Friday, 3 February 2012

BANK RECONCILIATION STATEMENT(BRS) ANALYSIS

BANK RECONCILIATION STATEMENT(BRS):
Definition:
Bank Reconciliation Statement is a statement prepared to reconcile
the difference between the balances as per the bank column of the
cash book and pass book on any given date.

Real Time Cases:
You operate a bank account in which you deposit money and withdraw
money from time to time. You maintain a record with yourself of these
deposits and withdrawals. One day you get your pass-book (statement
issued by the bank) updated but are surprised to find that the balance shown
by the pass book was different from what it should have been as per your
records. What will you do in this case? It is obvious that you will compare
the two sets of records and find out items which are recorded in one but
not in the other. 

Similar situation may arise in case of a business concern
which operates a bank account. These business concerns maintain record
of all of their banking transactions in their bank column of the cash book.
On any particular date the bank balance shown by the bank column cash
book and that shown by the pass book should be the same. But if there is
difference between the two, the business concern will find out the reasons
to reconcile the balance. In this lesson you will learn about reasons for
difference and prepare the reconciliation statement called Bank Reconciliation
Statement.

BRS ANALYSIS:
Business concern maintains the cash book for recording cash and bank
transactions. The Cash book serves the purpose of both the cash account
and the bank account. It shows the balance of both at the end of a period.
Bank also maintains an account for each customer in its book. All deposits
by the customer are recorded on the credit side of his/her account and all
withdrawals are recorded on the debit side of his/her account. A copy of
this account is regularly sent to the customer by the bank. This is called
‘Pass Book’ or Bank statement. It is usual to tally the firm’s bank
transactions as recorded by the bank with the cash book. But sometimes
the bank balances as shown by the cash book and that shown by the pass
book/bank statement do not match. If the balance shown by the pass book
is different from the balance shown by bank column of cash book, the
business firm will identify the causes for such difference. It becomes
necessary to reconcile them. To reconcile the balances of Cash Book and
Pass Book a statement is prepared. This statement is called the ‘Bank
Reconciliation Statement.

Need of preparing Bank Reconciliation Statement :
It is neither compulsory to prepare Bank Reconciliation Statement nor a date
is fixed on which it is to be prepared. It is prepared from time to time to
check that all transactions relating to bank are properly recorded by the
businessman in the bank column of the cash book and by the bank in its
ledger account. Thus, it is prepared to reconcile the bank balances shown
by the cash book and by the bank statement. It helps in detecting, if there
is any error in recording the transactions and ascertaining the correct bank
balance on a particular date.

When a businessman compares the Bank balance of its cash book with the
balance shown by the bank pass book, there is often a difference. As the
time period of posting the transactions in the bank column of cash book
does not correspond with the time period of posting in the bank pass book
of the firm, the difference arises. The reasons for difference in balance of
the cash book and pass book are as under :

1. Cheques issued by the firm but not yet presented for payment :
When cheques are issued by the firm, these are immediately entered on the
credit side of the bank column of the cash book. Sometimes, receiving
person may present these cheques to the bank for payment on some later
date. The bank will debit the firm’s account when these cheques are
presented for payment. There is a time period between the issue of cheque
and being presented in the bank for payment. This may cause difference
to the balance of cash book and pass book.

2. Cheques deposited into bank but not yet collected
:
When cheques are deposited into bank, the firm immediately enters it on
the debit side of the bank column of cash book. It increases the bank balance
as per the cash book. But, the bank credits the firm’s account after these
cheques are actually realised. A few days are taken in clearing of local
cheques and in case of outstation cheques few more days are taken. This
may cause the difference between cash book and pass book balance.

3. Amount directly deposited in the bank account
:
Sometimes, the debtors or the customers deposit the money directly into
firm’s bank account, but the firm gets the information only when it receives
the bank statement. In this case, the bank credits the firm’s account with
the amount received but the same amount is not recorded in the cash book.
As a result the balance in the cash book will be less than the balance shown
in the Pass book.

4. Bank Charges:
The bank charge in the form of fees or commission is charged from time
to time for various services provided from the customers’ account without
the intimation to the firm. The firm records these charges after receiving
the bank intimation or statement. Example of such deductions is : Interest
on overdraft balance, credit cards’ fees, outstation cheques, collection
charges, etc. As a result, the balance of the cash book will be more than
the balance of the pass book.

5. Interest and dividend received by the bank:
Sometimes, the interest on debentures or dividends on shares held by the
account holder is directly deposited by the company through Electronic
Clearing System (ECS). But the firm does not get the information till it
receives the bank statement. As a consequence, the firm enters it in its cash
book on a date later than the date it is recorded by the bank. As a result,
the balance as per cash book and pass book will differ.

6. Direct payments made by the bank on behalf of the customers:
Sometimes, bank makes certain payments on behalf of the customer as per
standing instructions. Telephone bills, rent, insurance premium, taxes, etc
are some of the expenses. These expenses are directly paid by the bank and
debited to the firm’s account immediately after their payment. but the firm
will record the same on receiving information from the bank in the form
of Pass Book or bank statement. As a result, the balance of the pass book
is less than that of the balance shown in the bank column of the cash book.

7. Dishonour of Cheques/Bill discounted:
If a cheque deposited by the firm or bill receivable discounted with the bank
is dishonoured , the same is debited to firm’s account by the bank. But the
firm records the same when it receives the information from the bank. As
a result, the balance as per cash book and that of pass book will differ.

8. Errors committed in recording transactions by the firm:
There may be certain errors from firm’s side, e.g., omission or wrong
recording of transactions relating to cheques deposited, cheques issued and
wrong balancing etc. In this case, there would be a difference between the
balances as per Cash Book and as per Pass Book.

9. Errors committed in recording transactions by the Bank:
Sometimes, bank may also commit errors, e.g., omission or wrong recording
of transactions relating to cheques deposited etc. As a result, the balance
of the bank pass book and cash book will not agree.

PREPARATION OF BANK RECONCILIATION STATEMENT :
To reconcile the bank balance as shown in the pass book with the balance
shown by the cash book, Bank Reconciliation Statement is prepared. After
identifying the reasons of difference, the Bank Reconciliation statement is
prepared without making change in the cash book balance.
We may have the following different situations with regard to balances
while preparing the Bank Reconciliation statement. These are:

1. Favourable balances:
(a) Debit balance as per cash book is given and the balance as per pass book
is to be ascertained.
(b) Credit balance as per pass book is given and the balance as per cash
book is to be ascertained.
2. Unfavourable balance/overdraft balance:
(a) Credit balance as per cash book (i.e. overdraft) is given and the balance
as per pass book is to be ascertained.
(b) Debit balance as per pass book (i.e. overdraft) is given and the balance
as per cash book is to be ascertained.

The following steps are taken to prepare the bank reconciliation statement:
(i) Favourable balances : When debit balance as per cash book or credit
balance as per pass book is given :
(a) Take balance as a starting point say Balance as per Cash Book.
(b) Add all transactions that have resulted in increasing the balance
of the pass book.
(c) Deduct all transactions that have resulted in decreasing the
balance of pass book.
(d) Extract the net balance shown by the statement which should be
the same as shown in the pass book.

In case balance as per pass book is taken as starting point all transactions
that have resulted in increasing the balance of the Cash book will be added
and all transactions that have resulted in decreasing the balance of Cash
book will be deducted. Now extract the net balance shown by the statement
which should be the same as per the Cash book..
The following illustration helps to understand dealing with the favourable
balance as per cash book or pass book.

Solution:

Bank Reconciliation statement of M/s Ananaya Industries
As on December 31, 2006
Particulars (Plus)
Amount (Rs.)
(Minus)
Amount (Rs.)
1. Balance as per cash book 32,500
2. Cheques deposited but not credited by the bank  8,900
3. Cheques issued but not presented for payment 12,500
4. Dividend received through ECS  5,000
5. Bank charges debited by bank 400
Balance as per pass book 40,700
50,000 50,000

Sometimes a businessman withdraws excess amount from the bank account
and the closing bank balance of a month is a debit balance. This balance
amount is called ‘overdraft balance’ as per Pass Book. This is shown in
the cash book as a credit balance.

UN FAVOURABLE BALANCE/OVERDRAFT BALANCE:
Sometimes a businessman withdraws excess amount from the bank account
and the closing bank balance of a month is a debit balance. This balance
amount is called ‘overdraft balance’ as per Pass Book. This is shown in
the cash book as a credit balance.

Credit balance as per cash book/Debit balance as per Pass Book.
Overdraft balance is to be shown in the minus column of statement as the
starting point. The other steps shall remain same.
The following illustration helps to understand dealing with the unfavourable
balance as per cash book and pass book.

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