What is BRS?
Suppose if you made a transaction in the bank no matter how small or big that is but you need to keep a record of the transaction that you have done and for that this BRS or more precisely this Bank Reconciliation Statement will play its role. A bank reconciliation statement records the difference between the bank statement and a general ledger. Now what is this ledger? Whenever any transaction is made in a bank it is recorded in the journal. After the statement is recorded in the journal it gets recorded in the principle book that is known as ledger.
There can be some cases in which the amount that is specified in the bank statement that a bank issues is different from the one that is mentioned in the accounting book of the company that is made by the charter accountant . So this bank reconciliation statement just checks the entities on the monthly basis so that there may not be any issued in the future for the company. In simple language you can regard this bank reconciliation statement or BRS to be a matching record for the cash account entry in correspondence to the statement issued by the bank. Bank Reconciliation Statement is going to check the differences that will be between them and then it will make the appropriate changes that are required. In this article you are going to get this brief information about Bank Reconciliation Statement, it's importance, the features that bank reconciliation statements have, and the reason why there are different cash books and bank's passbooks, how to make a bank reconciliation statement and other important points. Let's just have a look at all of them.
The record book or transactions of a bank account is known as a bank reconciliation statement. This statement allows the bank holders to keep a track of their funds and update transaction records they have made. In other words, the bank reconciliation statement is the bank's passbook. The balance given in the bank passbook statement should ally with the balance given in the cash book. In the statement, all the deposits shown in the credit column should be shown in a deposit column as well.
However, if the withdrawal is more than the deposits, it will show a debit balance (overdraft). Generally, saving’s bank account holder is given a passbook whereas current account business is given a Bank Statement.
Importance of Bank Reconciliation Statements
In most of the comparisons between the bank balance and the company’s cash book, the balance figure doesn’t tally. Therefore, it is important to know the reason for the difference and show it in the bank reconciliation statement and then tally the two balances. This statement reveals the cause of differences in funds in the bank balance and the company’s cash book. This also helps to understand the characteristics of bank reconciliation statements.
What are the Features of a Bank Reconciliation Statement?
A business entity or firm records the deposits of a bank on the debit side of the bank column in the cash book and withdrawals on the credit side of the bank column in the cash book. Likewise, all these transaction details are registered by the bank in their books. It is a little different as the bank records deposits on the customer’s credit side and withdrawals on the customer’s debit side.
The Features of a Bank Reconciliation Statement
The features of the bank reconciliation statement are given below:
The bank reconciliation statement (as the name suggests) is a statement.
It is not any type of account and doesn’t include part of the account’s process.
A firm can prepare it any time of the financial year when they require it.
The bank reconciliation statement is prepared on a particular day.
An individual or firm may prepare it to reconcile the reasons for the differences between the bank balance according to the passbook or bank balance according to the cash book.
Reasons for Differences Between Cashbook and Bank’s Pass Book
The main reason for the differences between the cash book and the bank’s passbook is the time in recording the transactions. There are many things that cause a difference in timing.
The cheque was paid in the bank but is not yet cleared.
The cheque is bank-issued but not yet deposited for payment.
Direct debit made by the bank from the customer’s side.
Interest and Dividends collected by the bank.
Direct deposition of an amount/ cheque in a bank account.
Bills discounted/ cheques deposited dishonoured.
Errors made by the bank or by the company.
In a few instances, the error in two balances can be made on the company’s cash book or from the bank side. The errors are as follows:
Errors made at recording the transaction by the company.
Errors made at recording the transaction by the bank.
Types of Bank Reconciliation Statement
There are two processes in which a bank reconciliation statement can be prepared:
Making documentation of bank reconciliation statements without modifying the cash book balance.
Filing for a bank reconciliation statement after making changes in the cash book balance.
Steps Involved in Making Bank Reconciliation Statement
At first, the statement’s record date is noted.
After this, the balance mentioned in the cash book is recorded in the statement. Sometimes, the balance mentioned in the bank’s passbook is recorded.
The deposited cheques that are not collected are removed.
Then the cheque is issued but deposited for payment, and the amount directly deposited in the bank account is noted.
It deducts all the transactions like amounts debited by the bank and overdraft interests not recorded in cash books, bills discounted, and cheques.
All the profits and credits collected by the firm and deposited in the bank directly gets added.
Adjustments related to errors and mistakes are made.
After implementing these steps, the balance between the cash book and bank statement should be the same.
Did You Know?
When the total debit column of the cash book exceeds the total credit column of the cash book, it is called a debit balance. This debit balance is also termed as a favourable balance. For an account holder, a favourable balance is an asset. Favourable balance explains a situation when an account holder has an abundance of deposits over withdrawals.
Conclusion
From the above article we can easily conclude that it is necessary to have a bank reconciliation statement. There can occur faults in the bank statements and at that time these BRS are going to be a great help for you. If you are looking to make huge transactions or even for making an Income Tax return statement, bank statements are going to be helpful for you. This bank statement is the basic medium of transaction in any bank. If the basic documents are having problems then it is obvious for the other ones to have some issues so it is necessary for any organisation to justify the basics.
Reconciliation statement is going to make the bank statement error free and along with this any additional charges will be cleared. Therefore before closing accounting the reconciliation is going to check whether the statement is safe and error free.
FAQs on Features of Bank Reconciliation Statements (BRS)
1. What is a Bank Reconciliation Statement (BRS) in accountancy?
A Bank Reconciliation Statement, or BRS, is a summary prepared periodically (usually monthly) to verify and compare the bank balance as per the company's Cash Book with the bank balance as per the Bank Passbook or bank statement. Its primary purpose is to identify and explain any differences between these two sets of records, ensuring the accuracy of the recorded bank transactions.
2. What are the key features of a Bank Reconciliation Statement?
The main features that characterise a Bank Reconciliation Statement are:
It is not part of the formal books of accounts but is a memorandum statement or a working paper.
It is prepared to reconcile the difference between the bank balance shown by the Cash Book and the Bank Passbook.
It helps in identifying errors and omissions committed either by the business's accountant or the bank.
It is typically prepared at the end of every month or any other regular interval.
It starts with the balance of either the Cash Book or Passbook and arrives at the balance of the other.
3. Why is it important for a business to prepare a BRS?
Preparing a BRS is crucial for maintaining financial control and accuracy. Its importance lies in its ability to:
Detect and prevent errors: It helps in identifying mistakes like incorrect entries, omissions, or calculation errors in either the Cash Book or the Passbook.
Prevent fraud: Regular reconciliation can expose unauthorised withdrawals or misappropriation of funds in a timely manner.
Ascertain the correct bank balance: It provides clarity on the actual funds available in the bank by accounting for unpresented cheques and uncredited deposits.
Update accounting records: It brings to light transactions like bank charges, interest credited, or direct payments made by the bank, which can then be recorded in the Cash Book.
4. What are the most common reasons for differences between a Cash Book and a Pass Book balance?
Differences primarily arise due to two main categories of reasons:
Timing Differences: These occur when a transaction is recorded by one party but not by the other in the same period. Examples include cheques issued but not yet presented for payment, and cheques deposited but not yet cleared by the bank.
Errors or Omissions: These are mistakes made by either the business or the bank. Examples include wrong amounts being recorded, transactions being omitted entirely, or a transaction being posted to the wrong account by the bank.
5. What is the standard format of a Bank Reconciliation Statement?
There isn't one single mandatory format, but a BRS is typically presented in a two-column format. It starts with the balance as per either the Cash Book or the Passbook. Then, items causing the difference are either added or subtracted to arrive at the balance as per the other book. For example, if starting with the Cash Book balance, you would add cheques issued but not presented and subtract bank charges not recorded in the Cash Book to reconcile it with the Passbook balance.
6. How do 'timing differences' impact the preparation of a BRS? Provide an example.
Timing differences are the most common cause of disagreement between the Cash Book and Passbook. They are not errors, but delays in recording. For example, if a business issues a cheque of ₹5,000 to a supplier on March 28th, it immediately credits its bank account in the Cash Book. However, if the supplier presents this cheque to the bank on April 4th, the amount will only be debited from the Passbook in April. On March 31st, this ₹5,000 will be a reconciling item, shown as 'Cheque issued but not presented', causing the Cash Book balance to be lower than the Passbook balance.
7. What is the fundamental difference between an 'error by the business' and an 'error by the bank' found during reconciliation?
The fundamental difference lies in who needs to make a correction in their primary records. An 'error by the business' (e.g., forgetting to record a cheque issued) requires a correcting entry in the company's own Cash Book. An 'error by the bank' (e.g., debiting a cheque from another company to your account) does not require any change in the Cash Book. Instead, the bank must be notified to reverse the incorrect entry in its own system, which will then reflect in the next bank statement.
8. How does a BRS contribute to the internal control system of a company?
A BRS is a key component of a company's internal control system over cash. By systematically comparing internal records (Cash Book) with external records (Bank Statement), it establishes a check and balance. This regular scrutiny discourages fraudulent activities like unauthorised withdrawals or 'teeming and lading' (a type of cash misappropriation). It also enforces discipline in bookkeeping, as any discrepancies must be investigated and resolved, ensuring the integrity and reliability of financial data.
9. Is a Bank Reconciliation Statement considered a part of the double-entry system of accounting?
No, a Bank Reconciliation Statement is not part of the double-entry system. It is a supplementary statement or a working paper. The double-entry system involves recording transactions in journals and posting them to ledgers (like the Cash Book). The BRS is prepared outside of this formal system to explain why the bank balance in the ledger differs from the bank's records. While it leads to adjusting entries that *are* part of the double-entry system, the statement itself is a tool for analysis, not a book of primary or final entry.
10. Can a BRS show a positive balance in one book and an overdraft in the other?
Yes, this is a common scenario. A business's Cash Book might show a positive (debit) balance, while the Bank Passbook shows an overdraft (credit balance). This can happen due to significant timing differences. For instance, if a company has deposited large cheques worth ₹2,00,000 which are not yet cleared, but has also issued cheques worth ₹50,000 which have been cashed, its records would differ greatly from the bank's until the deposits are processed. The BRS would be essential to explain this transition from a positive balance to an overdraft or vice-versa.
