statement is prepared with the balance of pass book, either favourable (credit)
or overdraft (debit) balance, the impact of all transactions on the cash book
shall be examined.
The transactions shall be
recorded in the bank reconciliation statement as under:
(i) Deduct:
All those transactions that
have resulted in decreasing in the balance as per cash book
Example:
Cheque issued on 15th March, 2011 but
not presented for payment up to 31st March, 2011 Rs. 10,000.
Impact:
In this
case, the issue of cheque has been recorded in the cash book on the payment
side but it was not entered in the pass book. Therefore, bank balance as shown
by cash book would have been shown at lower than the balance as shown by the
pass book. In other words, the balance shown by the pass book would be higher
than the balance shown by cash book to the extent of that cheque.
All those transactions that
have resulted in increasing the balance as per cash book
Example:
A cheque of Rs. 23,500 received from Ram
Lal, deposited in the bank; however, the bank could not collect the amount till
31st March, 2011.
Impact:
In this
case, the deposit of cheque has been recorded in the cash book on receipts side
but it was not entered in the pass book. Therefore, bank balance as shown by
cash book would have been shown at higher than the balance as shown by the pass
book. In other words, the balance shown by the pass book would be lower than
the balance shown by cash book to the extent of that cheque.
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