Bank Reconciliation Statement

Written and reviewed by Devendra Dubey, Mathematics & Commerce faculty at UniDrill (M.Sc. Mathematics, Osmania University · 10 years teaching). Based on NCERT Accountancy Class XI (Financial Accounting Part I), Chapter 5.

Two balances, both correct

On 31 March, Naveen opens his cash book and sees ₹72,000 in the bank column. He plans to pay a ₹75,000 supplier bill by cheque and wonders if he is short. Then his passbook arrives and shows ₹81,750. Is the cash book wrong? Is the bank?

Neither. Naveen has issued cheques the bank has not yet paid, and the bank has credited interest and a customer's deposit that Naveen has not yet written down. They are recording the same money at different times. A Bank Reconciliation Statement (BRS) is the statement that explains the gap, so that Naveen knows his true balance.

Cash book against passbook

The cash book (bank column) is the firm's own record. The passbook or bank statement is a copy of the firm's account in the bank's books. It is written from the bank's point of view, so everything is reversed.

Beyond the textbook. For the exam: a deposit appears as a credit in the passbook. In reality: the bank owes the depositor that money, so the customer's balance is a liability of the bank and every deposit increases the liability, which is a credit. Why it matters: the strange reversal stops looking arbitrary once you see the account through the bank's eyes.

The BRS is prepared by the account holder, not by the bank. It does not change the bank's books. It reconciles the firm's cash book with the bank's record.

Why the balances differ

Differences come from timing (one side has recorded an item and the other has not yet) and from errors.

Errors are different from timing. The firm can err by omitting or wrongly recording a cheque or by wrong totalling in the cash book. The bank can err by omitting or wrongly recording an item or by wrong totalling in the passbook. Wrong totalling is an error and never a timing difference.

Beyond the textbook. For the exam: many of these items arrive as bank advice only when the statement is received. In reality: modern direct credits and debits come mostly through bank transfers, UPI collections and auto debit mandates. These are the present day forms of direct deposits and standing instructions, and they work in exactly the same way for a BRS. Why it matters: a bank debit you did not expect is usually one of items (c), (f) or (g).

Which direction? The signed balance method

The usual confusion is whether an item is added or deducted. Instead of memorising a table for each starting point, use one rule. Treat a favourable balance as positive and an overdraft as negative. Let $U$ be the cheques issued but not presented, $D$ the cheques deposited but not collected, $K$ the credits made only by the bank (interest, dividend, direct deposits) and $B$ the debits made only by the bank (charges, standing instructions, dishonours). Then, for every starting position:

$$\text{Passbook balance} = \text{Cash book balance} + U - D + K - B$$

$$\text{Cash book balance} = \text{Passbook balance} - U + D - K + B$$

The first formula applies when you start from the cash book. The second is the same equation turned around, so every sign flips when you start from the passbook. Because overdrafts are entered as negative numbers, the same formulas work for them too. A positive answer is a favourable balance and a negative one is an overdraft.

Pause and predict: You issue a cheque for ₹5,000 today and it has not been presented. Your cash book bank column shows ₹50,000. What does the passbook show?

Check your answer: ₹55,000. You have already deducted the cheque in your cash book. The bank has not, so its balance is ₹5,000 higher.

Two ways to prepare a BRS

The BRS can be prepared without adjusting the cash book, listing every difference. Or it can be prepared after adjusting the cash book. In the second method the firm first updates its cash book for items it did not know about (bank charges, interest, dividend, direct deposits, standing instructions, dishonours). Only the true timing differences (unpresented cheques and uncollected deposits) remain for the BRS. This is the preferred method, because the cash book now shows the correct balance.

Worked examples

Worked example: from the cash book to the passbook. On 31 March, Naveen's cash book shows ₹72,000 (Dr). Find the passbook balance given these items.

The working is $72{,}000 + 9{,}500 - 6{,}200 - 350 + 1{,}200 + 8{,}000 - 2{,}400 = 81{,}750$, which is exactly the passbook balance in the hook. Naveen's real position is not ₹72,000 but ₹78,450 once the bank items are recorded, as the next step shows.

Adjusting the cash book for the four items the firm did not know (c, d, e, f):

The amended cash book balance is $72{,}000 - 350 + 1{,}200 + 8{,}000 - 2{,}400 = 78{,}450$. Now only the two timing items remain: $78{,}450 + 9{,}500 - 6{,}200 = 81{,}750$. Both methods agree, as they must.

Common wrong step. Deducting the unpresented cheques (₹9,500) as if they lower the bank balance. The cash book has already deducted them, so going to the passbook you must add them back.

Worked example: from the passbook to the cash book. The data is the same, but now you know only the passbook balance of ₹81,750 (Cr). Find the cash book balance. Every sign reverses.

Working: $81{,}750 - 9{,}500 + 6{,}200 + 350 - 1{,}200 - 8{,}000 + 2{,}400 = 72{,}000$. The answer returns to the figure we started with in the first example.

Common wrong step. Reusing the add and deduct columns from the first example. When the starting point changes from cash book to passbook, each item moves to the opposite column.

Worked example: an overdraft in the cash book. On 31 March the cash book shows an overdraft of ₹12,000. Cheques of ₹3,000 deposited are not yet collected, and cheques of ₹1,800 issued are not yet presented. The bank has also debited ₹150 charges and ₹420 interest on the overdraft, which the firm has not recorded. Find the passbook balance.

The passbook shows an overdraft of ₹13,770. The logic: the bank has not yet credited the ₹3,000 deposit, so its overdraft is larger by that amount. It has not yet paid the ₹1,800 cheques, so its overdraft is smaller by that amount. It has debited ₹570 of its own charges, which makes the overdraft larger.

Common wrong step. Adding every item, because "overdraft items add up". That gives $12{,}000 + 3{,}000 + 1{,}800 + 150 + 420 = 17{,}370$. The unpresented cheques actually reduce the bank's overdraft, so they go the opposite way from the rest.

Worked example: an overdraft in the passbook. The passbook shows an overdraft of ₹20,000. Cheques of ₹2,500 deposited are not yet collected, cheques of ₹4,700 issued are not yet presented, and the bank has debited ₹400 charges not yet entered in the cash book. Find the cash book balance.

The cash book shows an overdraft of ₹21,800. Check by going the other way: $-21{,}800 + 4{,}700 - 2{,}500 - 400 = -20{,}000$. Against the bank, the firm has already deducted ₹4,700 of cheques the bank has not yet paid (deeper), has already added ₹2,500 of deposits the bank has not yet credited (shallower) and has not yet deducted ₹400 of charges (shallower). The net effect is $4{,}700 - 2{,}500 - 400 = 1{,}800$ deeper than the bank's overdraft.

Common wrong step. Reading ₹20,000 as a favourable balance and getting $20{,}000 - 4{,}700 + 2{,}500 + 400 = 18{,}200$ in the bank. A sign that is wrong at the start is wrong in every line.

Pause and predict: The bank debits ₹300 for charges that you have not yet recorded. Starting from your cash book balance, do you add or deduct?

Check your answer: Deduct. The bank has reduced its balance by ₹300 and you have not, so the passbook is ₹300 lower than the cash book.

Worked example: when errors are involved. Naveen's cash book shows ₹40,000 (Dr). Cheques of ₹5,000 issued are not presented and cheques of ₹7,000 deposited are not collected. The bank has charged ₹200. While checking, he finds that a deposit of ₹4,500 was entered in his cash book as ₹5,400, and that the bank wrongly debited his account with ₹600 for another customer's cheque. Find the passbook balance.

The working is $40{,}000 + 5{,}000 - 7{,}000 - 200 - 900 - 600 = 36{,}300$. The firm corrects its own error in the cash book (the bank balance falls by ₹900) and asks the bank to correct the wrong debit of ₹600.

Common wrong step. Treating the ₹900 as a timing item or ignoring it because "the bank has not made any mistake". The firm's error makes the cash book higher than it should be by ₹900, so it must come off. The bank's error makes the passbook lower than the true figure by ₹600, so going from the cash book, it also comes off.

Beyond the textbook. For the exam: a cheque issued but not presented stays on the BRS until the bank pays it. In reality: a cheque is valid for only three months from its date. After that, the bank will not pay it, and the firm must cancel or reissue it. Why it matters: a long standing unpresented cheque on a BRS is a sign that the entry in the cash book needs attention.

Exam traps

Formula and format sheet

60-second revision

Where this chapter connects

The bank column you reconcile here is built in Recording of Transactions II, where the cash book, contra entries and overdraft were introduced. Errors found during reconciliation are corrected with the methods in Trial Balance and Rectification of Errors. The amended cash book balance is the bank figure that finally reaches the balance sheet in Financial Statements I.