Introduction and Importance of Bank Reconciliation

Statement (BRS)
To keep a record of business transactions, a Bank Reconciliation Statement
(BRS) comes into play. Bank Reconciliation Statement is a statement which
records differences between the bank statement and general ledger. The amount
specified in the bank statement issued by the bank and the amount recorded in
the organization’s accounting book maintained by Chartered Accountant might
differ. A BRS checks entries on a monthly basis to avoid any future
discrepancy. A BRS means matching records for a cash account entries
corresponding to the bank statement. BRS checks the dissimilarity found
between the two and makes appropriate changes. In this article, we will discuss
the bank reconciliation format and how to prepare it.

What is the Bank Reconciliation Statement (BRS)?

A bank reconciliation statement is a summary of business activity that
reconciles financial details. It ensures that payments have been processed and
money has been deposited on the same date. An accountant prepares the
reconciliation statement once a month.
The bank prepares a bank statement including cash deposits and withdrawals
for a month. Whereas, accounting record book records the same entries by the
hands of the accountant.

Due to the difference in publishing firms, errors might creep in. Bank
reconciliation helps in substituting those differences. In simple words, to
eradicate two different versions of the same document.
Difference Between Bank Reconciliation Statement and Company’s Ledger
Cheque issued by the company not delivered for payment

Before the end of the month (i.e. time of BRS generation) if a company issues a
cheque and it is not handed for payment, it would not be counted as debit
amount. This might become a discrepancy.

Deposits entered in ledger but not stated in the bank statement

The depositor might submit some amount in his account. If the payment is not
recorded in the bank statement, it will make a difference. Whereas a depositor
will never forget to add an entry for the same.

Understand the Preparation of Bank Reconciliation Statement here in detail.

Interest rates may differ

The interest rates differ from bank to bank. Ledger may contain entries with a
slight difference in interest. Also, interests on some entries might out in ledger!

Service charges might not be applied properly

Banks provide various services to their users with applicable service charges.
Like interest rates, service charges can be missed.

NSF Check might cause an error

NSF (Not Sufficient Funds) is a highlighted issue. Bank officials add money in
beneficiary’s account after receiving a cheque.

If a sufficient amount is not present in payee’s account, it deducts the amount

from the beneficiary’s account.

The bank returns the cheque to the payee with NSF Check. The entry might be
saved as an added amount and causes an error in the company’s ledger.
Steps to Prepare Bank Reconciliation Statement
Initial Check

First of all, compare the records in the company’s bank statement and ledger
cash account. Check off records that match. Check whether all records in ledger
clear the bank account statement. Reconciliation at this stage removes major
faults.

Deposit Check

Once the initial check is complete, mark all items remained in the ledger. Add
any transit deposits accounted in ledgers that might not appear in the bank
statement. Hence, the case of transit deposits occurs due to transactions made
just before bank holidays or non-working hours.

Transit deposits are deposits that are currently in pending status and therefore,
bank statement can’t note them.

Interests earned

Add the interests earned noting accurate interest rates. It applies only to
interest-bearing accounts.

Bank errors

After all, officials working in the bank are humans like us. They might
mistakenly interchange entries for two different account statements. Or they
might record wrong entries. Add or delete bank errors accordingly.

Outstanding Checks

Deduct outstanding checks from overall balance.

Check ledger errors

A bank provides facilities for which it charges. Like transfer charges, account
maintenance charges, late payment charges, etc. Deduct bank service charges
from the ledger.

Check Reconciliation

Ledger may contain posting a payment that didn’t reach completion. Make
necessary amendments. Check it carefully before adding in the bank statement.

Equate Final Balance

The overall balance must match to finalize reconciliation.

Journal Entries

As a part of this process, you might require to prepare some journal entries to
correct errors. These errors are those which interrupt during bank statement and
general ledger comparison.

Importance of Bank Reconciliation Statement

There’s no point in saying that banks aren’t trustworthy. But there is no harm in
double-checking the bank statements with ledgers. After all, bank accounts hold
our assets.

Segregation of duties makes it possible to rectify errors at a better speed.

Hence, the identification and correction of errors are necessary. Neither bank
nor you would like to meet a loss. Reconciliation also assists in monitoring the
flow of cash in a business.

When can we request a Reconciliation?

Usually, a general schedule suggests a monthly reconciliation. For example,

you are handling a large scale business with transactions over 50 in a week.
Cash accounts require some reconciliation schedule. A reconciliation can occur
in 15 days or weekly.
Conclusion
BRS proves to be a useful tool in fixing irrelevant faults in bank statements.
Bank statements are useful in huge transactions and in making Income Tax
Return (ITR) statements. We can call it a basic medium of operation in
banking. If basic is not justified, unidentified problems arise with further
documents.

Reconciliation makes the bank statement error-free and clears additional

charges. Therefore, before closing the accounting chapter in the banking book,
reconciliation checks whether the closing page hits green light i.e. ending is
correct and safe.

Solved Questions for You

Question: Who prepares the Bank Reconciliation Statement for private firms?

Answer: Private firms certainly have their own CA appointed to handle

business issues and payments. Therefore, he does so when the bank statement
arrives for the business account every month.

Question: Which accounts should be reconciled monthly?

Answer: Like passbook needs updating, similarly, it is mandatory to reconcile

data to avoid future discrepancies. But it is up to you to further look into the
matter. However, certain accounts need reconciliation monthly: Cash accounts,
prepaid expenses, payroll liabilities, inventory account, loans, and debt
accounts.
Preparation of Bank Reconciliation Statement
Businesses maintain a cash book to record various transactions. Also as a
record to cross-check bank statement. The process of comparing both the
records is Reconciliation. It checks the errors and states them in BRS (Bank
Reconciliation Statement). In addition, reconciliation takes place every month
to maintain the balance between the two records. Moreover, reconciliation
brings out the potential difference that profit a firm when ruled out. There are
many things that come up in a firm’s cash record which needs mending.
Reconciliation does that work for it. So let us study preparation of
bank reconciliation statement in detail.

Overview
Bank Reconciliation Statement is as necessary as a bank statement for a cash
account. It records necessary changes mandatory to declare the bank statement
and cash book records error-free and hence, required. Moreover, some random
errors like noting wrong entries to the data, etc. might not be replaced.

Reconciliation records all the needful changes and helps in the smooth
functioning of a firm. BRS is a statement which is prepared to reconcile the
difference between cash balance and bank statement balance.
 Understand the Need for preparing bank reconciliation statement here in
detail.

What is Reconciliation Mandatory for?

It isn’t mandatory to prepare a BRS until and unless you want to be double
sure. Also, there is no fixed date to reconcile both statements.

Two different firms prepare a cash record and bank statement. A firm records
transactions in the cash book. A bank issues a bank statement every month.

However, a third party prepares the Bank Reconciliation statement. It compiles

the errors they both make.

Steps in Preparation of Bank Reconciliation Statement

Check for Uncleared Dues

Step 1: First of all, compare the opening balances of both the bank column of
the cash book as well as the bank statement. The two can be different in terms
of uncleared dues like un-presented or un-credited cheques from the previous
month.

Compare Debit and Credit Sides

Step 2: Start by comparing the credit side of the bank statement to the debit
side of the bank statement. Also, compare the credit side of the cash book to the
debit side of the cash book. The two must be equal in both documents. Tick the
columns if you can’t find any error.

Check for Missed Entries

Step 3: Analyse entries in the bank column of the cash book as well as in
checkbook. Look for records that have been missed to be posted in the bank
column of the cash book. Make a separate list of all such items and list them in
cash book.

Correct them

Step 4: Correct the errors present in the cash book, if any.

Revise the Entries

Step 5: Calculate the balance after revising the updated cash book’s bank
column.

Make BRS Accordingly

Step 6: Prepare Bank Reconciliation Statement accordingly. Make sure to add

the updated version of records.

Add Un-presented Cheques and Deduct Un-credited Cheques

Step 7: Banks are not aware of Un-presented cheques because the beneficiary
doesn’t get the cheque. It is the case when the business firm forgets to deliver
the signed cheque to the issued name.

This situation leads to the addition of the cheque amount in the bank statement.

On the other hand, cheques which beneficiary has not yet collected are called
un-credited cheques. These must be deducted.

Make Final Changes

Step 8: Make all the final adjustments and check for bank errors in the bank
statement and the firm’s errors in the cash book. During heavy transaction days,
firms or banks may make mistakes in noting entries.

The process removes those errors. Although it consists of fine work,

reconciliation becomes a helping hand at hard times (large transaction days).
Left-Hand Side Equal to the Right-Hand Side

Step 9: The results from both the documents i.e. bank statement and cash book
must match with each other.

Why do we Need to Prepare Bank Reconciliation

Statement?
A bounced cheque leads to a fall in one’s reputation in the eyes of the bank.
This may lead to future misunderstandings for a firm’s relationship with Banks.

Moreover, it may also lead to delays in monetary help responses from bank
side. Therefore, reconciliation helps to tackle these mistakes and maintain a
healthy official relationship. BRS offers several other advantages to a business
firm:

 Detects Errors

A bank reconciliation statement helps to locate errors. After locating errors,

firms can easily remove them.

 Tracking Interest and Fees

The bank might add interest payments or deduct service fees from the
account without prior notice. The additions or deletions are visible directly
in the bank statement. A bank reconciliation statement helps in managing
these changes.

 Detecting Fraud

Suppose, an employee handles the bank account for the firm. Apparently,
the transaction history is clearly visible to the manager of the business by
reading the reconciliation statement. Hence, no chances of fraud are
entertained.
Conclusion
After going through the article, you have got an idea of how to prepare a bank
reconciliation statement. Most importantly, the idea behind it is to increase a
firm’s productivity.

Most businesses shut down due to severe losses. Through reconciliation, the
head investor can locate potential errors. Besides that, reconciliation records
important transactions that were earlier missed. The whole aim of the process is
to verify the bank statement and cash book.

Solved Questions for You

Question: Who prepares the bank reconciliation statement?

Answer: The company’s accountant prepares the bank reconciliation statement

whenever the bank statement arrives. Generally, the bank issues the bank
statement within a month.

Question: What is the need to prepare Bank Reconciliation Statement?

Answer: A bank reconciliation statement gives a clear picture of the bank

account in a very precise manner. However it takes time to make a BRS, it is
always beneficial for a firm’s growth. It also acts as a helping hand in account
management.