M. K. Approach to BRS

Bank Reconciliation Statement

Banks have become an indispensable part of the business organisation in today’s modern world. It is the basic necessity of every business organisation to maintain bank account for the safe and secure transactions. The banks offer various types of accounts as per the requirement of the customers The account with which we are most concerned in case of the bank reconciliation statement is the current account of the business.  Current account is the only account opened by the bank which gives the facility to withdraw more than what is there in the account. This facility of withdrawing more than the available balance is called as “Overdraft”.

Every business will maintain a record of its transactions with the bank in a book called as “Cash Book”. A business can maintain a separate account for bank or just maintain a column in the cash book. In this chapter, the word “Cash Book” would refer to the Bank Column of the cash book. As the cash book is prepared and maintained by the business all the entries in this book are made by the business.

As soon as a business opens a bank account with any bank, he receives a book called a “Pass Book” from the bank. He is expected to regularly get his pass book updated from the bank. The pass book is the record of the businesses bank account with the bank which is maintained by the bank. Now-a-days rather than giving the pass book the banks issue a periodic statement to the customers known as Bank Statement. A bank statement is a part of pass book itself.  As the pass book is prepared and maintained by the bank all the entries in this book are made by the bank.

Before we understand the need of Bank Reconciliation Statement it is important that we understand some common terms used in this context.

1.      Favorable Balance as per Cash Book:

It is also referred as “Balance as per Cash Book”. This balance indicates the amount of money that the business has in its bank as on a given date as per the Cash Book maintained by the business. The balance as per cash book is a Debit Balance as the Bank Account is as Asset for the business.  It is a situation when the total deposits in the bank are more than the total withdrawals from the bank.

2.      Unfavorable Balance as per Cash Book:

It is also referred as “Overdraft as per Cash Book”. This balance indicates the amount of money that the business owes to its bank as on a given date as per the Cash Book maintained by the business. The overdraft balance as per cash book is a Credit Balance as the Overdraft is a Liability for the business.  It is a situation when the total deposits in the bank are less than the total withdrawals from the bank.

3.      Favorable Balance as per Pass Book:

It is also referred as “Balance as per Pass Book”. This balance indicates the amount of money that the business has in its bank as on a given date as per the Pass Book maintained by the bank. The balance as per Pass Book is a Credit Balance as the business is the creditor of the bank, which makes it the liability of the Bank. It is a situation when the total deposits in the bank are more than the total withdrawals from the bank.

4.      Unfavorable Balance as per Pass Book:

It is also referred as “Overdraft as per Pass Book”. This balance indicates the amount of money that the business owes to its bank as on a given date as per the Pass Book maintained by the bank. The overdraft balance as per Pass Book is a Debit Balance as the business becomes the Debtor of the bank, which makes it the Asset of the Bank. It is a situation when the total withdrawals from the bank are more than the total deposits made in the bank.

What is Bank Reconciliation Statement?

From the above discussion, we can understand that the cash book and the pass book both record the transactions of the same account. This means that the balance as shown by the bank pass book and the firm’s cash book should show the same balance on a given day. In general it does not happen, this leads to preparation of a Bank Reconciliation Statement.

Bank Reconciliation Statement is a statement which is prepared by the firm (i.e. the customer of the bank) to identify the causes of difference between the balances between the two books. To reconcile is to tally. So in a Bank Reconciliation Statement the accountant would try to tally the balance as per cash book and as per the pass book.

There are many causes/ reasons for the difference in the balances between cash book and pass book. All the causes leading to the difference can be broadly classified into 2 parts as follows:

a)      Timing Difference

b)      Difference due to errors

Timing Difference

When the same entry is recorded in one book earlier and the other book latter it is called as timing difference. Here we need to understand that when the transaction is done by the firm/business it is first recorded in cash book and then into pass book. However, when the transaction is done by the bank it is first recorded in pass book and then in cash book. The following are the reasons that would fall under this head:

i)       Cheques issued but not presented for payment:- The entry is recorded on the payment side of the cash book as soon as the cheques is issued but the entry in the pass book is made only when it is presented for payment to the bank.

ii)     Cheques paid (deposited) into bank but not cleared:- The entry is recorded on the receipt side of cash book as soon as the cheques are deposited into bank but the entry in the pass book is made only when the cheques are cleared.

iii)   Interest allowed by bank:- The bank will enter such transaction on the deposit side of the pass book as soon as such interest is credited to the customer’s account, however the business would record such transaction only when the pass book is updated.

iv)   Interest charged by bank:- The bank will enter such transaction on the withdrawal side of the pass book as soon as such interest is debited to the customer’s account, however the business would record such transaction only when the pass book is updated.

v)     Interest and dividend collected by bank:-  The bank will enter such transaction on the Deposit side of the pass book as soon as such interest or dividend is collected on behalf of the customer, however the business would record such transaction only when the pass book is updated.

vi)   Direct payments by bank:- Sometimes business would give the standing instructions to the bank for making the payments directly. In such cases the bank will enter such transaction on the withdrawal side of the pass book as soon as such payment is made, however the business would record such transaction only when the pass book is updated.

vii) Direct deposit by customer:-  Sometimes the customers would directly deposit the payment in the businesses bank account. In such cases the bank will enter such transaction on the deposit side of the pass book as soon as such payment is received; however the business would record such transaction only when the customer intimates the business about the same.

viii)    Dishonour of a bill discounted with bank:-  If the bill discounted with the bank is dishonoured then the bank would enter such transaction on the withdrawal side of pass book and the business would record it at a later date.

DIFFERENCE DUE TO ERRORS

While recording the entries the errors can occur in both the books. Bank usually would not make errors so most of the errors can be found in cash book. However any error either in cash book or in pass book would lead to the difference in the balance as per both books. Errors include errors of partial omission, wrong amount, wrong bank account, wrong side, wrong casting, etc.

Format of Cash Book

Dr.	Cash Book		Cr.
Receipts	₹	Payment	₹

Format of Pass Book

Dr.	Pass Book		Cr.
Withdrawal	₹	Deposits	₹

Format of a Bank Reconciliation Statement:

Bank Reconciliation Statement as on .............
Particulars	Amount	Amount
Balance as per Cash Book		XX
Add;- --------------	XX
--------------	XX
--------------	XX	XX
Less:- -------------	XX
--------------	XX
--------------	XX	XX
Balance as per Pass Book		XX

 How to solve a problem on BRS?

There are many methods of solving a problem on BRS Here we are going to follow a completely new method called as “MK approach to BRS”

Step 1: Identify the nature of balance of the Starting point.

             There can be 4 possible starting points-

a)      Balance as per cash book        -           Debit Balance

b)      Overdraft as per cash book      -           Credit Balance

c)      Balance as per pass book         -           Credit Balance

d)      Overdraft as per pass book      -           Debit Balance

Step 2: Make the working note as mentioned below:

            If the starting point is a Debit balance, then mark Debit side (-) and Credit side (+).

	Cash Book
	Receipts	Payments
(-)	Pass Book		(+)
	Withdrawals	Deposits

If the starting point is a Credit balance, then mark Debit side (+) and Credit side (-).

	Cash Book
	Receipts	Payments
(+)	Pass Book		(-)
	Withdrawals	Deposits

Step 3: Now read the adjustments and identify the places where they are entered out of the 4 possible places. Apply the sign if the side.

Note: if the problem gives information about overcast or undercast balance as per any book then the rule is as follows:

In case of overcast or undercast balance as per any book then the rule is as follows:

In case of overcast balance use the sign of the same side and in case of under cast use the sign of the opposite side.

For eg. If the debit side of cash book is over cast by ₹ 100 then use the sign of debit side, i.e. (-) in case the starting point is a debit balance.

For eg. If the debit side of cash book is under cast by ₹ 100 then use the sign of credit side, i.e. (+) in case the starting point is a debit balance.

A QUICK REVIEW TABLE ON THE EFFECT OF ADJUSTMENTS IN PREPARATION OF BRS:

Sr. No.	Adjustment	Balance as per Cash Book                   (Dr. Balance)	Overdraft as per Cash Book         (Cr. Balance)	Balance as per Pass Book                  (Cr. Balance)	Overdraft as per Pass Book           (Dr. Balance)
1	Cheque Deposited but not cleared	Subtract	Add	Add	Subtract
2	Cheques issued but not presented	Add	Subtract	Subtract	Add
3	Direct deposit in bank by customer	Add	Subtract	Subtract	Add
4	Income directly collected by Bank	Add	Subtract	Subtract	Add
5	Payment directly made by bank	Subtract	Add	Add	Subtract
6	Bank Charges charged by Bank	Subtract	Add	Add	Subtract
7	Wrong Debit in Cash Book	Subtract	Add	Add	Subtract
8	Wrong Credit in Cash Book	Add	Subtract	Subtract	Add
9	Wrong Debit in Pass Book	Subtract	Add	Add	Subtract
10	Wrong Credit in Pass Book	Add	Subtract	Subtract	Add
11	Undercasting of Debit side of Bank column in Cash Book	Add	Subtract	Subtract	Add
12	Overcasting of Debit side of Bank column in Cash Book	Subtract	Add	Add	Subtract
13	Undercasting of Credit side of Bank column in Cash Book	Subtract	Add	Add	Subtract
14	Overcasting of Credit side of Bank column in Cash Book	Add	Subtract	Subtract	Add
15	Bill Receivable discounted with bank and Dishonored, not recorded in Cash Book	Subtract	Add	Add	Subtract

Let us take an example to understand the method:

Example: The cash book showed bank balance of ₹ 10000 as on 30^th November, 2015. However it was not the same as per pass book. The following causes were identified.

a)      Cheques issued but not presented for payment amounted to ₹ 2000

b)      Cheques deposited but not cleared to ₹ 3000

c)      Bank charges as per pass book ₹ 100

d)      Direct deposit by customer ₹ 1000.

Calculate bank balance as per pass book.

Solution:

As the starting point is the balance as per cash book, it is a debit balance.

Working Note: we need to mark (-) on the debit side and (+) on the credit side.

	Cash Book
	Receipts	Payments
	3000	2000
(-)	Pass Book		(+)
	Withdrawals	Deposits
	100	1000

1^st adjustment is of Cheques issued, as the transaction is done by the business it is first recorded in cash book on the “Payment side”.

2^nd adjustment is of cheques deposited; as the transaction is done by the business it is first recorded in cash book on the “Receipt side”.

3^rd adjustment is of bank charges is the activity done by the bank and hence it is recorded on the “Withdrawal side” of Pass Book.

4^th adjustment is of direct deposit in bank so it is recorded on the “Deposit side” of Pass Book.

Now Add the amounts on the credit side (2000+1000) and less the amounts on the debit side(3000+100) to the starting point, i.e. balance as per cash book.

₹10000 + Rs 3000 – ₹ 3100 = ₹ 9900.

So the balance as per pass book is ₹9900.

Bank Reconciliation Statement as on 30/11/2015
Particulars	₹	₹
Balance as per Cash Book		10000
Add: Cheques issued but not presented	2000
Direct deposit by customer	1000	3000
		13000
Less: Cheques Deposited but not cleared	3000
Bank Charges	100	3100
Balance as per Pass Book		9900