Every business that operates a bank account maintains a Bank Column in its Cash Book (recording deposits and payments through the bank). The bank also maintains a Pass Book (Bank Statement) — a copy of the bank's record of the customer's account. In theory, both should show the same balance. In practice, they often differ — and the Bank Reconciliation Statement (BRS) explains this difference.
Why Do Differences Arise?
- 1.Cheques issued but not yet presented for payment (Outstanding Cheques): The firm has recorded payment (Cr in Cash Book), but the bank has not yet paid.
- 2.Cheques deposited but not yet collected (cleared) (Outstanding Deposits / Uncredited Cheques): The firm has recorded receipt (Dr in Cash Book), but the bank has not yet credited the account.
- 3.Bank charges / interest on overdraft: The bank debits these in the Pass Book, but the firm has not yet recorded them in the Cash Book.
- 4.Interest credited by bank: The bank credits interest on deposits in the Pass Book; the firm may not have recorded it yet.
- 5.Direct payments by bank (ECS, standing orders): Bank has paid on behalf of the firm; firm not yet recorded.
- 6.Direct deposits by customers (NEFT): Customer pays directly to bank; firm not yet recorded.
- 7.Dishonoured cheques: Cheque deposited and recorded as Dr in Cash Book, but bank has debited back on dishonour.
- 8.Errors in either the Cash Book or Pass Book.
Key Terms
- Favourable Balance (Cr Balance as per Pass Book / Dr Balance as per Cash Book): The firm has money in the bank.
- Unfavourable Balance / Bank Overdraft (Dr Balance as per Pass Book / Cr Balance as per Cash Book): The firm has borrowed from the bank (overdrawn account).
Format of Bank Reconciliation Statement
Starting from Cash Book Balance (Dr) to arrive at Pass Book Balance (Cr):
BRS (Starting with Cash Book Dr balance — favourable):
| Particulars | Amount (Rs) |
|---|---|
| Balance as per Cash Book (Dr) | xxx |
| Add: Cheques deposited but not yet collected | + |
| Add: Interest / Direct deposits credited by bank, not in Cash Book | + |
| Less: Cheques issued but not yet presented | - |
| Less: Bank charges / interest debited by bank, not in Cash Book | - |
| Less: Dishonoured cheques debited by bank, not in Cash Book | - |
| Balance as per Pass Book | xxx |
The Logic Behind Adjustments
- If Pass Book balance is higher than Cash Book balance: receipts have been credited by bank but not by firm (add), OR payments have been made by firm but not yet debited by bank (add to Cash Book to go to higher Pass Book balance).
- Think of it this way: Start from one balance and add/subtract items until you reach the other balance.
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Basic BRS
Cash Book (Dr) balance: Rs 12,000
- Cheques issued but not presented: Rs 3,000
- Cheques deposited but not collected: Rs 2,000
- Bank charges: Rs 500
BRS:
Balance per Cash Book (Dr): 12,000
Less: Cheques issued not presented (bank not yet paid, so Pass Book balance is higher) — wait, this means bank has MORE money than Cash Book shows, so: Add: 3,000
Less: Cheques deposited, not collected (firm recorded receipt, bank has not credited yet): (2,000)
Less: Bank charges not recorded in Cash Book: (500)
Balance as per Pass Book: 12,500
Alternatively, starting from Pass Book:
Pass Book balance: 12,500
Add: Cheques deposited not collected (these will increase CB when cleared): 2,000
Add: Bank charges (will reduce CB once entered): 500
Less: Cheques issued not presented (will reduce PB when presented): (3,000)
= Cash Book balance: 12,000
Overdraft scenario
Cash Book (Cr) balance (overdraft): Rs 5,000 (this is an unfavourable balance)
- Bank has charged interest on OD Rs 800 (in Pass Book, not Cash Book)
- Cheque of Rs 2,000 directly deposited by customer (in Pass Book, not Cash Book)
BRS (starting from Pass Book Cr balance — unfavourable):
Balance as per Pass Book (Cr / overdraft): 5,000 + 800 = 5,800 (interest makes OD larger in Pass Book)
Less: Direct deposit not in Cash Book: 2,000 reduces OD
Pass Book balance after adjustments: Rs 4,600 OD ? This connects back to the Cash Book. BRS format: start Cash Book OD Rs 5,000; Add Bank Interest OD Rs 800 (makes it more OD in CB once recorded) = Rs 5,800 OD; Less Direct deposit Rs 2,000 (reduces OD) = Rs 3,800 OD = Pass Book balance (Cr) Rs 3,800.
Finding the missing figure
Cash Book Dr balance Rs 8,500; Pass Book Cr balance Rs 9,200. Only outstanding cheques exist. What is the value of outstanding cheques?
Reasoning: Outstanding cheques not yet presented → bank still has the money → Pass Book balance is higher.
9,200 = 8,500 + Outstanding cheques
Outstanding cheques = Rs 700.
Effect of dishonoured cheque
If a cheque of Rs 4,000 received from a debtor is dishonoured, the bank debits the account in the Pass Book. If the firm has not yet recorded this:
BRS: The Pass Book balance will be LOWER than the Cash Book balance by Rs 4,000.
Adjustment: Less Rs 4,000 from Cash Book balance to arrive at Pass Book balance.
Comprehensive BRS
Cash Book balance Rs 15,000 (Dr). Items:
(a) Cheques issued Rs 6,000 not yet presented
(b) Cheques deposited Rs 4,000 not yet credited
(c) Bank interest Rs 500 (credited in Pass Book, not Cash Book)
(d) Bank charges Rs 200 (debited in Pass Book, not Cash Book)
BRS:
Cash Book balance (Dr): 15,000
Add: Cheques issued not presented (Pass Book not yet reduced): 6,000 → 21,000
Less: Cheques deposited not credited (Pass Book not yet increased): (4,000) → 17,000
Add: Bank interest not in Cash Book (Pass Book higher by this amount): 500 → 17,500
Less: Bank charges not in Cash Book (Pass Book lower by this amount): (200) → 17,300
Pass Book balance: Rs 17,300
Why does it matter?
BRS helps detect: errors in the Cash Book, frauds (unauthorised payments), timing differences in clearance, and unrecorded income/charges. Banks and auditors insist on regular BRS preparation.
Updated Cash Book
Before preparing BRS, some firms update the Cash Book to incorporate items shown in the Pass Book but not in the Cash Book (like bank charges, interest, direct receipts). The updated Cash Book balance will then be closer to the Pass Book balance.
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Common mistakes
- Adding when you should subtract and vice versa — always think logically about which balance is being affected and in which direction.
- Confusing "Dr balance in Cash Book" (favourable — you have money) with "Dr balance in Pass Book" (unfavourable — bank shows you owe them money — overdraft).
- Ignoring timing differences and treating all differences as errors.
- Forgetting that the Pass Book is from the bank's perspective — your deposit is a LIABILITY for the bank (Cr in Pass Book means bank owes you money).
Summary
The Bank Reconciliation Statement reconciles the balance in the firm's Cash Book (Bank column) with the balance in the Pass Book (Bank Statement). Differences arise mainly from outstanding cheques, uncollected deposits, bank charges/interest, and direct transactions. BRS is a key internal control tool and must be prepared regularly (usually monthly) to detect errors, unrecorded transactions, and potential fraud.