Bank Reconciliation Statement

SAVITA MAHENDRU

ASST LECTURER IN COMMERCE�HRMMV

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Bank Reconciliation Statement

• Businesses maintain cash books to record both cash as well as bank transactions. 
• A Cashbook has a cash column that shows cash available with the business and a bank column that shows cash at the bank.
• Bank also keeps an account for every customer in their books. All the deposits are recorded on the credit side of the customer’s account and withdrawals are on the debit side of their account. An account statement is sent regularly to the customers by the bank. 
• Sometimes the bank balances as per the cash book and bank statement doesn’t match. In case the balance available in the passbook doesn’t match the bank column of the cash book, the business should identify the reasons for the same.
•  It is important to reconcile the differences. For reconciling the balances as shown in the Cash Book and passbook a reconciliation statement is prepared known as Bank Reconciliation Statement or BRS. 
• In other words, BRS is a statement that is prepared for reconciling the difference between balances as per the cash book’s bank column and passbook on a given date.

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Why Prepare a BRS?

• It‘s not compulsory to prepare a BRS and there’s no fixed date for preparing BRS.
• BRS is prepared on a periodical basis for checking that bank related transactions are recorded properly in the cash book’s bank column and also by the bank in their books. BRS helps to detect errors in recording transactions and determining the exact bank balance as on a specified date.

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How to prepare a BRS

• The first step is to compare opening balances of both the bank column of the cash book as well as bank statement; these could be different due to un-credited or un-presented cheques from a previous period.
• Now, compare the credit side of the bank statement with the debit side of the bank column of the cash book and the debit side of the bank statement with the credit side of the bank column of the cash book. Place a tick against all the items appearing in both the records.
• Analyze the entries both in the bank column of the cash book as well as the passbook and look for entries that have been missed to be posted in the bank column of the cash book. Make a list of such entries and make the necessary adjustments in the cash book.  
• Correct if any mistakes or errors appear in the cash book.
• Calculate the corrected and revised balance of the cash book’s bank column.

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• Now, start the bank reconciliation statement with an updated cash book balance.
• Add the un-presented cheques (cheques which are issued by the business firm to its creditors or suppliers but not presented for payment – Expense) and deduct un-credited cheques (Cheques paid into the bank but not yet collected – Income).
• Make all the necessary adjustments for the bank errors. In case the bank reconciliation statement begins with the debit balance as per the bank column of the cash book, add all the amounts erroneously credited by the bank and deduct all the amounts erroneously credited by the bank. Do vice-versa in case its start with the credit balance.
• The resultant figure must be equal to the balance as per the bank statement.

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Benefits of preparing a BRS

• Accounting errors could lead to circumstances that are more than just embarrassing when the cheques bounce or companies start getting annoying calls from creditors or suppliers for payments that are already released.  
• Bank reconciliations assist you in spotting fraud and reducing the risk of transactions that could cause penalties and late fees. BRS offers several advantages to a business which includes:
• Detecting errors: A bank reconciliation helps you in spotting accounting errors that are common to every business. These mistakes include errors such as addition and subtraction, missed payments and double payments.

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• Tracking Interest and Fee: Banks might add interest payments, fees or penalties to your account. Monthly bank reconciliation allows you to add or subtract such amounts in your books.
• Detecting Fraud: You may not be able to prevent employees from stealing your money once, however, you could prevent it in future. Bank reconciliations statement helps you in detecting and spotting fraudulent transactions. It is advisable to employ an independent person to perform the reconciliations for preventing the accounting employee from falsifying your books and reconciliations.
• Tracking Receivables: BRS allows you to confirm all your receipts, assisting you to avoid awkward situations and also identifying entries for receipts that you didn’t deposit.

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Tips to ensure efficient BRS

Firstly, it’s essential to have all the required documentation and information in hand. That means, if all the required documentation and information are at your disposal you get a better view of things. 

Avoiding common errors, such as:

• An error relating to duplication of entries.
• Not accounting for a transaction that would cause a difference equal to the missed amount
• Errors while entering commas and dots, which cause discrepancies that, could be of significant value. For instance, instead of entering INR 2,401.30, entering INR 240.13.
• Transposition errors while entering figures in the books. For instance, instead of entering INR 221,200, entering INR 212,200.

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• Banks can make mistakes too: It is possible that your bank might have committed a mistake. They might debit incorrect amounts from your account or credit deposits that don’t belong to you. For this reason, in case you find errors for which you don’t find any explanations, or for which you’re in doubt, the best thing is to consult your bank.
•  Reconciling items: Listing differences and reconciling them and then forgetting it is possible. In case differences keep on accumulating with no action taken, your bank reconciliation would become meaningless. It is needed that a constant check is kept on the reconciled transactions so that they are reflected in the right way in the bank column of the cash book and in the bank statement.

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4 common illustrations of bank reconciliation statements

Before deep diving into the practical examples of bank reconciliation statements, let’s go through a few terminologies which are used in a recurring way while explaining the examples:

1. Cash Book Balance More Than Bank

• ABC Corp, has a balance of $2000 as per passbook as on 31st march 2021. However, the balance as per cash book as on 31st march 2021 is  $2210.
• Let’s Understand the Transaction Details
• A check of $500 was deposited, but it is not yet processed by the bank.
• Bank charges of $60 were recorded in the passbook, but not in the cash book.
• Checks worth $300 were issued, but not presented.
• Bank interest of $50 was recorded in the passbook, but not in the cash book.

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2. Cash Book Balance More Than Bank

• JPN & Co, has a balance of $20,000 as per passbook as on 31st march 2021.

Let’s Understand the  Transaction Details

• Three checks of $1000, $1500, $1750 were deposited in the bank on 30th December 2021 but were recorded in the bank statement on January 2022.
• A check of $1000 was issued on 31st december 2021, was not processed.
• A dividend of $500 on stocks was credited to the bank account, but not recorded in the cash book.
•  A direct deposit of $600 was made in a bank account by a customer, which was not recorded in the cash book.
• Bank charges of $60 were entered only in the bank passbook.
• Balance as per cash book on 31st december 2021 was $22,210.

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3. Bank Balance More Than Cash Book

• Markson’s & co. has a difference in balance as per cash book and bank statement as on 31st March 2021.

Let’s Understand the Transaction Details

• Balance as per bank statement as on 31st March 2021 is $5000. Balance as per the cash book is $1,650.
• Checks of $2000 and $1000 issued as on 30th March 2021, but not yet cleared.
• Insurance paid by the bank is $200. It is not yet recorded in the cash book.
• An outgoing check of $1000 was recorded twice in the cash book. It is accurately recorded in the bank passbook.
• Payment of a $500 check is recorded twice in the passbook.
• Dividends received $600 recorded only in the bank statement and not in the cash book.
• A check of $500 was deposited on 29th March 2021, but it is not collected.
• Bank charges of $50 were debited, it is only recorded in the bank passbook.

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4. Cash Book Balance More Than Bank

• Rutherford Inc. has  a difference in the balance as on 31st March 2021 between the bank statement and cash book.

Let’s Understand the Transaction Details:

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Challenges Faced While Preparing Bank Reconciliation Statements

• Businesses can gain a variety of advantages from effective reconciliation processes. Without good reconciliation, it is difficult determining which expected payments haven’t been made. In addition to detecting fraud, cash book and bank reconciliation statements allow you to quickly identify any potential disruptions in your cash flow.
• Effective bank reconciliation process offers various advantages to businesses. It allows businesses to identify any expected payments that haven’t been made, and detect fraud. Bank reconciliation can also help businesses quickly identify any disruptions in their cash flow.

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• However, even today, the bank reconciliation process is highly manual in nature. The accountants are responsible for manually comparing the digital passbook and e-cash book to prepare bank reconciliation statements. Additionally, sometimes due to the delay in cash being processed in the bank, there is a difference between the passbook and the cash book. This might lead to multiple errors or inconsistencies in the bank reconciliation statement.

Let us explore the various problems in bank reconciliation process and real-life examples of errors in bank reconciliation:

• Cash-In Transit Not Being Reflected on PassbookIn case of electronic fund transfers such as wire transfers, ACH, and credit card payments, the cash is not immediately reflected in the bank, which leads to a difference in the passbook as compaACH, wire transferred to the cash book.
• Outstanding Checks Not Being Reflected on PassbookThis is a predominant issue which leads to multiple errors in bank reconciliation statements. If there is a delay in checks getting deposited or being processed, the balance on the passbook would not match the cash book balance.
• Manual Errors Related to Bank ReconciliationAs discussed earlier, bank reconciliation is a highly manual process. The accountants might enter incorrect transaction details or not add the bank fees or interest details mistakenly. These human errors might lead to problems in the bank reconciliation process and eventually the statement.

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Benefits of Preparing a Bank Reconciliation Statement

Preparing bank reconciliation statements can help businesses in the following ways:

• Helps businesses identify any potential theft
• Helps keep errors at a minimum
• Helps businesses quickly detect accounting errors
• Helps identify transactions cleared by the bank and the ones that are pending
• Helps spot errors and update fees and charges
• Helps detect any possibilities of fraud
• The tracking of receivables also gets easier 
• Helps periodically track transactions

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Final Word

• The difference between the balance reported in the bank column of the cash book and the passbook on any particular date is reconciled in a Bank Reconciliation Statement. It helps clarify discrepancies, reduces errors, helps keep track of transactions, and reduces the possibility of theft and fraud. For all businesses, a Bank Reconciliation Statement is a crucial document and must be prepared periodically for the smooth running of the company.