Bank Reconciliation Statement (BRS)

What a BRS is

A business records its bank transactions in the bank column of the cash book. The bank records the same transactions in the customer's account, a copy of which is the pass book or bank statement. The two are mirror images:

A bank reconciliation statement (BRS) is a statement prepared by the account holder, on a particular date, to explain why the two balances differ. It is not an account and is not part of the double-entry system.

Why the balances differ

Timing differences

• Cheques issued but not yet presented for payment (cash book already reduced, pass book not yet)
• Cheques deposited but not yet collected or credited (cash book already increased, pass book not yet)

Items the bank has recorded first

• Bank charges and interest on overdraft debited by the bank
• Interest or dividends collected and credited by the bank
• Direct deposits by customers into the firm's account
• Payments under standing instructions
• Deposited cheques dishonoured

Errors in the cash book or by the bank, such as a wrong amount or a double entry.

Rules for preparing a BRS

Starting with a favourable cash book balance (debit):

Starting with a favourable pass book balance, simply reverse every item. Starting with an overdraft, either reverse the add and deduct columns or, more safely, treat the overdraft as a negative figure and apply the normal rules.

Many firms first prepare an adjusted (amended) cash book for items the bank has recorded first and for cash book errors. Only the timing differences then remain in the BRS, and the adjusted balance is the one shown in the balance sheet.

Worked example 1: favourable balance

Cash book shows a debit balance of Rs 50,000. Cheques issued but not presented Rs 12,000; cheques deposited but not cleared Rs 8,000; bank charges Rs 500 and a direct deposit by a customer Rs 6,000 appear only in the pass book.

1. Balance as per cash book: 50,000
2. Add unpresented cheques: 12,000
3. Add direct deposit: 6,000
4. Deduct uncleared cheques: 8,000
5. Deduct bank charges: 500

Balance as per pass book = 50,000 + 12,000 + 6,000 - 8,000 - 500 = Rs 59,500 (credit).

Adjusted cash book balance = 50,000 + 6,000 - 500 = Rs 55,500, and 55,500 + 12,000 - 8,000 = 59,500. Both routes agree.

Worked example 2: overdraft

Cash book shows an overdraft of Rs 20,000. Unpresented cheques Rs 5,000; uncleared deposits Rs 7,000; interest on overdraft Rs 1,000 debited by the bank only.

Treat the overdraft as -20,000:

-20,000 + 5,000 - 7,000 - 1,000 = -23,000

Overdraft as per pass book = Rs 23,000 (debit balance).

Starting instead from a pass book overdraft, unpresented cheques are added to the overdraft, because the overdraft will grow when they are paid, and uncleared deposits are deducted. A pass book overdraft of Rs 9,000 with uncleared deposits of Rs 14,000 and unpresented cheques of Rs 3,500 gives -9,000 + 14,000 - 3,500 = Rs 1,500, a favourable cash book balance.

Worked example 3: errors

Cash book debit balance Rs 25,000. A cheque issued for Rs 4,800 was entered as Rs 8,400 (cash book understated by 3,600); a deposit of Rs 2,000 was entered twice (overstated by 2,000); unpresented cheques Rs 6,000.

Pass book balance = 25,000 + 3,600 - 2,000 + 6,000 = Rs 32,600.

Exam pointers

• The BRS is prepared by the customer, not by the bank.
• Cash book debit balance = pass book credit balance = favourable.
• Unpresented cheques make the pass book balance higher; uncleared deposits make it lower.
• Bank charges, interest, direct deposits and dishonoured cheques need a cash book entry; unpresented and uncleared cheques do not.
• In overdraft sums, use a negative sign and apply the ordinary rules.
• Check every answer by working backwards from the other balance.