Preparation of Bank Reconciliation Statement

Bank Reconciliation Statement (BRS) is a document that helps reconcile the differences between the bank balance as per the bank statement and the balance as per the company’s cash book. This statement is essential for ensuring that a business’s financial records align with the actual transactions processed by the bank. It helps identify discrepancies due to timing differences, errors, and omissions.

Purpose of Bank Reconciliation Statement

Steps to Prepare a Bank Reconciliation Statement

Step 1. Determine the Starting Balance

The first step in preparing a Bank Reconciliation Statement (BRS) is to determine the balance from which reconciliation will begin. The accountant may start with the Cash Book balance or Pass Book balance, depending on the information available and the requirements of the question. The starting balance should be clearly identified as a favourable balance or overdraft balance because the treatment of subsequent items depends on it.

Step 2. Compare Cash Book with Pass Book

The Cash Book is compared carefully with the Pass Book or Bank Statement for the same period. Each receipt, payment, cheque, deposit, and bank transaction is checked against the corresponding entry. The purpose is to identify transactions appearing in one record but not in the other. This comparison helps locate timing differences, omissions, errors, and unrecorded bank transactions that have caused the balances to differ.

Step 3. Identify Cheques Issued but Not Presented

Cheques issued by the business may not have been presented by the recipients to the bank before the reconciliation date. Such cheques are recorded in the Cash Book but are not yet reflected in the Pass Book. The accountant must identify these unpresented cheques from the records. Their treatment in the BRS depends on the starting balance and whether the objective is to reconcile the Cash Book balance with the Pass Book balance.

Step 4. Identify Cheques Deposited but Not Collected

Cheques deposited into the bank may take time to be collected. The business records the deposit in its Cash Book, while the bank records the credit only after collection. These are known as uncleared or uncollected cheques. The accountant should identify such items from the bank statement and deposit records. They are then appropriately adjusted in the BRS to explain the difference between the two balances.

Step 5. Record Bank Charges and Interest

The bank may directly record bank charges, commission, interest, or other deductions in the Pass Book without the business immediately recording them in the Cash Book. Similarly, the bank may credit interest or other income. These items must be identified and, where necessary, entered in the Amended Cash Book before preparing the BRS. This ensures that the reconciliation focuses only on genuine remaining differences.

Step 6. Identify Direct Credits and Debits

The bank may make direct credits or payments on behalf of the business. Direct customer deposits, dividend collections, and interest received increase the bank balance, while standing orders, loan instalments, insurance payments, and other authorized payments decrease it. The accountant should identify these transactions and determine whether they have already been recorded in the Cash Book. Unrecorded items should generally be incorporated through the Amended Cash Book.

Step 7. Check for Errors

The accountant should examine both the Cash Book and Pass Book for errors. Errors may include incorrect amounts, omissions, wrong additions, duplicate entries, or incorrect recording of transactions. Errors identified in the Cash Book should be corrected appropriately, while bank errors should be brought to the bank’s attention. Careful verification ensures that the BRS does not treat accounting mistakes as ordinary timing differences.

Step 8. Make Appropriate Adjustments

After identifying all differences, the accountant makes the required additions and deductions according to the chosen starting balance. The treatment depends on whether the statement begins with the Cash Book or Pass Book and whether the balance is favourable or an overdraft. Each item should be considered carefully so that its effect on the relevant balance is correctly reflected. Proper adjustment is essential for achieving reconciliation.

Step 9. Calculate the Reconciled Balance

After all appropriate adjustments have been made, the accountant calculates the reconciled bank balance. The additions and deductions are totaled, and the resulting figure represents the balance that should agree with the other record. The final amount should be checked mathematically and compared with the corresponding Cash Book or Pass Book balance. Any remaining difference indicates that an item may have been missed or incorrectly treated.

Step 10. Verify the Bank Reconciliation Statement

The final step is to verify the completed BRS. The accountant reviews each item, checks the calculations, confirms the treatment of favourable or overdraft balances, and ensures that the final balance agrees with the relevant bank record. Supporting documents such as cheques, deposit slips, bank statements, and payment records may also be reviewed. Proper verification ensures that the reconciliation is accurate and provides reliable accounting information.

Example of Bank Reconciliation Statement Preparation

Illustration

Suppose ABC Ltd. has a favourable balance as per Cash Book of ₹50,000 on 31 March 2026. On comparing the Cash Book with the Pass Book, the following differences are identified:

• Cheques issued but not presented for payment: ₹8,000
• Cheques deposited but not yet collected: ₹5,000
• Bank charges not entered in Cash Book: ₹1,000
• Interest credited by bank but not entered in Cash Book: ₹2,000
• Direct deposit by a customer into bank: ₹4,000

The objective is to prepare the Bank Reconciliation Statement and ascertain the balance as per the Pass Book.

Step 1: Prepare the Amended Cash Book

First, items already recorded by the bank but not entered in the Cash Book should be incorporated.

Starting Cash Book Balance = ₹50,000

Add:

• Interest credited by bank = ₹2,000
• Direct deposit by customer = ₹4,000

Less:

• Bank charges = ₹1,000

Therefore:

Amended Cash Book Balance = ₹50,000 + ₹2,000 + ₹4,000 − ₹1,000 = ₹55,000

Step 2: Prepare the Bank Reconciliation Statement

Now, only the remaining timing differences are considered.

Step 3: Explanation of Adjustments

• Cheques Issued but Not Presented: The business has already recorded these cheques as payments in the Cash Book, reducing its balance. However, the cheques have not yet been presented to the bank, so the bank has not reduced the Pass Book balance. Therefore, ₹8,000 is added to the Cash Book balance while reconciling it with the Pass Book.
• Cheques Deposited but Not Collected: The business has recorded these cheques as deposits in the Cash Book, increasing its balance. However, the bank has not yet collected them and therefore has not credited the Pass Book. Consequently, ₹5,000 is deducted from the Cash Book balance.

Final Result

The Amended Cash Book balance is ₹55,000, while the Pass Book balance after reconciliation is ₹58,000.

Therefore:

Balance as per Pass Book = ₹58,000

This example demonstrates that the Amended Cash Book is prepared first to incorporate bank-originated transactions, while the Bank Reconciliation Statement is then used to adjust the remaining timing differences.

Identified Differences:

1. Outstanding Checks: ₹10,000 (checks issued but not yet cleared by the bank)
2. Deposits in Transit: ₹12,000 (deposits made but not yet reflected in the bank statement)
3. Bank Charges: ₹2,000 (bank fees not recorded in the cash book)
4. Direct Deposits: ₹2,000 (money received directly by the bank not recorded in the cash book)

Bank Reconciliation Statement Format:

Explanation of Each Entry

1. Balance as per Cash Book: This is the balance available in the company’s cash book as of the date of reconciliation.
2. Deposits in Transit: These are amounts that have been deposited by the company but are not yet reflected in the bank statement. Adding this amount adjusts the cash book balance upward.
3. Outstanding Checks: These are checks issued by the company that have not yet been cleared by the bank. Subtracting this amount adjusts the cash book balance downward.
4. Bank Charges: These are fees charged by the bank for account maintenance or other services. If these charges are not recorded in the cash book, they need to be subtracted from the cash book balance.
5. Direct Deposits: These are amounts received directly into the bank account that have not yet been recorded in the cash book. Adding this amount adjusts the cash book balance upward.
6. Adjusted Cash Book Balance: After making all adjustments, this is the reconciled cash book balance.
7. Balance as per Bank Statement: This is the ending balance shown in the bank statement as of the date of reconciliation.

8. Adjusted Bank Balance: After accounting for deposits in transit and outstanding checks, this is the reconciled bank statement balance.