CHAPTER 13: BANK RECONCILIATION STATEMENT

When cash increases in the bank, the account holder adds the amount in the
receipt or debit side of the cash book, and to the credit or payments side when
cash is removed from the bank.
The bank also maintains an account of the account holder in its books of
accounts. Every deposit made by the account holder in his account is credited in
the books of the bank, and every withdrawal is debited.
A copy of this is given to the account holder in the form of bank statements or
pass book, for recording and reconciliation.

Debit entry in cash book = credit entry in pass book,

Credit entry in cash book = debit entry in pass book.

The reasons for the difference in the balances is important to find out. It could
have been due to error in recording in cash book or pass book, or not having
been recorded at all.

Pass book / bank statement: copy of the account of the account holder in the
books of accounts of the bank. It is sent to the account holder, to cross-check
the balances, and rectify them in the cash book.
A debit balance in the pass book, means credit balance in the cash book =
amount payable by the account holder to the bank.
A credit balance in the pass book, means debit balance in the cash book =
amount receivable by the account holder from the bank; money laying as
deposits.

Reasons for the difference in the balances:

1. Time difference in recording entries: there is usually a gap between when
the transactions are recorded in the cash book and when they are recorded
in the pass book.
 i. Cheque issued* is recorded in cash book on date of issue, but
recorded in bank when presented for payment – so there is a gap
of few days. If BRS is prepared on a date between issue &
presentation for payment, difference will arise.
ii. Cheque deposited* is recorded in the cash book on the date of
deposit, while in pass book, on receiving the amount from other
bank, i.e. cheque is cleared.
2. Recorded by bank, not by account holder: sometimes the bank records
certain transactions that are known to the account holder only on
receiving the pass book from the bank.
i. If the bank allows interest on the money deposited, it credits the
interest to this account in its books. But the a/c holder knows about
it when he receives the pass book. Until then the cash book balance
is less than pass book
ii. Banks provide services and overdraft facilities, for which they
charge bank charges/interest. They debit the a/c in their books.
iii. Sometimes bank collects the interest or dividend on the person’s
behalf and credits their account.
iv. If given standing instructions, they make certain payments, like
insurance premium.
v. If direct deposits are made, the bank credits the account, but the
person comes to know later
vi. If the bank doesn’t receive the payment against the bills
discounted* by it, it will debit the account holder’s account along
with the charges that may have incurred.
vii. When goods are sold on credit and the documents are sent through
the bank, it collects the amount on behalf of the seller and credits
his account.
3. Errors – by bank or account holder: transaction not being recorded, or
wrong amount carried forward, etc.
i. Wrong name is credited/debited
ii. Wrong amount is credited/debited – overcasted/undercasted

*Issue of cheque = payment to someone by cheque

*Deposit of cheque = depositing cash into your bank account.
*Discounting a bill = when there is a credit sale and a bill is issued stating the payment will
be made after 2 months, but there is an urgent need for funds. In such case, the business will
discount this bill from the bank (before the 2 months) and receive some money against it,
after deducting some interest.
It gets dishonoured if the business does not pay the money back to the bank.

Debit balance in cash book and credit balance in pass book is favourable
balance = amount laying deposited in the bank, i.e. receivable from the bank.
Credit balance in cash book and debit balance in pass book is unfavourable
balance = amount withdrawn in excess of the amount deposited, i.e. payable to
the bank.
Starting with cash book balance; overcasting on receipt side / undercasting on
payments side = more balance, so we will deduct. Overcasting on payments side
/ undercasting on receipt side = less balance, so we will add.

When preparing BRS for overdraft balance, start the amount with the negative
value and do the normal calculations.
If starting with positive value (for overdraft), the rules will reverse, i.e. where
you must add, you will deduct and vice-versa.