BANK RECONCILIATION STATEMENT (Unfavorable Balance)

Index

 

 BANK RECONCILIATION STATEMENT

(Unfavorable Balance)

S. No	Chapters	Pg. No
1	Introduction	3-4
2	Objective	5-6
3	Statement of the Problem	7
4	Analysis	8-9
5	Findings	10
6	Conclusion	11-12
7	Webliography	13

 

 

 

 

 

 

 

 

 

 

CHAPTER 1-INTRODUCTION

What is BRS?

BRS stands for Bank Reconciliation Statement, the business organizations keep a record of their cash and bank transactions in a cash book. The cash book also serves the purpose of both the cash account and the bank account and shows the balance of both at the end of the period. Once the cash book has been balanced, it is usual to check its details with the records of the firm’s bank transactions as recorded by the bank.

To enable this check, the cashier needs to ensure that the cash book is completely up to date and a recent bank statement (or a bank passbook) has been obtained from the bank. A bank statements or a bank passbook is a copy of a bank account as shown by the bank records. This enables the bank customers to check their funds in the bank regularly and update their own records of transactions that have occurred.

The amount of balance shown in the passbook or the bank statement must tally with the balance as shown in the cash book. But in practice, these are usually found to be different. Hence, we have to ascertain the causes for such difference. It will be observed that a bank statement/passbook shows all deposits in the credit column and withdrawals in the debit column. Thus, if deposits exceed withdrawals, it shows a credit balance and if withdrawals exceed deposits, it will show a debit balance (overdraft).

Need for Reconciliation

It is generally experienced that when a comparison is made between the bank

balance as shown in the firm’s cash book, the two balances do not tally.

Hence, we have to first ascertain the causes of difference thereof and then

reflect them in a statement called Bank Reconciliation Statement to reconcile

(tally) the two balances.

In order to prepare a bank reconciliation statement, we need to have a

bank balance as per the cash book and a bank statement as on a particular

day along with details of both the books. If the two balances differ, the entries

in both the books are compared and the items on account of which the

difference has arisen are ascertained with the respective amounts involved so

that the bank reconciliation statement may be prepared

Format for BRS Unfavorable Balance

	Particulars	Amount Rs.
Less:	Balance as per cash book (Overdraft)	XXX
	Cheques deposited but not credited by the bank	XXX
	Bank charges not recorded in the cash book	XXX
	Interest debited by the bank	XXX
Add:	Cheques issued but not presented	XXX
	Interest credited by the bank	XXX
	Balance as per bank passbook (Overdraft)	XXXX

 

It can also be prepared with two amount columns one showing additions

(+ column) and another showing deductions (-column).

	Particulars	Amount Rs. (+)	Amount Rs. (-)
	Balance as per cash book (Overdraft)		XXX
	Cheques deposited but not credited by the bank		XXX
	Bank charges not recorded in the cash book		XXX
	Interest debited by the bank		XXX
	Cheques issued but not presented	XXX
	Interest credited by the bank	XXX
	Balance as per bank passbook (Overdraft)	XXX

 

 

Preparation of Bank Reconciliation Statement

After identifying the causes of difference, the reconciliation may be done in

the following two ways:

(a) Preparation of bank reconciliation statement without adjusting cash book

balance.

(b) Preparation of bank reconciliation statement after adjusting cash book

balance.

It may be noted that in practice, the bank reconciliation statement is

prepared after adjusting the cash book balance.

 

 

 

 

 

CHAPTER 2- OBJECTIVE

 

Objectives, Advantages and Importance of Bank Reconciliation Statement (BRS)

1. To know the accuracy of entries in the Cash Book and the Pass Book:

The basic object of preparing Bank Reconciliation Statement is to test the accuracy for causes of difference in the Cash Book and the Pass Book.

 

2. To know the errors in Cash Book and Pass Book:

Cash inflow and outflow must tally as per, Cash Book with the Bank Pass Book or, Bank Statement.

 

3. Knowledge of cheques deposited for collection:

Bank Reconciliation Statement gives information about the position of cheques deposited for collection e.g.,

(i) How many cheques were issued and not presented for payment up to the date of reconciliation?

(ii) How many cheques were not credited up to the reconciliation time or were dishonored,

(iii) Cause of delay, in clearance etc.

 

4. Check on the misappropriation of cash:

The continuous comparison of Cash Book with the Pass Book keeps check on, is accountant trying to misappropriation of funds. The cases of misappropriation of cash by accountant can be detected easily.

 

5. Verification of Bank Balance

 

6. Mechanism of Internal control: The preparation of Bank Reconciliation statement is an important mechanism of internal control on cash inflow and outflow. It checks misappropriation of cheques, bank drafts, malpractices of dishonest employees dealing with cash and bank etc.

 

7. Knowledge of interest allowed by bank or Commission and Interest charged by Bank:

 

8. Knowledge of Other Facts:

• The knowledge of wrong entries by bank;

• The correct position of cash and bank deposit;

• Dividend directly collected by bank;

• Direct deposit of cash or cheque by a debtor;

• Payment made by the bank on behalf of business as per standing instructions;

• Position of dishonor of bills receivable.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CHAPTER-3 STATEMENT OF PROBLEM

Illustration 1

 

On March 31, 2021, Aiden had on overdraft of Rs. 8,000 as shown by his cash book.

1.    Cheques amounting to Rs. 2,000 had been paid in by him but were not collected by the bank.

2.    He issued cheques of Rs. 800 which were not presented to the bank for payment.

3.    There was a debit in his passbook of Rs. 60 for interest and Rs. 100 for bank charges.

Prepare bank reconciliation statement.

 

Illustration 2

 

From the following particulars of Daren & Co. prepare a bank reconciliation statement on December 31, 2020.

1.    Overdraft as per passbook 20,000

2.    Interest on overdraft 2,000

3.    Insurance Premium paid by the bank 200

4.    Cheque issued but not presented for payment 6,500

5.    Cheque deposited but not yet cleared 6,000

6.    Wrongly debited by the bank 500

 

 

 

 

 

 

 

 

 

 

 

CHAPTER-4 ANALYSIS

BRS Dealing with Unfavorable (Overdraft) balances

Bank reconciliation statement where bank balances has been positive – i.e., there has been money in the bank account.

However, businesses sometimes have overdrafts at the bank. Overdrafts are where the bank account becomes negative and the businesses in effect have borrowed

from the bank. This is shown in the cash book as a credit balance. In the

bank statement, where the balance is followed by Dr. (or sometimes OD) means

that there is an overdraft and called debit balance as per passbook.

An overdraft is treated as negative figure on a bank reconciliation statement.

 

Solution to Ilustration-1

Bank Reconciliation Statement of Mr. Aiden as on March 31, 2021

 

	Particulars	(+) Amount Rs.	(–) Amount Rs.
1	Balance as per cash book (Overdraft)		8,000
2	Cheques deposited but not yet collected charged by the bank		2,000
3	Bank Interest		60
4	Bank charges		100
5	Cheques issued but not presented for payment	800
6	Balance as per bank passbook (Overdraft)	9,360
		10,160	10,160

 

 

 

 

 

 

 

 

 

Solution to Ilustration-2

Bank Reconciliation Statement of Daren & Co. as on December 31, 2020

 

	Particulars	(+) Amount Rs.	(–) Amount Rs.
1	Balance as per passbook (Overdraft)		20,000
2	Cheques issued but not presented for payment		6,500
3	Interest on overdraft	2,000
4	Insurance premium paid by the bank	200
5	Cheques deposited but not yet cleared	6,000
6	Wrongly debited by the bank	500
7	Balance as per the cash book (Overdraft)	17,800
		26,500	26,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CHAPTER-5 FINDINGS

 

Findings of Illustration 1

Overdraft Balance as per Cash book of Mr. Aiden as on March 31, 2021 Rs.8,000

 

Things Subtracted

v  Cheques amounting to Rs. 2,000 had been paid in by him but were not collected by the bank.

v  There was a debit in his passbook of Rs. 60 for interest and Rs. 100 for bank charges.

 

Things Added

v  Cheques of Rs. 800 which were not presented to the bank for payment.

 

 

 

 

Findings of Illustration 2

Overdraft balance as per passbook of Daren & Co as on December 31, 2020 Rs.20,000

 

Things Subtracted

v  Cheque issued but not presented for payment 6,500

 

Things Added

v  Interest on overdraft 2,000

v  Insurance premium paid by the bank 200

v  Cheques deposited but not yet cleared 6,000

v  Wrongly debited by the bank 500

 

 

 

 

 

CHAPTER-6 CONCLUSION

There are four different situations while preparing the bank reconciliation statement.

1. When debit balance (favorable balance) as per cash book is given and the balance as per passbook is to be ascertained.

2. When credit balance (favorable balance) as per passbook is given and the balance as per cash book is to be ascertained.

3. When credit balance as per cash book (unfavorable balance/overdraft

balance) is given and the balance as per passbook is to ascertained.

4. When debit balance as per passbook (unfavorable balance/overdraft

balance) is given and the cash book balance as per is to ascertained.

Reconciliation of the cash book and the bank passbook balances amounts to an explanation of differences between them. The differences between the cash book and the bank passbook are caused by:

• Timing differences on recording of the transactions.

• Errors made by the business or by the bank.

Timing Differences

When a business compares the balance of its cash book with the balance shown by the bank passbook, there is often a difference, which is caused by the time gap in recording the transactions relating either to payments or receipts. The factors affecting time gap includes

(a) Cheques issued by the bank but not yet presented for

(b) Cheques paid into the bank but not yet

(c) Direct debits made by the bank on behalf of the

(d) Amounts directly deposited in the bank account

(e) Interest and dividends collected by the

(f) Direct payments made by the bank on behalf of the customers

(g) Cheques deposited/bills discounted dishonored

 

Differences Caused by Errors

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

(a) Errors committed in recording transaction by the

(b) Errors committed in recording transactions by the bank