Bank Reconciliation Statement

On the last day of Ashad a shop's cash book shows a bank balance of Rs 45,200, but the statement from the bank (the pass book) says Rs 52,550.

Nobody has made a mistake with the money; the two records describe the same account from two sides and are written at different moments. The Bank Reconciliation Statement (BRS) explains the difference item by item.

It is a control: an account that cannot be reconciled hides errors, delays or fraud.

4.1 Cash book versus pass book

The cash book is the business's own record.

The pass book (bank statement) is the bank's record of the same account, in the bank's own view: a deposit in the cash book is a debit, but the bank, which owes the money to the customer, shows it as a credit.

The roles of debit and credit are therefore reversed between the two books. This reversal is a common source of confusion; remember that a favourable balance is a debit in the cash book but a credit in the pass book.

4.2 Causes of difference

A. Timing differences (the business has recorded the item and the bank has not yet; no cash book entry is needed):

1. Cheques issued but not yet presented for payment: the cash book is already reduced, the bank balance is not.
2. Cheques deposited but not yet cleared/credited: the cash book is already increased, the pass book is not.

B. Items the bank has recorded but the business has not yet; each needs a correcting entry in the cash book:

3. Bank charges and commission, debited by the bank.
4. Interest credited on a savings or fixed account.
5. Direct deposits by customers (for example by connectIPS, bank transfer or standing instruction) that appear first on the statement.
6. Direct payments by the bank on the customer's behalf: insurance premium, loan instalment, electricity bill by standing order.
7. Dishonoured (bounced) cheques: a customer cheque the cash book showed as received is returned unpaid.
8. Errors in the cash book (wrong amount, wrong side) found during checking.

4.3 Preparing the BRS: step by step

1. Compare the cash book bank column with the pass book entry by entry; tick the matches.
2. List the unticked items on each side.
3. Update the cash book for every group B item; this gives the adjusted cash book balance.
4. Reconcile the pass book balance to the adjusted cash book balance using group A items only.

The two directions of the reconciliation formula, for a favourable (debit) cash book balance, are:

To go from	Add	Subtract
Adjusted cash book → pass book	Cheques issued but not presented	Cheques deposited but not credited
Pass book → adjusted cash book	Cheques deposited but not credited	Cheques issued but not presented

With an overdraft, signs reverse because the balance is credit-natured: cheques issued not presented reduce the overdraft shown in the pass book.

4.4 Worked schedule

Step 3: the cash book is corrected for group B items. Bank charges and the dishonoured cheque reduce it; interest and the direct deposit increase it:

45,200 − 350 + 1,200 + 6,000 − 3,000 = Rs 49,050

Step 4: starting from the pass book balance Rs 52,550, subtract the cheques issued but not presented (they have not yet left the bank) and add the cheques deposited but not credited (they have not yet reached the bank).

The result must equal the adjusted cash book balance. The program carries out both steps.

cash_book = 45200
adjustments = {"bank charges": -350, "interest credited": +1200,
               "direct deposit": +6000, "dishonoured cheque": -3000}
adjusted = cash_book + sum(adjustments.values())
print(f"adjusted cash book balance: {adjusted}")

pass_book = 52550
unpresented, uncleared = 12000, 8500
reconciled = pass_book - unpresented + uncleared
print(f"reconciled bank balance: {reconciled}")
assert adjusted == reconciled

adjusted cash book balance: 49050
reconciled bank balance: 49050

The two printed lines agree, so every difference has been explained. Notice that the unpresented cheque and the uncleared deposit never changed the adjusted figure: they only bridge the pass book to it.

4.5 Journal entries after the BRS

The corrections are posted to the cash book and ledger as ordinary entries:

Item	Entry
Bank charges Rs 350	Dr Bank Charges 350, Cr Bank 350
Interest Rs 1,200	Dr Bank 1,200, Cr Interest Income 1,200
Direct deposit Rs 6,000	Dr Bank 6,000, Cr Debtors 6,000
Dishonoured cheque Rs 3,000	Dr Debtors 3,000, Cr Bank 3,000

The debtor's account is re-debited on dishonour because the customer again owes the money. Once these entries are made, the Bank account in the ledger shows Rs 49,050, the figure that appears on the balance sheet.

4.6 Stale cheques and good practice

A cheque not presented within its validity period (usually six months in Nepal's banking practice; check the bank's rule) is stale.

The business reverses the original payment entry (Dr Bank, Cr the payee) and issues a replacement if the payee still has a claim.

Good practice: reconcile at least monthly, by someone other than the person who writes cheques, investigate any item outstanding for more than a few weeks, and keep a signed copy of each statement.

4.7.1 Eight benefits of preparing a bank reconciliation every month

1. It finds mistakes by the firm. A cheque entered as Rs 5,600 instead of Rs 6,500 appears as a difference. The bank's record is an independent check on the cash book. Correcting it early keeps the balance trustworthy.
2. It finds mistakes by the bank. Banks also make errors, such as posting a deposit to another account. A monthly comparison catches it while the paper trail is fresh. Complaints made late are harder to prove.
3. It exposes fraud. A forged or altered cheque, or a clerk who takes cash and delays the deposit, shows up as an unexplained difference. Regular reconciliation by someone who does not handle cash is a core control. Many small Nepali firms have been caught this way.
4. It records unrecorded items. Bank charges, interest and direct credits through ConnectIPS or Fonepay may be unknown until the statement arrives. The reconciliation tells the accountant to enter them. Without it, profit is wrong.
5. It shows true available cash. The cash book may show Rs 49,050 while the pass book shows Rs 52,550. Knowing the cheques still to clear helps decide what can be spent. This avoids dishonour for lack of funds.
6. It tracks dishonoured cheques. A customer cheque returned unpaid must be debited back to the customer. The reconciliation reminds the firm to chase payment. Delay lets a bad debt grow.
7. It supports audit. An auditor asks for the reconciliation at the year end and compares it with the statement. A clean, signed schedule shortens the audit. A missing one raises doubts about all the cash records.
8. It follows up stale cheques. A cheque unpresented for six months may be out of date. The schedule lists it so it can be cancelled and reissued. Old cheques that stay on the list distort the picture.

(a) A bank counter

(b) From cash book to pass book, in rupees

4.8 Summary and exercises

The BRS bridges the cash book and the pass book. Timing items stay out of the books and appear only in the statement; bank-originated items force correcting entries and produce the adjusted cash book balance, which then reconciles to the pass book.

1. List four timing differences and four differences that need a cash book entry.
2. The cash book shows a bank balance of Rs 30,000. Cheques issued not presented total Rs 5,000, cheques deposited not credited Rs 2,500, interest credited Rs 400 and charges Rs 150 are unrecorded. Find the pass book balance.
3. Starting from an overdraft in the pass book of Rs 18,000, cheques issued not presented Rs 6,000 and deposits not credited Rs 4,000, find the overdraft in the cash book.
4. Explain why debit and credit are reversed in a bank statement.
5. A customer cheque of Rs 7,500 is dishonoured. Give the entry in the business's books.
6. Why is it a control weakness if the same person writes cheques and prepares the BRS?

Model answers: medium (5 marks) and long (10 marks) questions

Q1 (5 marks). Why do the cash book and the pass book differ? List the causes.

Introduction. The cash book is the firm's record of its bank account; the pass book (bank statement) is the bank's record. They seldom agree on the same date, though both describe one account.

Causes (Figure 4.2).

1. Cheques issued but not yet presented: the firm has credited the cash book, but the bank has not yet paid.
2. Cheques deposited but not yet credited (uncleared): the firm has debited it, but the bank is still collecting.
3. Bank charges and interest entered by the bank and not yet by the firm.
4. Direct deposits by customers (for example by ConnectIPS) that the firm has not seen.
5. Dishonoured cheques: the bank has debited the account back.
6. Standing orders and direct debits, such as insurance.
7. Errors in either book.

Items 1 and 2 are timing differences; 3 to 6 need entries in the cash book. Conclusion: a bank reconciliation statement explains every difference.

Q2 (5 marks). The unadjusted cash book shows Rs 45,200 and the pass book Rs 52,550. Cheques issued not presented Rs 12,000; deposited not credited 8,500; bank charges 350; interest credited 1,200; direct deposit 6,000; customer cheque dishonoured 3,000. Prepare the reconciliation.

Step 1: correct the cash book (Figure 4.1).

Item	Rs
Cash book balance (Dr)	45,200
Less bank charges	(350)
Add interest credited	1,200
Add direct deposit	6,000
Less dishonoured cheque	(3,000)
Adjusted cash book	49,050

Step 2: bridge from the pass book. 52,550 − 12,000 + 8,500 = 49,050.

The two results agree, so every difference is explained.

Entries Dr Bank charges 350, Cr Bank 350; Dr Bank 1,200, Cr Interest income 1,200; Dr Bank 6,000, Cr Debtors 6,000; Dr Debtors 3,000, Cr Bank 3,000.

Conclusion the unpresented cheque and the uncleared deposit never alter the adjusted figure; they only link the two books.

Q3 (10 marks). Define a bank reconciliation statement. Explain its purpose, the steps of preparation and the journal entries that follow, using the figures of the schedule above.

Introduction. A bank reconciliation statement (BRS) lists the items that explain the difference between the cash book bank balance and the pass book balance on a date. It is not a ledger account; it is a working schedule.

Purposes. To detect errors and fraud, to find unrecorded items, to show true available funds, to follow dishonoured and stale cheques, and to support audit.

Steps.

1. Tick the cash book against the pass book item by item.
2. List the unticked items on each side.
3. Separate timing items from items needing entry.
4. Correct the cash book for the items the bank knew first, giving the adjusted balance.
5. Start from the pass book balance and add or subtract the timing items.
6. Compare the two results; they must agree.
7. Post journal entries for the cash-book corrections.
8. Investigate anything still unexplained and file the signed statement.

Statement (Figure 4.1).

Particulars	Rs
Balance as per pass book	52,550
Less cheques issued, not presented	(12,000)
Add cheques deposited, not credited	8,500
Balance as per adjusted cash book	49,050

Journal entries.

Dr	Cr	Rs
Bank charges	Bank	350
Bank	Interest income	1,200
Bank	Debtors (customer)	6,000
Debtors (customer)	Bank	3,000

Comparison of the two books.

Point	Cash book	Pass book
Kept by	the firm	the bank
Viewpoint	firm's asset (Dr balance)	bank's liability to the customer
Receipts	debit side	credit side
Payments	credit side	debit side
Overdraft	credit balance	debit balance

Good practice. Reconcile monthly, by a person who does not handle cash, and follow up cheques older than six months.

Conclusion. Because the bank holds an independent record, reconciliation is the cheapest control over a firm's cash. A schedule that ends with equal figures (Rs 49,050) shows that each difference is understood.