Big picture
A business records its bank transactions in the bank column of its cash book. The bank records the same transactions in the customer's account, a copy of which is the passbook (or bank statement). On any date, the two balances usually don't agree, because each side records some transactions at a different time, or records items the other doesn't yet know about.
A bank reconciliation statement (BRS) lists these differences and shows how one balance leads to the other. It confirms that both records are correct, or helps find errors.
Learning goals
Explain the meaning and need for a bank reconciliation statement.
Explain the causes of difference between the cash book and passbook balances.
Prepare a BRS starting from either the cash book or the passbook, for a favourable balance and for an overdraft.
Prepare an amended cash book and then a BRS.
Core ideas
1. Cash book and passbook: mirror images
The bank keeps the customer's account from its own point of view. For the bank, the customer's deposit is a liability (the bank owes it to the customer). So:
Transaction | Cash book (business) | Passbook (bank) |
|---|---|---|
Deposit into bank | Debit | Credit |
Withdrawal or cheque paid | Credit | Debit |
Favourable balance (money in the bank) | Debit balance | Credit balance |
Overdraft | Credit balance | Debit balance |
2. Causes of difference
(a) Timing differences
Cause | Effect |
|---|---|
Cheques issued but not yet presented for payment | Cash book has been credited (reduced), but the bank hasn't yet debited the account; passbook balance is higher |
Cheques deposited but not yet collected (credited) by the bank | Cash book has been debited (increased), but the bank hasn't yet credited the account; passbook balance is lower |
(b) Transactions recorded by the bank but not yet in the cash book
Cause | Effect on passbook compared with cash book |
|---|---|
Interest allowed by the bank | Passbook higher |
Direct deposit by a customer into the bank | Passbook higher |
Dividend or interest on investments collected by the bank | Passbook higher |
Bank charges, commission | Passbook lower |
Interest charged on overdraft | Passbook lower |
Direct payments by the bank under standing instructions (insurance premium, loan instalment) | Passbook lower |
Cheque deposited and dishonoured | Passbook lower |
(c) Errors in the cash book (wrong totals, wrong amounts) or by the bank (wrong debit or credit). Their effect depends on what was done wrongly.
3. Preparing the BRS: the rule
Start with one balance and adjust for each item to reach the other. Ask for each item: would the other balance be higher or lower because of this?
Starting from the cash book (favourable) balance to find the passbook balance:
Add | Less |
|---|---|
Cheques issued but not presented | Cheques deposited but not collected |
Interest allowed by bank, not in cash book | Bank charges, not in cash book |
Direct deposits by customers | Direct payments by bank |
Dividends collected by bank | Cheques dishonoured, not in cash book |
If you start from the passbook balance, reverse every sign.
4. Worked example: favourable balance
On 31 March the bank column of Neel Traders' cash book shows a debit balance of ₹50,000. Prepare a BRS.
Cheques issued ₹12,000 had not been presented for payment.
Cheques deposited ₹8,000 had not been collected by the bank.
Bank charges of ₹300 were not recorded in the cash book.
Interest of ₹1,200 credited by the bank was not recorded in the cash book.
A customer deposited ₹5,000 directly into the bank.
The bank paid an insurance premium of ₹2,500 under standing instructions.
A cheque of ₹3,000 deposited earlier was dishonoured; this was not recorded in the cash book.
Bank Reconciliation Statement as on 31 March
Particulars | Plus ₹ | Minus ₹ |
|---|---|---|
Balance as per cash book (Dr) | 50,000 | |
Add: Cheques issued but not presented | 12,000 | |
Add: Interest allowed by bank | 1,200 | |
Add: Direct deposit by customer | 5,000 | |
Less: Cheques deposited but not collected | 8,000 | |
Less: Bank charges | 300 | |
Less: Insurance premium paid by bank | 2,500 | |
Less: Cheque dishonoured | 3,000 | |
Total | 68,200 | 13,800 |
Balance as per passbook (Cr) | 54,400 |
5. Worked example: overdraft
When the cash book shows an overdraft (credit balance), treat it as a negative figure, apply the same adjustments, and the result is the passbook overdraft.
Example. On 30 June the cash book shows an overdraft of ₹20,000. Cheques issued but not presented ₹6,000; cheques deposited but not collected ₹4,000; interest on overdraft charged by bank ₹800 (not in cash book).
Overdraft as per cash book (20,000)
Add: Cheques issued but not presented +6,000
Less: Cheques deposited but not collected -4,000
Less: Interest on overdraft charged by bank -800
Overdraft as per passbook (18,800)The cheques not yet presented mean the bank has paid out less than the cash book shows, so the bank overdraft is smaller. Interest on overdraft increases it.
6. Amended cash book method
When the bank has recorded items the business has not (items in part 2(b) and errors in the cash book), first correct the cash book, then prepare a BRS using only the timing differences and bank errors.
Using the first example.
Amended cash book (bank column)
Dr Particulars | ₹ | Cr Particulars | ₹ |
|---|---|---|---|
Balance b/d | 50,000 | Bank charges | 300 |
Interest allowed | 1,200 | Insurance premium | 2,500 |
Direct deposit by customer | 5,000 | Cheque dishonoured | 3,000 |
Amended balance c/d | 50,400 | ||
Total | 56,200 | Total | 56,200 |
BRS from the amended balance
Particulars | ₹ |
|---|---|
Amended balance as per cash book | 50,400 |
Add: Cheques issued but not presented | 12,000 |
Less: Cheques deposited but not collected | (8,000) |
Balance as per passbook | 54,400 |
The same passbook balance results, which confirms the work. The amended balance of ₹50,400 is the correct bank balance to show in the balance sheet.
7. Need for a BRS
It identifies the reasons for the difference between the two balances.
It helps detect errors in the cash book or by the bank.
It discourages fraud, since bank records act as an independent check.
It gives the correct bank balance for the balance sheet.
A reliable problem-solving routine
Note the starting balance and whether it is favourable or an overdraft (treat an overdraft as negative).
For each item, ask whether it makes the other record's balance higher or lower.
Add the items that make it higher, subtract those that make it lower.
If starting from the passbook, reverse every sign.
If asked, prepare the amended cash book first using only the bank-side items and cash book errors, then reconcile with timing differences.
Connections that matter
Special purpose books produce the bank column of the cash book.
Trial balance and rectification deals with the errors that a BRS may reveal.
Financial statements use the correct bank balance from the amended cash book.
Common mistakes
Using the same sign for an item whether starting from the cash book or the passbook. Reverse the signs when the starting point changes.
Treating an overdraft as a positive balance.
Adding cheques deposited but not collected when going from cash book to passbook. They reduce the passbook balance.
Including timing differences in the amended cash book. Only bank-side items and cash book errors are corrected there.
Revision checklist
I can explain why the cash book and passbook are mirror images.
I can list the causes of difference and their effect.
I can prepare a BRS from a favourable balance or an overdraft, starting from either book.
I can prepare an amended cash book and then a BRS.