Bank Reconciliation Statement

Bank Reconciliation Statement is a statement prepared to find out why the bank balance shown by Cash Book and the bank balance shown by Pass Book or Bank Statement are different.

A business records bank transactions in its Cash Book.

The bank records the same transactions in the Pass Book or bank statement.

Sometimes both balances do not match.

BRS helps us find the reasons and match them.

Simple line: BRS explains the difference between Cash Book bank balance and Pass Book balance.

Cash Book is prepared by the business.

It records cash and bank transactions from the business side.

Pass Book or Bank Statement is prepared by the bank.

It records bank transactions from the bank's side.

Example: if Riya deposits Rs.10,000 into bank, Riya records it in Cash Book and the bank records it in the bank statement.

But sometimes timing or bank actions create differences.

Balances differ because every bank transaction may not be recorded by both sides at the same time.

Example: Riya issues a cheque today.

She records it in Cash Book immediately.

But the bank will record it only when the cheque is presented and paid.

So Cash Book balance and Pass Book balance may be different for some time.

Simple line: Most BRS differences happen because of timing or bank-side entries.

Riya runs a stationery shop.

Her Cash Book shows bank balance Rs.20,000.

But her bank statement shows Rs.22,500.

She is confused.

Then she checks and finds bank interest Rs.1,000 not recorded in Cash Book, bank charges Rs.500 not recorded in Cash Book, a customer directly deposited Rs.2,000 into bank, and one cheque of Rs.4,000 issued by Riya is not yet presented.

Now she understands why balances are different.

This checking process is called Bank Reconciliation.

Cheque issued but not presented: business gave cheque to someone, but the person has not deposited it in bank yet.

Cash Book has already recorded the payment, but bank has not reduced balance yet.

Simple line: Cash Book balance is lower, Pass Book balance is higher.

Cheque deposited but not cleared: business deposited cheque into bank, but bank has not cleared it yet.

Cash Book has already recorded the receipt, but bank has not increased balance yet.

Simple line: Cash Book balance is higher, Pass Book balance is lower.

Bank charges mean bank deducts charges directly.

Pass Book reduces balance, but Cash Book may not record it immediately.

Interest credited by bank means bank adds interest.

Pass Book increases balance, but Cash Book may not record it immediately.

Direct deposit by customer means customer deposits money directly into bank.

Bank records receipt, but business may not know immediately.

Direct payment by bank means bank pays something directly, like insurance premium or loan instalment.

Bank reduces balance, but business may not record it immediately.

Dishonoured cheque means cheque deposited earlier is rejected by bank.

This lesson uses Cash Book balance as the starting point.

Add items that bank has added but Cash Book has not recorded, such as interest credited by bank and direct deposit by customer.

Subtract items that bank has deducted but Cash Book has not recorded, such as bank charges, direct payment by bank, and dishonoured cheque.

Cheque issued but not presented is added because Cash Book has already reduced balance but bank has not.

Cheque deposited but not cleared is subtracted because Cash Book has already increased balance but bank has not.

Important: add/subtract direction can change depending on whether you start with Cash Book balance or Pass Book balance.

Memory line: Always ask, which book has already recorded it, and which book has not?