FINPREP - Concept Notes Chapter Name Bank Reconciliation Statement Chapter No.

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Concept Notes Subject: Accounting

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FINPREP - Concept Notes Chapter Name Bank Reconciliation Statement Chapter No. 3

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FINPREP - Concept Notes Chapter Name Bank Reconciliation Statement Chapter No. 3 Bank Reconciliation Statement

3.1. Bank Pass Book or Bank Statement: Bank pass book or bank statement is an extract of the ledger account of the customer as per the bank's book of accounts. It is a periodical statement of account that details all transactions that the account holder has had through the bank account. For example, if you have an account with HDFC Bank, you will get periodical statements either physically or in electronic form from the bank. The statement will give details of how much money you had in the account at the beginning of the period, what amounts were deposited during the period, what amounts were withdrawn during the period and what is the balance in the account at the end of the period. 3.2. A comparative analysis of bank pass book and cash book: The bank pass book will be a mirror image of the cash book maintained by the customer. X Ltd. has a current account with ICICI Bank. When X Ltd. deposits money into the ICICI Bank account, it will make an entry in its cash book and the bank will make an entry in X Ltd's account, in its books. When X Ltd. deposits money into the bank, X Ltd. will debit its cash book (the bank column). ICICI Bank will credit X Ltd's account in its books (because, X Ltd. is a liability to the bank). So, it means that whatever is debited to the cash book by X Ltd will be credited by ICICI Bank to X Ltd's account and whatever is credited to the cash book by X Ltd., will be debited by ICICI Bank to X Ltd's account. A comparative analysis of the pass book and cash book (bank column) is as follows: Table 1:

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FINPREP - Concept Notes Chapter Name Bank Reconciliation Statement Chapter No. 3
3.3. Nature of balances: Table 2:

How to read the above table: The above table helps us to understand the nature of balance depending on which side of the account it is. Favorable balance means positive balance and unfavorable balance means an overdrawn balance or a negative balance. An overdrawn balance as per the bank column of the cash book will be shown as a current liability (bank overdraft) in the balance sheet. The favorable balance as per the bank column of the cash book will be shown as a current asset (cash and bank balances) in the balance sheet. 3.4. Bank Reconciliation Statement (BRS): The bank reconciliation statement (BRS) is a statement prepared by the account holder or the customer. In our example, X Ltd. will prepare the BRS. BRS is not a financial statement like the P&L account or the BS. It is a control tool. The account holder or customer, i.e. X Ltd in our example, should periodically compare the balance as per the bank column of the cash book and the balance as per the pass book. Ideally, the balances should be equal. In case there is a difference, the reasons for the difference have to be listed down. The statement that lists out the reasons for difference between the balance as per the bank column of the cash book and the pass book is called the BRS. BRS is prepared as at a particular date. 3.5. Reasons for difference between pass book and cash book: The difference between the balance as per the bank column of the cash book and the pass book could be due to 1) Timing differences or 2) Errors in the cash book or in the pass book Timing differences are the differences that arise due to delay in recording an entry in the cash book or in the pass book. Certain transactions are recorded first in the cash book and then later in the pass book and there are certain transactions that get recorded in the pass book first and in the cash book later.

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FINPREP - Concept Notes Chapter Name Bank Reconciliation Statement Chapter No. 3
Table 3:

Point to note: 1) The difference in the balances is only a temporary difference. The differences will disappear either on lapse of time (in case of timing differences) or when the errors or omissions are rectified or recorded. The above table has to be read as follows (an illustration): 1) Cheques issued but not presented for payment: For example, X Ltd. issues a cheque for Rs.1, 000 to its creditor. X Ltd. has an account with ICICI Bank. As soon as the cheque is issued, X Ltd. will debit the creditor and credit the bank column of its cash book. After passing this entry, the bank balance as per the cash book will come down automatically. However, ICICI Bank will debit X Ltd's account in its books, only when the cheque is presented for clearance by the creditor to his bank. Till such time, the balance as per the pass book will be greater than the balance as per the bank column of the cash book. When, the creditor presents the cheque and the cheque is cleared, ICICI Bank will debit X Ltd's account. Only after this happens, the pass book balance will be equal to the balance as per the bank column of the cash book. 3) Interest credited by the bank: Interest is credited by the bank based on the balance maintained by the customer with the bank. This interest will be entered by the bank first and only when the customer receives the pass book, he will get to know about the credit of interest, after which he will make an entry in the cash book for the interest received. Till such time, the balance as per the pass book will be greater than the balance as per the cash book.

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FINPREP - Concept Notes Chapter Name Bank Reconciliation Statement Chapter No. 3
3.6. Preparation of BRS: BRS may be prepared in two ways: 1) Without adjusting cash book and 2) After adjusting cash book for items 3 to 8 of Table 3. 3.6.1 Without adjusting the cash book: When we prepare the BRS without adjusting the cash book, we need to keep in mind the rules from following table. The rules are very logical. Hence we need to understand the logic behind every treatment and then prepare the BRS. Table 4:

Let us look at the following examples to understand better: Example 1: From the following information, ascertain the balance as per the pass book as at 31st Dec 1) Bank balance (Dr) as per cash book on 31st Dec is Rs.634, 000 2) Interest for the month of Dec Rs.16, 000 is entered in the pass book 3) Bank charges of Rs.300 for the above period are debited to the pass book 4) Cheques issued but not cashed prior to 31st Dec amounted to Rs. 116,800 5) Cheques deposited into bank but not cleared before 31st Dec were for Rs.217, 000 6) Interest on investment collected by the bank and credited in the pass book Rs.120, 000

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FINPREP - Concept Notes Chapter Name Bank Reconciliation Statement Chapter No. 3

Let us look at the following examples to understand better: Example 2: From the following information, ascertain the balance as per the pass book as at 31st Dec 1) Bank balance (Cr) as per cash book on 31st Dec is Rs.634, 000 2) Interest on OD for the month of Dec Rs.16, 000 is entered in the pass book 3) Bank charges of Rs.300 for the above period are debited to the pass book 4) Cheques issued but not cashed prior to 31st Dec amounted to Rs. 116,800 5) Cheques deposited into bank but not cleared before 31st Dec were for Rs.217, 000 6) Interest on investment collected by the bank and credited in the pass book Rs.120, 000

Example 3: From the following information ascertain the balance as per cash book: 1) Bank OD as per pass book Rs.16, 500 2) Cheques issued not presented for payment Rs. 8,750 3) Cheques deposited with the bank not collected Rs. 10,500 4) Cheques recorded in the cash book not sent for collection Rs.2, 000 5) Payments received directly by bank from customers Rs.3, 500 6) Bank charges debited in the pass book Rs.200 7) Premium on insurance policy paid by bank understanding instruction Rs. 1,980

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FINPREP - Concept Notes Chapter Name Bank Reconciliation Statement Chapter No. 3
8) A bill for Rs.3, 000 discounted with the bank was dishonored and the bank has charged Rs.100 as noting charges.

Example 4: If in example 3, we assume that the balance as per pass book is favorable, the balance as per cash book would be ascertained as follows:

3.6.2 After adjusting cash book: BRS can also be prepared after adjusting the cash book for items 3 to 8 in Table 3. An adjusted cash book will be prepared in order to give record/rectify items 3 to 8 of Table 3 and the closing balance would be the adjusted cash book balance. This balance will be taken to the balance sheet as a current asset. The cash book of K showed a bank balance of Rs.1, 200 (Dr) as at 30th June. However, the pass book showed an overdrawn balance. On investigation it was found that1) Receipts Colum of the cash book had been overcast by Rs.1, 100. 2) Cheques drawn an entered in the cash book in June amounting to Rs.1, 670 were not presented yet. 3) Discount received from a supplier of Rs.100 had been included with the cheque entered in the bank column of the cash book in April. For Private Circulation to registered students. Page 8 of 9

FINPREP - Concept Notes Chapter Name Bank Reconciliation Statement Chapter No. 3
4) An amount of Rs.750 paid directly into K's account by a customer was not entered in the cash book. 5) A cheque payment of Rs. 1,230 in April had been entered in the cash book as Rs. 1,320 6) The bank had charged K's business account with a cheque for Rs.2, 200 in February, which should have been passed through K's private account 7) Bank charges of Rs.80 on 31st march and Rs.100 on 30th June had not yet been entered in the cash book. 8) Cheque to the value of Rs.3, 780 received from customers was recorded in the cash book on 28th June but not entered by the Bank until 2nd July. We are required to find out the adjusted cash balance and also prepare the BRS.

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