Businesses maintain cash book to record both the cash as well as bank transactions. A Cashbook has a cash column which shows cash available with the business and a bank column which shows cash at bank.
Bank also keeps an account for every customer in their books. All the deposits are recorded on credit side of customer’s account and withdrawals are on the debit side of their account. An account statement is sent regularly to the customers by the bank.
Sometimes the bank balances as per cash book and bank statement doesn’t match. In case balance available in the passbook doesn’t match the bank column of the cash book, the business should identify the reasons for the same. It is important to reconcile the differences.
For reconciling the balances as shown in the Cash Book and passbook a reconciliation statement is prepared known as Bank Reconciliation Statement or BRS. In other words, BRS is a statement which is prepared for reconciling the difference between balances as per cash book’s bank column and passbook on a given date.
Why Prepare a BRS?
It‘s not compulsory to prepare a BRS and there’s no fixed date for preparing BRS. BRS is prepared on a periodical basis for checking that bank related transactions are recorded properly in cash book’s bank column and also by the bank in their books. BRS helps to detect errors in recording transactions and determining the exact bank balance as on a specified date.
How to prepare a BRS
- The first step is to compare opening balances of both the bank column of the cash book as well as bank statement; these could be different due to un-credited or un-presented cheques from a previous period.
- Now, compare credit side of the bank statement with debit side of the bank column of cash book and debit side of the bank statement with the credit side of the bank column of the cash book. Place a tick against all the items appearing in both the records.
- Analyze the entries both in the bank column of the cash book as well as pass book and look for entries which have been missed to be posted in the bank column of the cash book. Make a list of such entries and make the necessary adjustments in the cash book.
- Correct if any mistakes or errors appear in cash book.
- Calculate the corrected and revised balance of cash book’s bank column.
- Now, start bank reconciliation statement with updated cash book balance.
- Add the un-presented cheques (cheques which are issued by the business firm to its creditors or suppliers but not presented for payment – Expense) and deduct un-credited cheques (Cheques paid into the bank but not yet collected – Income).
- Make all the necessary adjustments for the bank errors. In case the bank reconciliation statement begins with the debit balance as per bank column of the cash book, add all the amounts erroneously credited by the bank and deduct all the amounts erroneously credited by the bank. Do vice-versa in case its start with the credit balance.
- The resultant figure must be equal to the balance as per the bank statement.
Benefits of preparing a BRS
Accounting errors could lead to circumstances which are more than just embarrassing when the cheques bounce or companies start getting annoying calls from creditors or suppliers for payments which are already released. Bank reconciliations assist you in spotting fraud and reducing the risk of transactions which could cause penalties and late fees. BRS offers several advantages to a business which includes:
Detecting errors: A bank reconciliation helps you in spotting accounting errors which are common to every business. These mistakes include errors such as addition and subtraction, missed payments and double payments.
Tracking Interest and Fee: Banks might add interest payments, fees or penalties on your account. Monthly bank reconciliation allows you to add or subtract such amounts in your books.
Detecting Fraud: You may not be able to prevent employees from stealing your money once, however, you could prevent it in future. Bank reconciliations statement helps you in detecting and spotting fraudulent transactions. It is advisable to employ an independent person to perform the reconciliations for preventing the accounting employee from falsifying your books and reconciliations.
Tracking Receivables: BRS allows you to confirm all your receipts, assisting you to avoid awkward situations and also identifying entries for receipts which you didn’t deposit.
Tips to ensure efficient BRS
1. Firstly, it’s essential to have all the required documentation and information in hand. That means, if all the required documentation and information are at your disposal you get a better view of things.
2. Avoiding common errors, such as:
a. Error relating to duplication of entries.
b. Not accounting for a transaction that would cause a difference equal to the missed amount
c. Errors while entering commas and dots, which cause discrepancies that, could be of significant value. For instance, instead of entering INR 2,401.30, entering INR 240.13.
d. Transposition errors while entering figures in the books. For instance, instead of entering INR 221,200, entering INR 212,200.
3. Banks can make mistakes too: It is possible that your bank might have committed a mistake. They might debit incorrect amounts from your account, or credit deposits which doesn’t belong to you. For this reason, in case you find errors for which you don’t find any explanations, or for which you’re in doubt, the best thing is to consult your bank.
4. Reconciling items: Listing differences and reconciling them and then forgetting it is possible. In case differences keep on accumulating with no action taken, your bank reconciliation would become meaningless. It is needed that a constant check is kept on the reconciled transactions so that they are reflected in the right way in the bank column of the cash book and in the bank statement.