Bank Reconciliation Statement

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Definition, Meaning and Need for BRS:

If there is any discrepancy between the cash book balance and that of bank statement, then the business prepares a bank reconciliation statement (BRS) to explain the causes of differences and to reconcile the two balances.

The idea of BRS is to discover the various things that the bank has done in the bank statement which business was not aware of, put right anything that is wrong and draw up a logical explanation of the remaining differences, which are not errors but are delayed by the time lag.

Explanation:

A bank statement provides an independent record of exactly those transactions which are entered in the bank column of a cash book. Theoretically, closing balance in the cash book should be the same as the balance in the bank statement on the same date. The independent record of bank statement therefore offers an excellent check on the accuracy and entirety of the cash book. However, when a customer sees the bank statement, it should not come as a surprise, if the bank statement balance differs from the balance of bank column of the cash book. It leads to prepare a bank reconciliation statement or BRS.

Reasons for difference/disagreement between Bank Statement Balance and Cash Book Balance:

Normally, the difference in the cash book balance with the bank statement balance are due to a lack of knowledge of what the other party (bank or business) has been doing. Difference/disagreement between bank statement balance and cash book balance may be due to two reasons:

(1) Items in the Bank Statement but not in the Cash Book:

(i) Direct credits (deposits/lodgements) arise when someone pays a debit by transferring money fro his or her own bank account directly into the business bank account. Such transaction is also known as inter-bank Giro or credit transfer.

Example: Dividend received directly into the business bank account, etc.

(ii) Standing order payments: These are the regular payments of fixed sums at stated dates by the bank under the authority of the business.

Example: Mortgage payments, payments for rent, etc.

(iii) Direct debits or debit transfers: They are used in a similar way to standing orders to pay money to trade payables, but this time it is the trade payable (not the bank) itself, who is allowed to ask the bank to debit our account. Under direct debits amounts varies from period to period.

Example: Payments of utility bills, etc.

(iv) Bank charges and bank interests: These amounts are taken from the business bank account to cover the costs of running the account, providing services, for interest on loans and overdrafts which the business may have taken from the bank.

¬†(v) Dishonoured cheques: The cheques which have been paid into the bank for payment, but which have been returned (bounced) usually due to insufficient funds in the drawer’s account.

(vi) Bank errors: The bank statement may contain errors, these are fairly unlikely, but the bank must be notified if such errors have occurred.

(2) Items in the Cash Book but not in the Bank Statement:

(i) Un-presented cheques: Cheques issued by the business to its trade payables and credited in the cash book but have not been presented into the bank for payments so are not debited in the bank statement.

(ii) Un-credited cheques (deposits/lodgements): These are the cheques received from the customers (debited in the cash book) and paid into the bank for collection but they have not been cleared and credited by the bank.

Note: The above are two usually due to differences in the time at which items are recorded.

(iii) Cash book errors: The mistakes and errors made while recording transactions in the cash book.

Summary of items causing difference/disagreement between two balances:

bank reconciliation transactions