In this article, we will learn in-depth about the bank reconciliation statement, including its definition, cash book, and pass book, the reason for the mismatch between cash book and pass book, the purpose of bank reconciliation statement, preparation, and much more.

What is the Pass Book and Cash Book?

You need some fundamental knowledge of two items, Passbook, and Cash Book also called the bank book, in order to know what the bank reconciliation statement is?

Now as you are studying Accountancy instead of A, B, C. Let me assume that you have grown enough to know what a Passbook is?

But still, I know that there may be some people among you who don’t know what a Passbook is? because in an underdeveloped or developing country still, many families don’t have a bank account.

So, for those who don’t know, a passbook is the record of deposits and withdrawals of a person made with the bank. It’s when you deposit money into the bank and your pass-book is credited and your money is debited from your pass-book if you withdraw the money out of your bank. And the Bank keeps this passbook. All right, so that’s what a passbook is?

Now, the next thing is Bank Book which is also known as Cash Book. As I previously said and it is usually the Bank Column of the Cash Book. So, before studying the Bank Reconciliation statement, a cash book or bank book is usually studied.

Therefore, most of you may already know about it. For those who don’t, a cash book is a book in which receipts and cash payments are recorded. But unlike the passbook, which is prepared by the bank, a cash book is prepared by the customer of the bank or we can say it is prepared by the business. 

Now there are only two columns in the Cash Book: one is a cash and the other a bank column, but we are dealing only with the bank column in the Bank Reconciliation Statement because it only covers those transactions which relate to the Bank.

So, we can say that both pass and cash books are receipts and payment statements. But the only difference is that Pass Book is prepared by the bank and the cash book is prepared by bank clients, I.e. Company.

What is the Bank Reconciliation Statement?

Now, the point is that most of the time, the balance of the pass book and the balance of the cash book do not match, which is why we are preparing the Bank Reconciliation statement.

So, we can say that the Bank Reconciliation Statement is a statement that explains the difference between the balances of the Pass book and the Bank Book.

According to Pyle and Larson, “Bank reconciliation statement is an analytical statement of the difference between the cash book balance and the balance of the bank statement of an organization.”

Reason for Mismatch between Cash Book and Pass Book

Now, as I said, sometimes the passbook and the cash book don’t match, but the question is, why? 

Let’s understand that.

See, as I said the bank book is prepared by the bank, which is usually correct, and the cash book is prepared by the bank’s client or the business, which may make mistakes. So sometimes because of the error made by the customer or the business in recording the transactions in the bank’s cash book column. There is a disparity between cash book balance and passbook balance. So, the reason for this mismatch is an error in the recording.

A different timing is another reason for the mismatch, for instance: When we deposit a cheque in the bank, we immediately debit the cash book with the cheque amount. However, the bank will take some time to deposit the cheque into the account. If we check the balance of pass book and the bank book at that time it will result in a mismatch.

Yet another reason is No information regarding the transaction. For example – When a bank pays Interest, it credits the pass book but we do not know about such Interest until we check the pass book, so we do not record it in the Bank book or in the Bank column of the Cash Book which results in a mismatch.

What is the purpose behind the preparation of the Bank Reconciliation Statement?

Before moving to the next step, you need to know what is the purpose behind the preparation of the Bank Reconciliation statement? For example-The trading account is prepared to know the gross profit, i.e. the final result of the trading account is either gross profit or gross loss. Therefore, the net profit or net loss is the end result of the profit and loss statement.

So, the question is what is the purpose behind preparing BRS? What will be the end result of preparing BRS? What are we trying to find here? 

And the answer is as I previously said we are trying to find the differences between Cash Book and Pass Book and we will reverse them so that if we start with the balance of Cash Book, the end result will be the balance as per pass book and if we start with the balance as per pass book, the end result will be Balance as per Cash Book.

How to Prepare Bank Reconciliation Statement with a Problem?

Now, let’s study how to prepare the Bank Reconciliation Statement that is also known as the BRS with a problem.

So, here is our problem where it is stated Prepare Bank Reconciliation Statement of XYZ Ltd. from the information given below.

Let’s show you how you can solve this problem. Here’s the bank reconciliation report format, and it’s not a standard BRS format, I want to tell you, so you can prepare it anyway, but that’s still the best format for me.

You can also read: Short Questions and Answers-Bank Reconciliation Statement

Bank Reconciliation Format

The format of the bank reconciliation format is as follows:

Bank Reconciliation Statement

We therefore always begin with either the cash-book balance or the pass-book balance. It’s up to the issue. As you can see, we get the balance as per the cash book so you will begin to do.

Therefore, the 2nd step will be to reverse the entries which result in the difference among balances of pass book and cash book.

So, let’s continue. 

1st Transaction:

Balance as per Cash Book $25,000

2nd Transaction:

So, in our 2nd transaction, withdrawn $2000 from a bank but recorded it as $2500 in Cash Book. That means we have recorded $500 extra in cash book which results in the lower balance of the cash book as compared to pass book because as per the pass book we have withdrawn only $2,000 but as per the cash book we have withdrawn $2,500.

So, we have deducted $500 extra from the cash book. So, to reverse the entry, we will add this $500 to the cash book. Therefore, Add an extra amount deducted from Cash Book $500

I hope you got it. If not, nothing to worry about you can go a little back and follow this step again, or you can continue and understand this concept in the next entries.

3rd Transaction:

Now, the third entry, Interest given by bank $50 and not recorded in Cash Book. When the bank gives interest on our money, it results in an increase of balance in the pass book.

But the account holder will only come to know of such Interest when he sees the pass book, therefore the balance of the cash book becomes less than the balance of the pass book. So, to make the balance equal, we will record the interest given by the bank in the cash book. Therefore, add interest given by the Bank $50

4th Transaction:

Now the 4th transaction is, Cheque received from ABC Ltd deposited into the bank not yet cleared $1000. In this transaction, XYZ Ltd. has received a cheque from ABC Ltd and deposited it into the bank. This is not yet clear as you may know that sometimes the bank takes time to clear cheques because of various reasons. 

So, here when XYZ ltd. saw the pass book, the cheque was not cleared although it was not aware of it and therefore recorded it in the cash book which results in the difference between Pass Book and cash book as the balance of cash book got increases by the amount of cheque.

Therefore, we will reverse the transaction and will deduct such an amount from the cash book so that the balance of both books gets equal. Therefore, Less Cheque received from ABC Ltd has not yet cleared $1000

5th Transaction:

Now the 5th transaction, Cheque issued to Peter not yet presented for payment of $1500. In this transaction, XYZ Ltd. has given a cheque to Peter, therefore it will assume that Peter has presented it for payment and the money is deducted from the bank.

Therefore it has already deducted the amount of cheque from the cash book. But when XYZ LTD. sees the pass book, it comes to know that the cheque is still not presented for payment. Therefore it has to reverse the transaction in the cash book.

As it has already deducted $1500 from the cash book, now it has to add it back. Therefore, Add Cheque issued to Peter has not yet been presented for the payment. $1500

6th Transaction:

The next entry, Deposited $5000 in the bank but recorded as $3500 in the cash book. Here in this entry, XYZ Ltd has deposited $5000 in the bank but wrongly recorded it as $3500. Which results in the difference between the balances of both books.

Therefore, to balance both books we have to add $1500 to the cash book. Therefore, Add Less amount recorded in the cash book. $1500

7th Transaction:

Now the 7th and the last transaction is, Cheque received entered twice in cash book $2000. So when we receive a cheque from someone, it increases the balance of both pass book and cash book.

But here, we have added such an amount to the cash book 2 times, Therefore, we have to deduct $2000 from the cash book. So as to make the balances of both books equal. Therefore, Less Cheque entered twice in cash book $2,000 

Now what we have to do is to add all these transactions. First and then add the amount into the Balance as per Cash Book. So after adding all these, we get $3,550 which when added to $25,000 gets equal to $28,550. Now we have to subtract the below amount from this $28,550 and after subtracting we get $25550. Which is our balance as per pass book.

That’s all. I hope you got it. If not, do tell me what else I should explain here and I will write a new article about that. Please do not forget to comment.

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