1. Meaning and Need
A Bank Reconciliation Statement (BRS) is a statement (not an account) prepared to reconcile (explain) the difference between the bank balance shown in the firm's Cash Book (Bank Column) and the balance shown in the bank's Pass Book (Bank Statement).
Who prepares BRS? It is prepared by the account holder
(business/customer), NOT by the bank itself.
Need / Importance of BRS
- Detects errors in Cash Book and Pass Book.
- Prevents and detects frauds (e.g., embezzlement by cashier).
- Acts as an internal check on book-keeping.
- Provides the correct/true bank balance at any date.
- Keeps track of cheques not yet presented or deposits not yet credited.
2. Causes of Difference Between Cash Book and Pass Book
Category A: Timing Differences (Cheque-related)
- Cheques issued but not yet presented for payment: Business records it as payment (Cash Book), but bank decreases balance only when cheque is presented.
- Cheques deposited/sent for collection but not yet credited by bank: Business records receipt (Cash Book), but bank credits only after clearing.
Category B: Direct Bank Transactions (not yet in Cash Book)
- Interest allowed by bank: Bank credits Pass Book; business hasn't recorded it yet in Cash Book.
- Bank charges / commission debited by bank: Bank debits Pass Book; not yet entered in Cash Book.
- Direct payment by bank (e.g., standing instructions): Insurance premium, loan EMI paid directly by bank.
- Direct deposit by customer into bank: Customer pays directly into the firm's bank account — not recorded in Cash Book yet.
- Dividend / interest received and credited directly by bank: Reflected in Pass Book but not Cash Book.
Category C: Errors
- Errors committed in Cash Book (wrong amount, posted to wrong side).
- Errors committed in Pass Book by the bank.
3. Balances and Their Meanings
| Balance | In Cash Book (Bank Column) | In Pass Book |
|---|---|---|
| Favourable / Positive | Debit balance (deposits > withdrawals) | Credit balance (money available) |
| Unfavourable / Overdraft | Credit balance (withdrawals > deposits) | Debit balance (money owed TO bank) |
4. Preparation of BRS — All 4 Cases
BRS can be started with any of the four balances. The standard adjustments are:
Case 1: Starting with Debit Balance as per Cash Book (Favourable)
| Cause of Difference | Add (+) or Deduct (–) |
|---|---|
| Cheques issued but not presented | Add (+) |
| Cheques deposited but not collected | Deduct (–) |
| Interest credited by bank (not in CB) | Add (+) |
| Bank charges debited by bank (not in CB) | Deduct (–) |
| Direct collection by bank | Add (+) |
| Direct payments by bank | Deduct (–) |
Case 2 (Credit Balance in CB / Overdraft): Reverse the signs — Add becomes Deduct
and vice versa.
Case 3 (Credit Balance in Pass Book): Same adjustments as Case 1 but start from Pass Book side.
Case 4 (Debit Balance in PB / Overdraft): Start from unfavourable Pass Book balance; adjustments are reversed.
Case 3 (Credit Balance in Pass Book): Same adjustments as Case 1 but start from Pass Book side.
Case 4 (Debit Balance in PB / Overdraft): Start from unfavourable Pass Book balance; adjustments are reversed.
5. Key Points to Remember
- BRS is prepared on a specific date (not for a period).
- BRS does NOT form part of the double entry system — it is not an account.
- After preparing BRS, necessary corrections may be made in the Cash Book.
- Error on the bank's side is corrected by the bank, not in the firm's Cash Book.
- Favourable balance means money available; Overdraft means money borrowed from bank.