CBSE Class 11 Accountancy Bank Reconciliation Statement Notes

A Bank Reconciliation Statement is a report prepared to identify and explain the reasons for any discrepancies between the bank column of the cash book and the balance shown in the bank statement (passbook). Bank reconciliation is the systematic practice of verifying that the cash balance in a business's ledger matches the corresponding balance indicated on the bank statement. This procedure aims to pinpoint differences between the two sets of records and update the company's ledger to reflect correct values where necessary.

Causes of Differences in Cash Book and Pass Book

• Transactions documented in the Cash Book but omitted from the Bank Statement (Pass Book).
• Transactions documented in the Bank Statement (Pass Book) but omitted from the Cash Book.
• Mismatches resulting from recording errors on the part of the business or the bank.

Purpose of Bank Reconciliation

The primary objective of bank reconciliation is to contrast a company's internal cash records against the external records kept by its financial institution. It verifies whether cash transactions are consistently reported in both sets of accounts. The final cash figure computed internally by the company is called the "book balance," while the final figure provided by the bank is called the "bank balance."

Need and Importance

• Assists in identifying and correcting entry errors or omissions made by the bank or the firm itself.
• Reassures the business of the precision of the cash book's bank balance.
• Simplifies the process of preparing a revised or adjusted Cash Book.
• Lowers the risk of fraudulent activities by internal staff or banking personnel.
• Enables efficient monitoring of deposited cheques that are currently in the process of collection.

Procedure of Preparing Bank Reconciliation Statement (BRS)

The statement is drafted once a fully updated Bank Pass Book or Bank Statement is obtained.

1. Compare the debit entries of the cash book against the credit entries of the passbook, and match the credit entries of the cash book with the debit entries of the passbook.
2. Mark or check off matching entries that appear consistently in both records.
3. Identify any unmarked items, as these represent the sources of variance between the two balances.
4. Formulate the BRS using either the balance from the Cash Book or the balance from the Pass Book as the baseline.

Difference Between Bank Statements and Company's Accounts

When a business receives a periodic bank statement displaying opening balances, transactions, and closing balances, the bank's final cash figure and the company's ledger balance rarely match.

The following are some of the causes behind the disparity:

• Deposits in Transit: Funds and cheques that the business has received and logged internally, but which the bank has not yet processed and updated on its statement.
• Outstanding Cheques: Cheques written and issued by the firm to its suppliers or creditors that have not yet been presented to the bank for payment.
• Bank Service Charges: Nominal fees deducted automatically by financial institutions for account maintenance or transactional services.
• Interest Earned: Credit interest paid directly by the bank into interest-yielding business accounts.
• Non-Sufficient Funds (NSF) Cheques: If a customer deposits a cheque, but the drawer's account lacks adequate funds, the bank will reverse the initial credit and deduct the amount from the business's account, returning the cheque as unpaid.

Steps to Prepare Bank Reconciliation Statements

Preparation occurs after updating the bank passbook. The business matches internal Cash Book entries against the bank statement's records using these steps:

Step 1: Match the cash book's debit side with the passbook's credit side, ticking off identical entries. Note any unticked items, as these indicate discrepancies between the two records.

Step 2: Follow the same process to match the credit side of the cash book with the debit side of the passbook. Log the outstanding unticked entries as additional causes of mismatch.

Step 3: Use the Cash Book balance as the initial point to draft the statement. Beginning with the Cash Book balance leads to the Pass Book balance as the final result. Add transactions that increase the bank-side balance and subtract those that reduce it.

Bank Reconciliation Statement Rules

Establishing standard guidelines ensures accuracy when preparing the BRS. The essential rules of BRS preparation include:

• A debit balance in the cash book indicates actual funds or deposits held by the business.
• A debit entry in the cash book corresponds to a credit entry in the passbook.
• A credit balance in the cash book represents an unfavorable (overdraft) balance.
• A debit balance in the cash book represents a favorable (positive) balance.
• Unpresented cheques that have been written but not cleared must be adjusted.

Method of Preparing BRS Starting with the Balance/Overdraft as per Bank Column of Cash Book

Bank Reconciliation Statement as on .............................

Note:

• When the sum of the positive (+) items exceeds the sum of the negative (-) items, the difference represents a credit balance or a positive/favorable balance in the Pass Book.
• Conversely, if the negative (-) items exceed the positive (+) items, the resulting difference is a debit balance or overdraft on the Pass Book side.
• Initiating the BRS with the Cash Book balance means the reconciliation process concludes with the Pass Book balance, and vice versa.
• A debit balance in the Cash Book is considered favorable and is treated as a positive (+) balance.
• A debit balance in the Pass Book is considered unfavorable (representing an overdraft) and is treated as a negative (-) balance.
• A credit balance in the Pass Book represents a favorable, positive (+) balance.
• A credit balance in the Cash Book represents an unfavorable, negative (-) balance (overdraft).