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Bank Reconciliation statement(BRS)

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Agenda

Module - —Bank Reconciliation Statements

What is BRS?

Need for BRS

Reasons for differences bank statement and bank book

Forms of BRS

BRS Process

Practical Case Questions


What is BRS?

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Overview of BRS

A company's bank account contains a record of the transactions including, among others,

• Cheques written, and

• Cheques received from customers, etc.

Similarly the bank also creates a record of company's bank balance after processing the company's cheques, deposits, service charges, and other items

Typically a bank would mail a bank statement to the company at the end of each month which contains:

• list of activity in the bank account during that month and

• the closing balance in the bank account

When the company receives its bank statement, the company verifies whether the amounts mentioned in the bank statement are consistent with the amounts in the company's bank account or not

This process of confirming the amounts is referred to as reconciling the bank statement or simply bank statement reconciliation (BRS)

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Rationale for Bank Reconciliation

The amount of balance shown in the passbook or the bank statement must tally with the balance as shown in the bank account as per company’s accounts; however these are usually found to be different

Hence, the company would be interested to ascertain the causes for such difference

Bank reconciliation process explains the difference between:

• the bank balance shown in company’s bank statement, as supplied by the bank, and

• the corresponding amount shown in the company’s own accounting records at a particular point in time

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Important Note

If an item appears on the bank statement but not on the company's books, the item is probably going to be an adjustment to the Cash balance on (per) the company's books.

If an item is already in the company's Cash account, but has not yet appeared on the bank statement, the item is probably an adjustment to the balance per the bank statement.


Need for BRS


Why BRS?

In an ideal scenario, there should not be any difference between the balance shown as per the bank statement and company’s bank book; however this would happen only when all the entries are recorded in both

BRS should be prepared regularly as part of the internal control system of the business:

• To check the accuracy of the bank book

• To check the accuracy of the bank statement

• To ensure that there is no undue delay between payments, receipts and their clearance by the bank

• To discover payments made and items received by the bank not entered in the bank book

• To detect and rectify any error committed in both the books

It is not mandatory to prepare BRS nor a date is fixed on which it is to be prepared. It is prepared on a regular basis to check that all transactions relating to bank are properly recorded by the company and by the bank as well

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Timing of BRS preparation

A common question relating to BRS is regarding the number of days after month-end when the bank reconciliation should be done

Ideally the bank reconciliation should be done within a couple of days after the month-end since it would ensure that:

• Cash balance as per company’s books depicts the right balance, and

• Company’s financial statements for the month include all of the transactions and nothing is missed out

The bank reconciliation, in all cases, should be done before closing the monthly books. This is helpful on account of the following reasons:

• It may reveal that some receipts were recorded in the bank account but were not yet recorded in the company’s records

• Similarly, there might be some payments that were deducted from the bank account, but were not yet entered into the company's books

• Also, the reconciliation may highlight some errors in the transactions recorded in the company's books

As part of internal control exercise, the reconciliation must be performed by someone other than the person writing the cheques or recording amounts in the books

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Reasons for differences bank statement and bank book


Causes of differences in balance in two books

Whenever bank reconciliation needs to be done, one must first ascertain the possible reasons for such differences

These differences could be on account of following two reasons:

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Reasons of differences

Timing differenceDifferences due to error in

recording the entries


Timing Differences

When the same entry is recorded in the either of the book earlier and in the other book later , it is termed as the timing difference

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Reasons for Timing Difference

Cheques issued but not presented for payment

Cheques paid into bank, but not cleared

Interest allowed by the bank

Interest and expense charged by the bank

Interest and dividends collected by the bank

Direct payments by the bank

Direct payments into the bank by the customer

Dishonour of a bill discounted with the bank


Timing Differences Examples

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Cheques issued but not presented for payment

Cheque of Rs.50,000 is issued but not presented for payment.

On issue of cheque, the bank account in company’s book is credited and hence balance in account would reduce

However the balance as per bank’s pass book would continue to remain same until that cheque is presented for payment in bank

Cheques paid into bank, but not cleared

Cheque of Rs.50,000 is deposited in bank but not cleared

As soon as the cheque is submitted in bank, the company would increase the bank balance in its book by Rs.50,000

However the balance in bank’s pass book would continue to remain same until that cheque is cleared


Timing Differences Examples … contd.

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Interest allowed by the bank

Company maintains some cash balance in bank and hence bank pays Rs.50,000 as interest on such cash balance lying in bank

The bank would increase the balance in the pass book of the customer as soon as it credits such amount of Rs.50,000

The customer would come to know about it only at a later stage and hence company would increase its bank balance in its books afterwards

Interest and expense charged by the bank

Similar to interest income for company, interest expense on overdraft and other bank charges are booked by company when it would come to know about it



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Interest and dividends collected by the bank

Bank collects dividend of Rs.50,000 on some stocks owned by company

The bank would increase the balance in the pass book of the customer as soon as it receives this amount of Rs.50,000


Direct payments by the bank

The company has taken a fire insurance for its building and mandated bank to electronically pay annual premium of Rs.50,000 to insurance company

Bank would book this expense as soon as this payment is made and accordingly balance in pass book would reduce by Rs.50,000

The customer would come to know about it only at a later stage and hence company would decrease its bank balance in its books afterwards



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Direct payments into the bank by the customer

A customer of company had bought goods worth Rs.50,000 on credit some time back and later on deposited this cash directly in the bank account of company

The bank would immediately increase the balance in company’s pass book


Dishonour of a bill discounted with the bank

The balances as per cash book and pass book of ABC Ltd are Rs.1,00,000

ABC Ltd has got a cheque from one of its debtors for Rs.40,000

ABC Ltd deposits this cheque in bank and immediately increase the balance in its cash book to Rs.1,40,000

The bank finds after 5 days that the cheque is dishonored for non payment and charges Rs.1,000 towards such dishonor; hence the balance in pass book would become Rs.99,000

As such, ABC Ltd would reduce balance in cash book once it comes to know about it and accordingly it would deduct the amount of dishonored cheque of Rs.40,000 and Rs.1,000 bank charges


Timing Differences Summary

The following table encapsulates a few situations under timing differences:

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S# Transactions Time of recording in bank book

Time of recording in pass book

1 Cheques issued but not presented for payment

At the time of issuance of cheque At the time of clearance of cheque

2 Cheques paid into bank, but not cleared At the time of deposit of cheque At the time of clearance of cheque

3 Interest allowed by the bank When entry is posted in pass book At the time of allowance/ credit to the account

4 Interest and expense charged by the bank

When entry is posted in pass book At the time of charging/ debit to the account

5 Interest and dividends collected by the bank

When entry is posted in pass book On collection

6 Direct payments by the bank When entry is posted in pass book At the time of payment

7 Direct payments into the bank by the customer

When entry is posted in pass book At the time of receipts by bank

8 Dishonour of a bill discounted with the bank

When entry is posted in pass book At the time of dishonour of cheque

Source: ICAI


Differences due to error in recording the entries

Sometimes the difference between the two balances may be accounted for by an error on the part of the bank or an error in the bank book of the business.

This causes difference between the bank balance shown by the bank book and the balance shown by the bank statement.

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Errors committed in recording transaction by the firm

Omission or wrong recording of transactions relating to cheques issued, cheques deposited and wrong totalling, etc. committed by the firm while recording entries in the bank book cause difference between the

bank book and the passbook balance

Errors committed in recording transactions by the bank

Omission or wrong recording of transactions relating to cheques deposited and wrong totalling, etc. committed by the bank while posting entries in the passbook also cause differences between the passbook and the bank

book balance


Forms of BRS


Forms of BRS

Two forms of bank reconciliation are in common usage

• The bank balance is reconciled to the balance in the depositor’s records (or the balance in the depositor’s records to the bank balance)

• Both the bank balance and the balance per depositor’s records are reconciled to a correct balance

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Case Study – Forms of BRS

Illustration:

The bank book of M/s XYZ showed a balance at the bank of Rs.570 in hand on 31 January 2013. At the same date, the bank statement balance of M/s XYZ’ account was Rs.446 overdrawn. The difference was accounted for as follows:

a) Cheques for Rs.1,555 sent to creditors on 30 January were not paid by the bank until 8 February.

b) Cheques amounting to Rs.2,520 paid into the bank on 31 January were not credited by the bank until 1 February.

c) A standing order for a charitable subscription of Rs.60 had been paid by the bank on 21 January but no entry had been made in the bank book.

d) A cheque paid by M/s XYZ for rent on 15 January for Rs.345 had been entered in his bank book as Rs.354.

Prepare the bank reconciliation statement by both the forms.

*Use the BRS excel for the given case.

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Case Solution – Method 1

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Case Solution – Method 2

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BRS Process


Bank Reconciliation Process

Bank reconciliation process includes the following four steps:

After required adjustment, balances as per bank and as per company’s books are compared and journal entries are passed, if required to amend any errors or omissions

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Adjusting the Balance per Bank

1

Adjusting the Balance per Books

2

Preparing Journal Entries

4

Comparing the Adjusted Balances

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BRS Process – Step 1

Step 1: Adjusting the Balance per Bank:

The first step is to adjust the balance on the bank statement to the true, adjusted, or corrected balance.

The items necessary for this step are listed below:

• Deposits in transits

• Outstanding cheques

• Bank Errors

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Deposits in Transit

These are amounts already received and recorded by the company, but are not yet recorded by the bank

For example, a store deposits its cash receipts of June 30 into the bank's night depository at 11:00 p.m. on June 30. The bank will process this deposit on the morning of July 1. As of June 30 (the bank statement date) this is a deposit in transit

Because deposits in transit are already included in the company's Cash account, there is no need to adjust the company's records

However, deposits in transit are not yet on the bank statement. Therefore, they need to be listed on the bank reconciliation as an increase to the balance per bank in order to report the true amount of cash

Adjusting the Balance per

Bank

1Adjusting the Balance per

Books

2


4Comparing the

Adjusted Balances

3


BRS Process – Step 1 … contd.

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Outstanding Cheques

These are cheques that have been written and recorded in the company's bank account, but have not yet cleared the bank account

Cheques written during the last few days of the month plus a few older cheques are likely to be among the outstanding cheques

Because all cheques that have been written are immediately recorded in the company's bank account, there is no need to adjust the company's records for the outstanding cheques

However, the outstanding cheques have not yet reached the bank and the bank statement; so outstanding cheques are listed on the bank reconciliation as a decrease in the balance per bank

Bank Errors

These are mistakes made by the bank which could include the bank:

• recording an incorrect amount,

• entering an amount that does not belong on a company's bank statement, or

• omitting an amount from a company's bank statement

The company should notify the bank of its errors. Depending on the error, the correction could increase or decrease the balance shown on the bank statement.



Step 2: Adjusting the Balance per Books:

The second step of the bank reconciliation is to adjust the balance in the company's bank account so that it is the true, adjusted, or corrected balance.

The following are the standard adjustments required to adjust the balance:

• Bank Service charges

• Interest earned

• Bills receivable collected by bank

• Dishonour of bills receivable

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Bank


Books

2


4Comparing the

Adjusted Balances

3



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Bank Service Charges

These are the charges levied by the bank for providing various services like:

• demand drafts,

• issuing cheque books,

• overdraft charges,

• bank fee for processing a stop payment order on a company's cheque, etc.

Since these charges have already been recorded in bank, no adjustments are required in the bank book

However, these needs to be adjusted (decrease) the balance as per books

Interest Earned

These will appear on the bank statement when a bank gives a company interest on its account balances

The amount is added to account balance and there is no need to adjust the balance per bank statement

However, the amount of interest earned will increase the balance in company's bank account on its books



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Bills receivable collected by bank

Bills receivable are assets of a company. When notes come due, the company might ask its bank to collect the bills receivable

For this service the bank will charge a fee

The bank will:

• increase the company's account for the amount it collected (principal and interest) and

• decrease the account by the collection fee it charges

Since these amounts are already on the bank statement, no adjustment required

However, balance as per company account needs to be adjusted.

Dishonour of bills receivable

Whenever a bills receivable by bank has been dishonored, that is debited by the bank to the account along with the dishonor charges

This is required to be adjusted in the company’s books as well



Step 3: Comparing the Adjusted Balances

After adjusting the balance per bank (Step 1) and after adjusting the balance per books (Step 2), the two adjusted amounts should be equal.

If they are not equal, you must repeat the process until the balances are identical.

The balances should be the true, correct amount of bank balance as of the date of the bank reconciliation.

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Bank


Books

2


4Comparing the

Adjusted Balances

3



Step 4: Preparing Journal Entries

Journal Entries must be prepared for the adjustments to the balance per books (Step 2).

Adjustments to increase the bank account balance will require a journal entry that debits Bank and credits another account.

Adjustments to decrease the bank balance will require a credit to bank and a debit to another account.

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Bank


Books

2


4Comparing the

Adjusted Balances

3


Practical Case Questions (Use the BRS Excel)


Case Study 1

From the following particulars of XYZ, prepare bank reconciliation statement as on March 31, 2014.

1. Bank balance as per cash book Rs. 75,000.

2. Cheques issued but not presented for payment Rs. 12,000.

3. The bank had directly collected dividend of Rs. 4,000 and credited to bank account but was not entered in the cash book.

4. Bank charges of Rs.600 were not entered in the cash book.

5. A cheque for Rs.16,000 was deposited but not collected by the bank.

6. Balance as per pass book is Rs.74,400

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Case Study 1 – Solution

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Case Study 2


1. Balance as per the cash book Rs. 80,000.

2. Cheques for Rs. 10,000 is deposited in the bank but not yet collected by the bank.

3. Rs.500 bank incidental charges debited to XYZ account, which is not recorded in cash book.

4. A cheque for Rs. 15,000 is issued by XYZ not presented for payment.

5. Balance as per pass book is Rs.84,500

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Case Study 3


1. The bank passbook of XYZ showed a balance of Rs. 1,05,000

2. Cheques issued before month end amounting to Rs. 35,000 had not been presented for encashment

3. Two cheques of Rs. 10,000 and Rs. 15,000 were deposited into the bank on last day of month but the bank gave credit for this in next month

4. There was also a debit in the passbook of Rs. 5,000 in respect of a cheque dishonoured on last day of the month

5. The balance as per cash book is Rs1,00,000

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Case Study 4


1. Bank overdraft as per cash book – Rs.2,00,000

2. Bills for collection credited by the bank but no advice received by the company – Rs.50,000

3. Transport subsidy received from the State Govt directly by the bank but not advised to the company – Rs15,000

4. Amount wrongly debited to company account by the bank, for which no details are available –Rs.25,000

5. Draft deposited in the bank but not credited till last date of the month – Rs.5,000

6. Interest debited by bank but no advice received – Rs.20,000

7. Cheque issued but not yet presented to bank – Rs.5,000

8. Overdraft as per bank statement – Rs.1,80,000

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Case Study 5


1. XYZ received bank statement showing a favorable balance of Rs.50,000; however this did not tie back to balance in the cash book

2. A deposit of Rs.7,500 paid during the month had not been credited by the bank until first day of next month

3. During the month, the company had entered into hire purchase agreement to pay by bank order Rs.25,000 on 15th of each month; however no entries were made in cash book in this month

4. A customer of the firm who received a cash discount of 5% on his account of Rs.20,000 paid the firm a cheque during the month; however the cashier erroneously entered the gross amount in the bank column of cash book

5. Bank charges amounting to Rs.125 not been entered in cash book

6. A customer directly deposited Rs.45,500 in the bank but no entry was made in cash book

7. Rs.5,500 paid into bank had been entered twice in the cash book

8. A debit of Rs.11,375 appeared in the bank statement for an unpaid cheque, which had been returned marked ‘out of date’. The cheque had been re-dated by the customer and paid into the bank again on 7th of next month

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Case Study 6


1. The cash book showed an overdraft of Rs.40,000; however the bank statement showed a credit balance of Rs.45,000

2. Interest on term loan Rs.3,500 debited by bank but not accounted in XYZ’s book

3. Bank charges Rs.75 was debited by bank in the current month but accounted in XYZ’s books in next month

4. Rs.67,500 representing collection of PQR’s cheque was wrongly credited to the account of XYZ by the bank in their bank statement

5. Cheque deposited but not collected by bank – Rs.6,500

6. Cheque issued but not presented for payment – Rs.27,575

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Case Study 7


1. The pass book of XYZ showed a credit balance of Rs.10,500, while the cash book of XYZ showed a debit balance of Rs.5,025

2. Bank charged Rs.100 for bank charges

3. Interest allowed by bank Rs.75

4. Two cheques, one from RIL for Rs.5,000 and another from HUL for Rs.2,500, were collected in the following month although they were banked in the current month

5. Cheques issued to ITC for Rs.2,000 and to HP for Rs.3,500 were not yet presented for payment

6. Dabur Ltd directly deposited Rs.7,500 into the bank account which was not entered in the cash book

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Case Study 8


1. Overdraft as per passbook - Rs.1,00,000

2. Interest on overdraft - Rs.15,000

3. Cheque deposited but not yet cleared - Rs.40,000

4. Cheque issued but not presented for payment - Rs.20,000

5. Insurance Premium paid by the bank - Rs.10,000

6. Wrongly debited by the bank - Rs.5,500

7. Overdraft as per cash book – Rs.49,500

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