Introduction to Bank Reconciliation Statement-BRS

Once upon a time, there were two best friends named Chand and Pasha. They both have different objectives in their life but yet depends upon each other for their needs. Chand is a young businessman and Pasha is a dynamic service provider. Whenever Chand requires any help he will reach out to Pasha without any hesitation and in return, Pasha will always try his level best to help his friend in need. But one day they both get into an argument because of miscommunication.

What do you think, they should do next to resolve these differences?

Welcome! In this article, I'm going to introduce you to a new lesson named Bank Reconciliation Statement - BRS. By the name itself, students get extremely anxious and always try to skip the topic. 

But if you don't understand this topic then maybe you won't understand how our banks functions and helps our business.

So let's start!

A businessman who opens a current account with a bank for his business and records his transaction with the bank either in Bank Account ledger or in the Bank column of the columnar cash book i,e. three column cash book bank column. At the time of opening the bank account, the bank will give him a book called “Pass Book.”

So as per CASH BOOK bank column Dr Side record all cheques received (Receipts) and Cr side records all cheques issued or paid (Payments).

And as per PASS BOOK, Dr Side records all Withdrawals from bank and Cr side records all Deposit into the bank.

What do we mean by Bank Reconciliation Statement - BRS?

Cashbook bank balance and passbook balance are generally the same but in actual practice, these two balances may not be the same as on a particular date. So a Statement known as Bank Reconciliation Statement is prepared. BRS is defined as a statement prepared to reconcile the difference between the bank balances shown by the cash book and passbook.

What is a Favorable Balance?

When in the passbook deposits are more than withdrawal and in cash book cheque received are more than cheque issued, it is called Favourable Balance.

Favourable balance shows cashbook Dr Balance and passbook Cr balance

Favourable Balance =   Cashbook Dr Balance (Receipts)

                                      Pass Book Cr. Balance (Deposits)

What is an Unfavorable or Overdraft Balance?

 When the passbook withdrawals are more than deposits and in cash book cheque issued is more than cheque received it is called bank overdraft.

Unfavourable or bank overdraft shows cash book Cr balance and Passbook Dr Balance.

Bank overdraft =   Cashbook Cr Balance (Payments)

                                 Passbook Dr Balance (Withdrawals)

Why there is a need for preparing BRS?

1. The BRS is prepared by the customer (businessman) and not by the bank.

2. It is prepared periodically, usually at the end of every month.

3. It enables the customer to check the accuracy of the entries made in cash book and passbook.

4. It helps the customer to keep a track of cheques sent to the bank for collection but not cleared and cheques issued but not presented for payment for an unreasonably long period.

What are the main causes of the difference between cash book balance and passbook balance?

The items which usually cause the difference between the two balances are:

1. Entries recorded in cash book but not recorded in the passbook.

2. Entries recorded in the passbook but not recorded in the cash book.

THESE ARE SOME IMPORTANT POINTS WHILE PREPARING BRS:

1. BRS is always prepared as on a particular date. It is never for a month or year.

2. It is a statement and not an account.

3. The term bank balance means favourable balance, unless otherwise stated.

4. In the case of favourable balance, the cash books show debit balance and the passbook shows credit balance.

5. In case of unfavourable or bank overdraft, the cash book shows credit balance and the passbook shows debit balance.

6. In the problem either the balance as per cash book is given and the balance as per passbook is to be ascertainment or the balance as per pass book is given and the balance as per cash book is to be ascertainment.

7. The balance given is to be taken as a starting point. Addition or deductions are to be made in that balance only to arrive at the other balance.

8. See the effects of each item on the two balances. i.e., cash book bank balance and passbook balance.

9. If balance which is given is less and the balance to be arrived at is more than add (+), but if the balance which is given is more and the balance to arrive is less, then deduct (-).

10. If balance given as per           consider effects of                                                        

      Cashbook                    à        passbook                          

      Passbook                     à        cash book  

     Cashbook overdraft      à        cash book  

     Passbook overdraft       à        passbook

11.  When extracts of cash book and pass book are given in the problem then see whether the two books relate to the same periods or different periods.
12.  If the books are for different periods then common items should be considered and if it is for the same period then common items should be ignored. 

So, that's it for today.

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