Why Bank Reconciliation Statement (BRS) is Prepared?
When any transaction related to the bank happens, say, cash is deposited in the bank. The businessman records this transaction in the bank column of the Debit side of the Cash Book and the Bank records the same on the Credit side of the Pass Book. Similarly, when cash is withdrawn from the bank, it is recorded in the bank column of the Credit side of the Cash Book by the businessman and the Debit side of the Pass Book. Therefore, the opposite side of the Cash Book and Pass Book should always tally, i.e., the Debit side of the bank column of the Cash Book should always tally with the Credit side of the Pass Book and vice-versa. If this does not happen and some difference is found between the opposite sides of the Cash Book and Pass Book, then it means that there is some error or mistake.
To correct such mistakes, Cash Book and Pass Book are compared, and a statement is prepared.
BRS is generally prepared after a fixed period or when the bank sends the updated Pass Book back to the businessman after making entries of all the transactions during a period.
Need for Reconciliation:
1. Detection of Errors: Reconciliation of Cash Book and Pass Book helps in detecting any error. An error can be either made by the bank in the Pass Book or by the businessman in the Cash Book. When both the books are compared, then an error if any, can be easily found.
2. Detection of Cause of Error: Bank Reconciliation Statement not only helps in detecting the errors but also helps in detecting the cause of that error. When both the books are compared, then the cause can easily be found due to which wrong entry the balances are not tallying.
3. Correction in Cash Book: With the help of Bank Reconciliation Statement, corrections can be made in the Cash Book by comparing it with the Pass Book. Cash Book can only be corrected when the error and its cause is identified.
4. Knowledge of Bank Balance: Sometimes Cash Book shows less balance, but in reality, bank account has not been debited yet. When the actual bank balance is known to the business, it helps the business in making future transactions in a better way.
5. Control over Misappropriation: Misappropriation of funds by the personnel of the bank as well as the employees of the company can be avoided if reconciliation is done at regular intervals. Reconciliation helps in determining the actual position of the balance company as any misappropriated figure can be detected easily.
Illustration:
The balance of cash at bank as shown in the Cash Book of Sahil & Co. on 31st December 2021 was ₹8,200. On comparing it with the pass book, the following differences were noted:
- Cheque sent for collection amounting to ₹6,400 have not been cleared by the bank so far.
- Cheque issued but not presented for payment ₹4,000.
- Bank charges ₹200 not entered in the Cash Book.
- Credit of ₹500 in the pass book in respect of interest was not recorded in the Cash Book.
- A vendor deposited ₹2,000 directly in our bank account which was only recorded in the pass book.
- As per standing instructions of Sahil & Co., the bank has made the following payments:
- Insurance premium : ₹1,200
- Club Fees : ₹1,000
Prepare a Bank Reconciliation Statement as on 31st December 2021.
Solution: