A Bank Reconciliation Statement (BRS) is needed to:
• Identify Differences: Bring out the reasons for the difference between the Cash Book (Bank Col) and Passbook balances.
• Check Accuracy: Verify the arithmetical accuracy of transactions recorded in both books.
• Detect Errors/Fraud: Highlight delays in clearance or undue debits, preventing embezzlement.

A Bank Overdraft is a facility where a bank allows a customer (usually current account holders) to withdraw money exceeding their deposit balance.
• Cash Book: Represented by a Credit Balance.
• Passbook: Represented by a Debit Balance (Unfavourable balance).

This occurs when the bank erroneously reduces the customer’s balance due to a clerical mistake.
Example: A cheque of ₹5,000 issued by “Ram & Sons” is wrongly processed and debited from “Ram Brothers” (our) account. This causes the Passbook balance to decrease while the Cash Book remains unchanged.

• Cheques issued but not yet presented: Entry made in Cash Book (Cr.) but not in Passbook until encashed.
• Cheques deposited but not yet collected/credited: Entry made in Cash Book (Dr.) but not in Passbook until funds clear.

A favourable balance as per Cash Book means a Debit Balance. It indicates that the business has money deposited in the bank (an Asset). It corresponds to a Credit balance in the Bank Passbook.

1. Record items appearing only in the Passbook (Bank charges, Interest, Direct deposits) in the Cash Book.
2. Rectify any errors committed in the Cash Book.
3. Calculate the new Adjusted/Amended Balance.
4. Prepare BRS using this adjusted balance and items of “Time Lag” only.

Definition: A Bank Reconciliation Statement (BRS) is a statement prepared on a particular date to reconcile the bank balance as per the Cash Book with the balance as per the Bank Passbook by showing the reasons for differences between the two.

Why it is prepared:

• To verify the accuracy of entries made in both books.
• To update the Cash Book by identifying transactions recorded only by the bank (e.g., bank charges, interest).
• To keep a check on the bank staff and the firm’s cashier to prevent fraud.
• To know the actual bank balance available for use.

The differences generally arise due to three categories:

• Cheques Issued but not Presented: Reduces Cash Book immediately, but Passbook decreases only when the payee visits the bank.
• Cheques Deposited but not Credited: Increases Cash Book immediately, but Passbook increases only upon clearance.

• Interest Credited: Bank adds interest; firm doesn’t know until statement arrives.
• Bank Charges/Interest Debited: Bank deducts charges; firm unaware.
• Direct Deposit by Customer: Increases Passbook balance directly.
• Direct Payments: Bank pays insurance premium/bills as per standing instructions.

• Errors in totaling or balancing the Cash Book.
• Errors committed by the Bank (Wrong debit or credit).

When preparing BRS with an Amended Cash Book, we first update the Cash Book to reflect the “True” bank balance before reconciling timing differences.

Process:
Step 1: Take the bank balance as per the existing Cash Book.
Step 2: Record transactions that are present in the Passbook but missing in the Cash Book (e.g., Bank charges, Interest allowed, Direct receipts, Direct payments).
Step 3: Rectify any errors committed in the Cash Book (e.g., casting errors, wrong posting).
Step 4: Balance the Cash Book to find the Adjusted/Corrected Cash Balance.
Step 5: Prepare the BRS using only the items of timing differences (Cheques issued but not presented, Cheques deposited but not cleared) and any bank errors.