Bank Reconciliation Statement- Favorable Balance

After learning cash book, its time to understand about Bank Reconciliation Statement (BRS). It is a vital concept in Accounting and every student of accounting must have deep understanding about this. so just learn it.

   Before learning this it is advisable to learn about cash book first learn here everything about cash book  

Introduction--        

In our day to day business activities we record the cash and bank transactions in our cash book. By cash and bank transaction, i mean  sold/purchased goods on cash or paid someone in cash or received cash from them but if we paid or received cheques from them or to them it is a bank transactions. Now the thing is that for every bank transaction made by us, we record it in our cash book and correspondingly our bank record those transactions in its pass book which is a book maintained by all banks to record transaction done by their customer through banks.

suppose, we paid rent of our business premises in cheques. Then what will happen? we would record this transaction in the credit side of the bank column of our cash book and our bank would record that in the debit side of its pass book. Here we must note that what is debit for us is credit for our bank and vice versa, so the entry must be opposite in both books.
                         
                                 The concept of bank reconciliation statement occurs when there is a mismatch between the balance showing in our cash book and balance showing in bank's pass book. Now you are thinking how can mismatch occcurs? answer is, it can! Because it is not possible to discuss with our banker, after recording every transaction, whether they have recorded that transaction properly or not.

To explain my concept take it a scenario, our Accounting year closes on 31st march, we issued a cheque to our supplier on 28th march, there may be chances that our supplier has not presented that cheque to the bank for payment withing 31st march or presented after that date say for example 4th April, In that situation, we would record that transaction immediately on 28th march as soon as we issued that cheque  that is 28th march but our bank would record that transaction on the date on which the cheque presented to the bank for payment that is 4th April that is on the date on which money becomes transfer from our bank to the suppliers bank account. Thus it will show the different balance, because of  that transaction, in cash book and pass books on 31st march. And here comes the need to reconcile (adjust) both the balances so we need to prepare bank reconciliation statement.

Formatting-- 

BRS is prepared in the following way:

	Particular	Amount	Amount
	Balance at bank as per cash book		xxx
ADD	i) cheque issued but not yet presented	xxx
	ii) interest allowed by bank	xxx
	iii) dividend collected directly by bank	xxx
	iv) direct payment into bank by customer	xxx	+xx
LESS:	v) cheque deposited but not yet cleared	xxx
	vi) interest charged by bank	xxx
	vii) standing instruction for payment	xxx
	viii) dishonored of cheque	xxx	-xx
	Bank balance as per pass book		xxx

Now let me analyse the above BRS.

The first line is " bank balance as per cash book" it means we are taking cash book balance to adjust it with pass book balance.

i) "cheque issued but not yet presented" it means we have issued cheque to our suppliers but they have not presented that cheque to bank for payment within date. Here we are adding it because as soon as we issued the cheque we must have credited that amount in the bank column of cash book and for this our cash book balance decreased as compare to our pass book balance ( it will be debited when the cheque will be presented for payment) so we need to add the amount to have it equal with pass book balance.

ii) "interest allowed by the bank" it means we have earned some interest on the balance maintained by us in bank but bank might have not informed us or we might have forgot to record it in cash book but in pass book it was recorded as soon as bank allowed it. so our balance on cash book is down but pass book balance is up thus we need to add the amount to have it equal with pass book.

iii)  "dividend collected directly by bank" it means we have a share in stock market as a investment and we dividend was credited directly in our pass book but in cash book we did not record it (the reason may be we forgot or were not informed by bank) here again cash book balance is low as compare to pass book balance therefore we need to add the amount to have our cash book equal with pass book.

iv) "direct payment into bank by customer" it means our customers have paid directly into our bank here also we were not informed about that by the bank or we might have forgotten to record whatever may be the reason  but the consequences for that is our pass book got increases as compare to our cash book. thus we need to add the amount from cash book balance to have it equal with pass book.

v) "cheque deposited but not yet cleared" it means we got cheque and we have it deposited into bank.we have a tendency to record it immediately in the cash book as soon as we deposited cheque. but on the other hand, bank have not got payment from that cheque so it can not record that amount in pass book till it is cleared so pass book has reduced balance as compared to cash book what we need to balance both the book is deduct the amount with cash book balance.

Here one thing should be noted that we must add/less all the amount only with cash book balance as we have started our statement with "bank balance as per cash book"

Had it been "bank balance as per pass book" we would have to do all add/less with pass book balance.


vi) "interest charged by the bank" it means we might have taken loan from bank and bank has charged interest for it. Now bank has immediately debited the amount in pass book but we can not record it until we are informed (or there may be other reason like fraud or misrepresentation of accounting or negligence) whatever may be the reason our cash book balance is more as compared to pass book balance so we need to balance them by reducing cash book balance.

vii) "standing instruction for payment" it means we have given permission to our bank to make payment timely of certain things ( may be like electric bill or gas bill or internet bill) in that situation bank immediately after making payment debit it in pass book but we might have been informed about that after the close of the month therefore, our cash book is more than pass book. To make it balance we need to reduce it with the amount.

viii) "cheque dishonored" it means the cheque which we deposited in our bank has got cancelled or dishonored that is our bank failed to get payment from that cheque. now when we deposited cheque into bank we must have debited this in our cash book but bank could not credit the same in its pass book because of the dishonored cheque so our cash book balance is more than pass book for this amount thus, deduct it to get both the book balance.

After the above adjustment whatever balance will remain must be equal to pass book balance.

We should note one more thing that at the time of recording of cash book we did not have that information about cheques not cleared, standing instruction etc etc given above. that is why our balances with pass book did not matched. 


Q) How do we know our balances have not matched with pass book?

Actually at every month end we bring "bank statement(pass book)" and when we found there is a difference in the balance of both the book we prepare BRS to reconcile the balance and on reconciling we find all the reason of difference.

Q) Is it necessary that we do not have any information regarding any transaction through cheques?

No! we have the information on maximum transaction done through cheques but there are certain cases in which we are not informed or for any reason we failed to get information. only on that situation there will be difference in balance of pass book and cash book and so we need to prepare the BRS.


The above question we just explained is about favorable balance of cash book but what would we do we had overdraft balance of cash book? to find out the answer, just wait for my upcoming post on BRS (overdraft balance)