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Maintaining accurate financial records is an important part of accounting. Businesses record their cash and banking transactions to understand how money enters and leaves their accounts. However, the balance shown in a company's cash book may not always match the balance displayed in its bank statement.
These differences can occur because transactions may be recorded at different times, bank charges may not yet appear in the company's books, or payments and deposits may still be under processing. To understand and explain these differences, accountants prepare a Bank Reconciliation Statement (BRS).
For commerce and accounting students, learning how to prepare a BRS is an important practical skill. It connects concepts such as cash books, bank statements, deposits, withdrawals and accounting records with everyday financial activities.
This guide explains what a Bank Reconciliation Statement is, why balances differ, how to prepare one using a systematic method and how to solve a basic numerical example.
A Bank Reconciliation Statement is a document prepared to explain the differences between the bank balance recorded in an organisation's cash book and the corresponding balance shown in its bank statement on a particular date.
The cash book is maintained by the organisation to record cash and bank transactions. A bank statement is provided by the bank and shows transactions processed through the account.
Although both records relate to the same bank account, their balances may differ at a particular point in time.
A BRS helps identify the reasons for these differences and determine whether the records are consistent after considering the relevant transactions.
Imagine that a business checks its accounting records and finds a bank balance of โน25,000. Its bank statement shows โน22,000.
The difference is โน3,000. Instead of assuming that one record is incorrect, the accountant investigates the transactions responsible for the difference.
The investigation may identify deposits that have not yet been credited by the bank, payments that have not yet been presented or other banking entries.
The BRS presents these differences in an organised manner.
Preparing a BRS is useful for more than matching two balances. It helps organisations review their financial records and identify transactions that need attention.
Some important purposes include:
A business may record a transaction before the bank processes it. Reconciliation helps explain such differences.
Bank charges, interest credits or other bank-initiated transactions may appear in the bank statement before they are recorded in the cash book.
Incorrect amounts, duplicate entries or transactions recorded on the wrong side can create differences between the two records.
Regular reconciliation helps an organisation review its banking activity and identify unfamiliar transactions for further investigation.
A properly reconciled bank balance supports the preparation and review of accounting records.
| Purpose | What the accountant checks | Possible benefit |
|---|---|---|
| Timing differences | Deposits and payments awaiting processing | Explains temporary balance differences |
| Missing entries | Bank charges, interest and direct payments | Helps update the cash book |
| Recording errors | Incorrect amounts or duplicate entries | Improves record accuracy |
| Unfamiliar transactions | Entries not recognised by the organisation | Supports further investigation |
| Balance verification | Cash book and bank statement balances | Improves financial monitoring |
Before preparing a BRS, students should understand the two records being compared.
A cash book is an accounting record maintained by an organisation to record cash and bank transactions. It may include money deposited into the bank, cheques issued, electronic payments and other banking transactions.
In a cash book maintained from the organisation's perspective:
Money deposited into the bank account generally increases the bank balance.
Payments made through the bank generally decrease the bank balance.
The bank column of the cash book is used when preparing a BRS.
A bank statement is a record supplied by the bank showing transactions processed through the customer's account.
The bank records transactions from its own accounting perspective. Therefore, the debit and credit presentation may appear opposite to the way transactions are recorded in the organisation's cash book.
This difference in perspective is important when students interpret banking entries.
| Basis | Cash book | Bank statement |
|---|---|---|
| Prepared by | Organisation | Bank |
| Purpose | Records the organisation's cash and bank transactions | Reports transactions processed by the bank |
| Main perspective | Organisation's accounting records | Bank's account records |
| Deposits | Recorded as increases in the bank column | Generally shown as credits by the bank |
| Payments | Recorded as decreases in the bank column | Generally shown as debits by the bank |
| Common use | Internal accounting record | External banking record |
Students should identify the reason for each difference before making adjustments. The same transaction can affect the two records at different times.
When an organisation issues a cheque, it records the payment in its cash book. However, the person receiving the cheque may deposit it later.
Until the cheque is presented and processed by the bank, the bank statement may continue to show a higher balance than the cash book.
An organisation may deposit a cheque and record it in its cash book. The bank may take additional time to process the cheque.
During this period, the cash book may show a higher balance than the bank statement.
Banks may deduct service charges or other applicable fees from an account. If the organisation has not yet entered these charges in its cash book, the bank statement will show a lower balance.
A bank may add interest to an account. If the organisation has not recorded this amount, the bank statement may show a higher balance.
Customers may deposit money directly into the organisation's bank account. The organisation may not immediately know about the transaction, even though the bank has processed it.
Some payments may be deducted automatically from an account. Examples include authorised standing instructions or recurring payments.
If the organisation has not recorded the transaction, a difference will arise.
An organisation or bank may record an incorrect amount or make another processing error. Such differences require investigation and appropriate correction rather than simply being treated as timing differences.
| Reason for difference | Initial effect on cash book and bank statement | What needs to be checked |
|---|---|---|
| Cheque issued but not presented | Cash book balance may be lower | Whether the cheque has been processed |
| Cheque deposited but not credited | Cash book balance may be higher | Whether the deposit has been credited |
| Bank charges not recorded | Bank statement balance may be lower | Bank charge entry |
| Interest not recorded | Bank statement balance may be higher | Interest credit |
| Direct deposit not recorded | Bank statement balance may be higher | Source and amount of deposit |
| Automatic payment not recorded | Bank statement balance may be lower | Authorisation and payment details |
| Recording error | Depends on the error | Original transaction and supporting records |
A systematic process makes BRS preparation easier. Students should first identify the starting balance, examine the transactions and then apply the appropriate adjustments.
Collect the cash book and bank statement for the same account and reconciliation date.
Check that both records cover the correct period. Using records from different dates can create unnecessary confusion.
Determine whether the question asks you to start with:
Balance as per cash book, or
Balance as per bank statement.
Read the question carefully because the starting point affects the direction of adjustments.
Match the entries in the cash book with the entries in the bank statement.
Identify transactions appearing in one record but not the other. Also check for differences in amounts and dates.
Group the differences according to their reasons, such as:
Cheques issued but not presented.
Cheques deposited but not credited.
Bank charges.
Interest credited.
Direct deposits.
Automatic payments.
Recording or bank errors.
Determine whether each item increases or decreases the balance being reconciled.
The treatment depends on the starting balance and the accounting method specified in the question.
Add the items that increase the starting balance and subtract the items that decrease it.
Check the calculations and make sure the adjusted balance agrees with the other record after considering all relevant differences.
One of the most common difficulties students face is deciding whether an item should be added or subtracted.
The easiest approach is to understand how the transaction affects the balance being used as the starting point.
The following table assumes that the BRS starts with a favourable balance as per the cash book.
| Item | Treatment when starting with cash book balance | Reason |
|---|---|---|
| Cheque issued but not presented | Add | Cash book has reduced the balance, but bank has not processed the payment |
| Cheque deposited but not credited | Subtract | Cash book has increased the balance, but bank has not credited the deposit |
| Bank charges not recorded | Subtract | Bank has reduced the balance |
| Interest credited but not recorded | Add | Bank has increased the balance |
| Direct deposit not recorded | Add | Bank has received the amount |
| Automatic payment not recorded | Subtract | Bank has deducted the amount |
Important: This table assumes a favourable cash book balance and a standard reconciliation approach. If the question starts with the bank statement balance, uses an overdraft or asks for an adjusted cash book first, the treatment must be reconsidered. Students should always establish the starting point before applying adjustments.
Let's understand the process through a simple example.
Question:
A business has a favourable bank balance of โน20,000 as per its cash book on 31 March. The following differences are identified:
Cheques issued but not presented for payment: โน4,000.
Cheques deposited but not yet credited by the bank: โน2,500.
Bank charges not recorded in the cash book: โน300.
Interest credited by the bank but not recorded in the cash book: โน200.
Prepare a Bank Reconciliation Statement.
Balance as per cash book = โน20,000.
Cheques issued but not presented: Add โน4,000.
Cheques deposited but not credited: Subtract โน2,500.
Bank charges: Subtract โน300.
Interest credited: Add โน200.
| Particulars | Amount (โน) |
|---|---|
| Balance as per cash book | 20,000 |
| Add: Cheques issued but not presented | 4,000 |
| Add: Interest credited by bank | 200 |
| Subtotal | 24,200 |
| Less: Cheques deposited but not credited | 2,500 |
| Less: Bank charges | 300 |
| Balance as per bank statement | 21,400 |
Starting balance = โน20,000.
Total additions = โน4,000 + โน200 = โน4,200.
Total deductions = โน2,500 + โน300 = โน2,800.
Reconciled balance = โน20,000 + โน4,200 − โน2,800 = โน21,400.
Therefore, the balance as per the bank statement is โน21,400.
This example demonstrates the standard treatment of the listed items when starting with a favourable cash book balance. In an actual accounting exercise, students should also check whether any item has already been entered in the cash book.
Students often understand the individual transactions but make mistakes while preparing the final statement.
The following errors should be avoided:
Always identify whether the question provides the cash book balance or bank statement balance.
The treatment should be based on the effect of the transaction on the starting balance. Memorising a table without understanding the accounting perspective can cause mistakes.
Only relevant transactions and differences relating to the specified reconciliation date should be considered.
A bank statement is prepared from the bank's perspective. Its debit and credit entries may appear opposite to the organisation's cash book.
If a transaction has already been recorded in the cash book and processed by the bank, it should not be adjusted again without a valid reason.
Some differences are simply due to timing. Students should investigate the reason before deciding that a mistake has occurred.
Check additions, deductions and the final balance separately before completing the statement.
A BRS and an adjusted cash book are related but are not the same thing.
An adjusted cash book is prepared when the organisation updates its cash book for transactions or errors that have not yet been recorded. Examples may include bank charges, interest credited and direct payments.
A BRS is then prepared to explain the remaining differences between the updated cash book balance and the bank statement balance.
| Basis | Adjusted cash book | Bank Reconciliation Statement |
|---|---|---|
| Main purpose | Updates the organisation's cash book | Explains differences between two balances |
| Focus | Missing entries and relevant book errors | Remaining reconciling items |
| Bank charges | Usually recorded in the cash book | May be considered when starting from the unadjusted cash book |
| Interest credited | Usually recorded in the cash book | May be considered when starting from the unadjusted cash book |
| Output | Updated cash book balance | Reconciled balance |
| Preparation | Involves accounting entries in the cash book | Involves a reconciliation statement |
Students should follow the format required by their syllabus or examination question. Some questions ask for a direct BRS, while others require an adjusted cash book followed by a BRS.
Try solving the following exercise independently.
Question:
A business has a favourable balance of โน15,000 as per its cash book. The following differences are identified:
Cheques issued but not presented: โน3,000.
Cheques deposited but not credited: โน1,800.
Bank charges not recorded: โน150.
Interest credited by the bank but not recorded: โน250.
Prepare a Bank Reconciliation Statement.
| Particulars | Amount (โน) |
|---|---|
| Balance as per cash book | 15,000 |
| Add: Cheques issued but not presented | 3,000 |
| Add: Interest credited | 250 |
| Subtotal | 18,250 |
| Less: Cheques deposited but not credited | 1,800 |
| Less: Bank charges | 150 |
| Balance as per bank statement | 16,300 |
Answer: โน16,300.
Students should try to classify each item before checking the completed calculation. This develops understanding of the underlying accounting treatment rather than relying only on memorised rules.
Learning BRS becomes easier when students understand the accounting concepts that support it.
Here are some practical ways to improve:
Revise basic accounting terminology: Understand cash book, bank statement, debit, credit and favourable balance.
Practise transaction classification: Learn how deposits, withdrawals, charges and interest affect the bank balance.
Solve numerical questions regularly: Start with simple examples and gradually work with more complex differences.
Use a consistent statement format: Organise particulars and amounts in clearly labelled columns.
Check calculations independently: Recalculate the additions and deductions before finalising the answer.
Understand the accounting perspective: Remember that the bank statement and cash book are prepared from different viewpoints.
Study related accounting topics: Learn journal entries, ledgers, cash books and trial balances to strengthen the foundation.
Students exploring commerce and accounting can also review relevant learning options through EasyShiksha's Bookkeeping and Accounting course and Accountancy programme listings.
A Bank Reconciliation Statement is an important accounting tool that helps explain differences between an organisation's cash book balance and its bank statement balance. It allows students to understand how transaction timing, missing entries and recording errors can affect financial records.
The key to preparing an accurate BRS is to identify the starting balance, understand the reason for each difference and apply the correct addition or deduction. Students should focus on understanding the effect of each transaction rather than memorising adjustments without context.
With regular numerical practice and a clear understanding of cash books and bank statements, students can develop the confidence to prepare Bank Reconciliation Statements and strengthen their broader accounting knowledge.
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