Need for a bank reconciliation statement
A bank reconciliation statement is a statement prepared on a date to explain the difference between the bank balance as per the cash book and as per the pass book (bank statement). It is not an account; it is a statement.
- Finds errors in the cash book or pass book so they can be corrected.
- Shows the true bank balance for the balance sheet.
- Brings to light items like bank charges or dishonoured cheques to be recorded.
- Acts as a check on fraud by staff handling bank transactions.
- Helps follow up delays in clearing cheques.
Causes of difference between cash book and pass book
1. Timing differences
- Cheques issued but not yet presented for payment: cash book reduced, pass book not yet.
- Cheques deposited but not yet cleared/credited: cash book increased, pass book not yet.
2. Items recorded first by the bank
- Bank charges, interest on overdraft (debited by bank).
- Interest or dividend collected and credited by bank.
- Direct deposit by a customer into the firm's account.
- Direct payments by the bank under standing instructions (insurance premium, EMI).
- Dishonour of a cheque deposited or a bill discounted.
3. Errors
- By the firm: wrong amount, wrong side, missed or double entry, wrong totalling in the cash book.
- By the bank: wrong credit or debit of another customer's item, wrong amount.
Preparing the bank reconciliation statement
Format: Particulars | Plus items ₹ | Minus items ₹.
Starting with balance as per cash book (debit = favourable):
- Add: cheques issued but not presented; interest/dividend credited by bank; direct deposits by customers; errors that made the cash book too low.
- Less: cheques deposited but not cleared; bank charges; direct payments by bank; dishonoured cheques; errors that made the cash book too high.
- Result: balance as per pass book.
Starting with balance as per pass book: do the opposite (add cheques deposited but not cleared, subtract cheques issued but not presented, and so on).
Overdraft (unfavourable balance)
If the cash book shows a credit balance (overdraft), write it as a minus figure (or put it in the minus column) and apply the same logic; a final minus answer means an overdraft as per pass book. A simple way: treat overdraft as a negative number and add or subtract as usual.
Tip: first update the cash book for items only the bank knew (charges, interest, direct items), then prepare the BRS with the amended cash book balance, using only timing items and bank errors.
Key formulas and definitions
- Pass book balance = Cash book balance + items making pass book higher − items making pass book lower
- From cash book (Dr): + cheques issued not presented, − cheques deposited not cleared
- From cash book: + bank credits not in cash book, − bank debits not in cash book
- Overdraft = negative balance in calculations
Worked examples
1. Cash book balance ₹50,000. Cheques issued not presented ₹8,000; deposited not cleared ₹5,000; bank charges ₹200; interest credited ₹600. Find pass book balance.
50,000 + 8,000 + 600 − 5,000 − 200 = ₹53,400.
2. Pass book balance ₹30,000. Cheques deposited ₹6,000 not cleared; cheques issued ₹4,500 not presented; bank charges ₹150 not in cash book. Find cash book balance.
Start with pass book: 30,000 + 6,000 − 4,500 + 150 = ₹31,650.
3. Cash book balance ₹12,000. A cheque of ₹2,000 deposited was dishonoured; EMI ₹3,500 paid directly; customer paid ₹4,000 directly. Pass book balance?
12,000 − 2,000 − 3,500 + 4,000 = ₹10,500.
4. Cash book shows overdraft ₹20,000. Cheques issued not presented ₹5,000; cheques deposited not cleared ₹7,000; interest on overdraft ₹800 not recorded. Find pass book balance.
Take −20,000. Add 5,000 → −15,000. Less 7,000 → −22,000. Less 800 → −22,800. Overdraft as per pass book ₹22,800.
5. A receipt of ₹450 was recorded as ₹540 in the cash book. Cash book shows ₹25,000. Other items: none. Pass book balance?
Cash book is ₹90 too high, so subtract: 25,000 − 90 = ₹24,910.
6. Payment side of the cash book (bank column) was undercast by ₹1,000. Cash book balance ₹40,000; cheques not presented ₹3,000. Pass book?
Undercast payments → cash book ₹1,000 too high → subtract. 40,000 − 1,000 + 3,000 = ₹42,000.
Common mistakes
- Using the same add/subtract rules when starting from the pass book. The signs reverse.
- Forgetting that an overdraft is a negative balance.
- Treating bank charges as a plus item from the cash book. They reduce the pass book balance, so subtract.
- Thinking the BRS is a ledger account. It is only a statement; errors and bank items are corrected separately in the cash book.