Bank Reconciliation Statement
Bank Reconciliation Statement (BRS) teaches you to track down every rupee that appears in your cash book but not your bank statement — and vice versa — so your records are always trustworthy and fraud-proof.
Every CBSE board exam includes at least one BRS problem worth 6–8 marks, and in real life, any business that skips monthly reconciliation risks missing fraud, duplicate payments, and costly bank errors — skills you will use from your first accounting job or your own shop's books.
Concept
Lots of students think…
"Unpresented cheques and deposits in transit both reduce the bank statement balance, so you subtract both from the bank side when preparing a BRS."
Actually…
They move in opposite directions. An unpresented cheque means money you paid out hasn't left the bank yet — so the bank statement shows too much, and you subtract it. A deposit in transit means money you received hasn't arrived at the bank yet — so the bank statement shows too little, and you add it. Getting the direction right is the whole skill in BRS.
By the end of this chapter, you will understand why your cash book and bank statement never show the same balance — and exactly how to track down every rupee that explains the gap.
Two Books, One Account
Your business writes a cash book — your own record of every deposit and payment through your bank. The bank writes its own record, called a passbook or bank statement. Both books track the same account, yet their closing balances almost never match. That mismatch is completely normal.
Sunita runs a garment shop in Jaipur. On 31 March, her cash book shows ₹45,000 but her bank statement shows ₹42,500. Neither figure is wrong — they just capture the same account at different moments in time.
Timing Differences — Cheques in Transit
Most mismatches happen because of timing. When you write a cheque to pay someone, you record it immediately in your cash book. But the payment only leaves your bank account when the person deposits it and it clears — sometimes days later. Until then, the bank still shows that money in your account.
Ravi issues a ₹1,800 cheque to his spare-parts supplier on 27 April. Ravi's cash book balance drops by ₹1,800 at once. The supplier only banks it on 2 May — so until then, Ravi's bank statement still shows ₹1,800 more than his cash book. This is called an unpresented cheque.
Timing Differences — Deposits Not Yet Credited
The opposite also happens. You deposit a customer's cheque and record it in your cash book right away. But the bank may not credit your account until the next working day. For that one day, your cash book shows more money than the bank statement does. This is called a deposit in transit.
Priya deposits a ₹3,000 cheque from a customer on 31 March at 4 pm. She writes it in her cash book immediately. The bank only credits her account on 1 April — so on 31 March, her bank statement is ₹3,000 lower than her cash book.
Bank-Side Items You Forgot to Record
Banks do things to your account without telling you instantly — automatic EMI payments, service charges, interest earned, or a dividend credited directly. You find out only when the bank statement arrives. Until you add these to your cash book, your own records are out of date.
Ravi's bank quietly deducts ₹500 as annual locker charges and credits ₹600 as interest — both on 30 April. Ravi never recorded either. So his cash book is ₹500 too high and ₹600 too low compared with reality. Once he spots them on the bank statement, he posts both in his cash book.
The Adjusted Cash Book Method
One way to prepare the BRS is to first bring your own cash book up to date. Add any bank interest or direct credits; deduct any bank charges or standing orders. This gives you the corrected cash book balance. Then adjust only for timing differences (unpresented cheques, deposits in transit) to reach the bank statement balance.
Sunita's cash book shows ₹45,000. She deducts ₹300 bank charges and ₹1,000 insurance standing order, then adds ₹600 bank interest. Corrected cash book = ₹44,300. She then confirms that ₹44,300 matches after adjusting the bank side for timing items — it does. BRS closed.
The Bank Statement Method
You can also start from the bank statement balance and work backwards. Add deposits in transit (bank hasn't credited them yet, so its balance is too low). Deduct unpresented cheques (bank hasn't paid them yet, so its balance is too high). The result must equal your corrected cash book balance.
Sunita's bank statement shows ₹42,500. She adds ₹3,000 (deposit in transit) and deducts ₹1,200 (unpresented cheque to her fabric supplier). Result: ₹44,300 — exactly what the adjusted cash book method gave. Both paths lead to the same true balance.
What Needs a Journal Entry and What Does Not
Timing differences like unpresented cheques and deposits in transit fix themselves automatically in the next statement — no journal entry needed. But items that were genuinely missing from your cash book — bank charges, standing orders, interest, or any recording error — need a journal entry to update your books.
Ravi does not write a journal entry for the unpresented ₹1,800 cheque — it will appear on next month's statement automatically. But he does write entries for the ₹500 locker charge, the ₹600 interest credit, and his ₹180 recording error, because those are permanent corrections his cash book must carry.
Notes
A Bank Reconciliation Statement (BRS) is a statement prepared on a particular date to explain, item by item, why the bank balance shown by a firm's own cash book (bank column) differs from the balance shown by the bank's pass book/statement. It does not form part of the double-entry books; it simply reconciles the two balances by adjusting for timing differences and unrecorded items so that both figures can be agreed.
Key terms & definitions
- Cash Book (Bank Column)
- The firm's own record of receipts into and payments out of its bank account. A debit balance here means a favourable (positive) balance; a credit balance means a bank overdraft.
- Pass Book / Bank Statement
- The copy of the customer's account maintained by the bank. From the bank's viewpoint the customer is a creditor, so a customer's deposit is a credit balance (favourable) and an overdraft is a debit balance in the pass book.
- Bank Reconciliation Statement (BRS)
- A statement prepared on a specific date to reconcile the cash book bank balance with the pass book balance by listing and adjusting the items that cause the difference between them.
- Unpresented / Outstanding Cheque (Cheque Issued but Not Yet Presented)
- A cheque the firm has issued and entered (deducted) in its cash book, but which the payee has not yet presented for payment, so the bank has not yet reduced the balance. Until it is cleared, the pass book shows a higher balance than the cash book.
- Uncredited Cheque / Deposit in Transit (Cheque Deposited but Not Yet Collected)
- A cheque the firm has deposited and entered (added) in its cash book, but which the bank has not yet collected and credited. Until it clears, the pass book shows a lower balance than the cash book.
- Bank Charges
- Amounts the bank debits to the customer's account for services (e.g., commission, ledger folio, collection charges). The bank records them at once; the firm records them only when it sees the statement, so till then the cash book balance is higher.
- Standing Order / Direct Debit
- A standing instruction under which the bank makes recurring payments (insurance premium, loan EMI, rent) on the firm's behalf. The bank debits the account immediately; the cash book is updated later.
- Direct Deposit / Direct Credit
- Amounts credited straight into the account by the bank (interest allowed, dividend, or money paid in directly by a customer). The bank records them at once; the cash book records them later, so till then the pass book balance is higher.
- Dishonoured Cheque
- A deposited cheque (or bill) that the bank fails to collect because it bounces. The firm had already added it in the cash book; on dishonour the bank reverses it, so the pass book balance falls below the cash book.
- Bank Overdraft
- A negative bank balance that arises when the firm has withdrawn more than it deposited. It is a credit balance in the cash book and a debit balance in the pass book (an amount owed by the firm to the bank).
- Favourable Balance
- A positive bank balance: a debit balance as per the cash book and the same figure as a credit balance as per the pass book.
Meaning and need for a BRS
- Two separate records are kept of the same bank account: the firm keeps the bank column of its cash book, and the bank keeps the customer's pass book/statement.
- On any given date the two closing balances rarely match, even when no mistake has been made; this is normal, not necessarily an error.
- A BRS is prepared to find and explain the reasons for the difference and to satisfy that, after adjustments, both balances are correct.
- It is a memorandum statement (a working), not a ledger account, and does not pass any journal entry by itself.
- Benefits: it locates errors and omissions in either book, detects delays and frauds, brings the cash book up to date, and confirms the true bank balance.
Why the two balances differ — three causes
- Timing differences: the same transaction is recorded on different dates by the firm and the bank (e.g., cheques issued but not yet presented, cheques deposited but not yet collected).
- Transactions recorded by the bank but not yet by the firm: bank charges, interest charged on overdraft, standing orders/direct debits paid, interest allowed and other direct credits, collections made directly by the bank.
- Errors and omissions: a wrong amount, a wrong side, or a missing entry in either the cash book or the pass book.
- Most reconciling items are timing differences and self-correct in the next period; items missing from the cash book (charges, interest, standing orders, errors) need a correcting/journal entry.
Relationship between cash book and pass book balances
- A favourable balance is a DEBIT balance in the cash book and a CREDIT balance in the pass book; the two are the same amount but appear on opposite sides because the bank treats the customer as a creditor.
- An overdraft is a CREDIT balance in the cash book and a DEBIT balance in the pass book.
- Therefore an item that increases the firm's balance in the cash book reduces the difference seen from the pass book and vice versa — this opposite viewpoint is the key to deciding add or less.
Items that make the PASS BOOK balance higher than the cash book
- Cheques issued but not yet presented for payment (the cash book is already reduced; the bank has not yet paid).
- Cheques/amounts paid directly into the account by customers that the firm has not yet recorded.
- Interest allowed by the bank and other direct credits (dividends, interest on investments) not yet entered in the cash book.
- Bills receivable / cheques collected by the bank on the firm's behalf and credited, but not yet entered by the firm.
Items that make the CASH BOOK balance higher than the pass book
- Cheques deposited but not yet collected/credited by the bank (cash book already increased; bank not yet).
- Bank charges, commission and interest on overdraft debited by the bank but not yet recorded by the firm.
- Standing orders / direct debits (insurance, EMI, subscriptions) paid by the bank but not yet recorded by the firm.
- Cheques deposited and entered in the cash book that were later dishonoured / returned by the bank.
- A cheque entered in the cash book but omitted to be sent to or banked at the bank.
Methods of preparing a BRS
- Statement method (most common in exams): start from one given balance (cash book OR pass book) and adjust each item to arrive at the other balance.
- When you start from one balance, ask for each item: 'Does the OTHER book already show this, and is the OTHER balance therefore higher or lower?' Add the items that make the other balance higher; subtract those that make it lower.
- Adjusted (amended) cash book method: first correct the cash book for items the bank has already recorded (add interest/direct credits, deduct charges/standing orders/dishonoured cheques) to get the adjusted cash book balance; then prepare the BRS using only the remaining timing items (unpresented and uncredited cheques) to reach the pass book balance.
- Both methods must give the same agreed (true) balance.
Starting from a FAVOURABLE cash book balance (Dr.) → find pass book balance
- ADD: cheques issued but not yet presented; interest/dividends credited by the bank; amounts directly deposited by customers; bank collections credited but not recorded — all make the pass book higher.
- LESS: cheques deposited but not yet credited; bank charges and interest on overdraft; standing orders/direct debits paid by the bank; cheques deposited that were dishonoured — all make the pass book lower.
- Rule of thumb: items that 'add to the bank' from its side are added; items that 'reduce the bank' from its side are subtracted.
Starting from a FAVOURABLE pass book balance (Cr.) → find cash book balance
- Reverse every direction used above: what is ADDED when starting from the cash book is LESS when starting from the pass book, and vice versa.
- LESS: cheques issued but not yet presented; interest/dividends and direct credits not in the cash book; direct deposits by customers.
- ADD: cheques deposited but not yet credited; bank charges; standing orders paid by the bank; dishonoured cheques.
Overdraft balances — the signs flip
- An overdraft means a NEGATIVE balance, so the logic of add/less reverses compared with a favourable balance; the safest approach is to put a minus sign on the overdraft and treat additions and subtractions algebraically, then read the answer's sign.
- Starting from an overdraft as per cash book (Cr.): ADD cheques deposited but not credited, bank charges, standing orders, dishonoured cheques (they increase the overdraft); LESS cheques issued but not presented and direct credits (they reduce the overdraft).
- Starting from an overdraft as per pass book (Dr.): ADD cheques issued but not presented and direct credits; LESS cheques deposited but not credited, bank charges, standing orders, dishonoured cheques.
- Tip: write 'Overdraft as per Cash Book' as a negative figure at the top; if the final figure is still negative it remains an overdraft, if it turns positive it has become a favourable balance.
Treatment of errors
- Identify in WHICH book the error was made (cash book or pass book) and start the BRS from the OTHER book's balance, or adjust the side that contains the error.
- An undercast/overcast or wrong entry in the cash book is corrected on the cash-book side; an error in the pass book is corrected on the pass-book side.
- Example: a payment of ₹1,200 recorded in the cash book as ₹1,020 means the cash book balance is overstated by ₹180, so deduct ₹180 when reconciling from the cash book balance.
Adjusted cash book method — what to post and what not to
- Post into the amended cash book only the items the bank has ALREADY actioned but the firm has not: interest/dividends credited (debit side), and charges, interest on overdraft, standing orders and dishonoured cheques (credit side).
- Do NOT post pure timing differences (unpresented cheques and uncredited cheques) into the cash book — they will appear automatically next period; carry them into the BRS instead.
- Correct any cash-book errors here too; the resulting balance is the adjusted cash book balance, which is the true balance the BRS then reconciles to the pass book.
Formulas & formats
- There is no algebraic 'formula'; the BRS is a structured statement. Standard heading: 'Bank Reconciliation Statement as on <date>'.
- STARTING FROM FAVOURABLE CASH BOOK BALANCE (Dr.) to reach PASS BOOK balance: Balance as per Cash Book (Dr.) ......................... XXX ADD: Cheques issued but not yet presented ............ + Interest/dividend credited by bank, not in cash book + Amounts directly deposited by customers .......... + LESS: Cheques deposited but not yet credited .......... − Bank charges / interest on overdraft ............. − Standing orders / direct debits paid by bank ..... − Cheques deposited but dishonoured ................ − = Balance as per Pass Book (Cr.) ...................... XXX
- STARTING FROM FAVOURABLE PASS BOOK BALANCE (Cr.) to reach CASH BOOK balance — every sign above is REVERSED: Balance as per Pass Book (Cr.) ........................ XXX ADD: Cheques deposited but not yet credited .......... + Bank charges / standing orders / dishonoured chq . + LESS: Cheques issued but not yet presented ............ − Interest/dividend & direct credits ............... − = Balance as per Cash Book (Dr.) ..................... XXX
- STARTING FROM OVERDRAFT AS PER CASH BOOK (Cr.) to reach PASS BOOK overdraft (write the overdraft as a negative figure): Overdraft as per Cash Book ............................ (XXX) ADD (increase overdraft): cheques deposited not credited; bank charges; standing orders; dishonoured cheques + LESS (reduce overdraft): cheques issued not presented; interest/direct credits − = Overdraft as per Pass Book .......................... (XXX)
- STARTING FROM OVERDRAFT AS PER PASS BOOK (Dr.) to reach CASH BOOK overdraft — signs are the reverse of the line above: ADD: cheques issued not presented; interest/direct credits. LESS: cheques deposited not credited; bank charges; standing orders; dishonoured cheques.
- ADJUSTED CASH BOOK then BRS: Step 1 — Amended Cash Book: opening cash book balance + interest/direct credits − bank charges − standing orders − dishonoured cheques ± error corrections = Adjusted Cash Book balance. Step 2 — BRS: Adjusted Cash Book balance + cheques issued not presented − cheques deposited not credited = Pass Book balance.
- Memory aid: 'Whatever you ADD going one way, you LESS going the other way; for an overdraft, flip the signs once more.'
Important questions & model answers
What is a Bank Reconciliation Statement, and why is it prepared?
1 mark- It is a statement prepared on a particular date to reconcile the bank balance shown by the cash book with that shown by the pass book.
- It is prepared to identify and explain the reasons for the difference between the two balances and to confirm the correct bank balance.
State the relationship between the cash book balance and the pass book balance for (a) a favourable balance and (b) an overdraft.
1 mark- Favourable balance: debit balance in the cash book = credit balance in the pass book (same amount, opposite sides).
- Overdraft: credit balance in the cash book = debit balance in the pass book.
Give any three reasons why the cash book balance may be higher than the pass book balance.
3 marks- Cheques deposited into the bank but not yet collected/credited (cash book already increased, bank not yet).
- Bank charges, commission or interest on overdraft debited by the bank but not yet recorded by the firm.
- Standing orders/direct debits paid by the bank, or cheques deposited that were later dishonoured, not yet recorded in the cash book.
Explain why an unpresented (outstanding) cheque and a deposit in transit are adjusted in opposite directions on the bank/pass-book side.
3 marks- When a cheque is issued, the cash book is reduced at once but the bank reduces its balance only when the cheque is presented; until then the pass book is HIGHER, so an unpresented cheque is ADDED to a favourable cash book balance (or deducted from the pass book balance).
- When a cheque is deposited, the cash book is increased at once but the bank credits it only on collection; until then the pass book is LOWER, so a deposit in transit is DEDUCTED from a favourable cash book balance (or added to the pass book balance).
- Because one item makes the pass book too high and the other makes it too low, they are treated in opposite directions.
Distinguish between the cash book and the pass book (any three points).
3 marks- Maintained by: the cash book is written by the firm/account holder; the pass book is written by the bank.
- Nature of balance: a favourable balance is a debit in the cash book but a credit in the pass book.
- Recording time: many items (charges, interest, standing orders) are recorded by the bank first and by the firm later, which is why the two balances differ on a given date.
On 31 March 2025, Meena's cash book (bank column) shows a debit balance of ₹52,000. Prepare a BRS to find the pass book balance, given: (i) cheques issued but not yet presented ₹6,000; (ii) cheques deposited but not yet credited ₹4,200; (iii) bank charges ₹250 not recorded in the cash book; (iv) interest allowed by the bank ₹800 not recorded in the cash book; (v) insurance premium paid by the bank under standing order ₹1,500 not recorded in the cash book.
4 marks- Start: Balance as per Cash Book (Dr.) = ₹52,000.
- ADD cheques issued but not presented ₹6,000 (pass book higher) → 58,000.
- ADD interest allowed by bank ₹800 (pass book higher) → 58,800.
- LESS cheques deposited but not credited ₹4,200 (pass book lower) → 54,600.
- LESS bank charges ₹250 (pass book lower) → 54,350.
- LESS insurance premium under standing order ₹1,500 (pass book lower) → 52,850.
- Balance as per Pass Book (Cr.) = ₹52,850.
From the following, prepare a BRS as on 30 June 2025 starting from the PASS BOOK balance. Credit balance as per pass book ₹40,000; cheques issued but not yet presented ₹5,000; cheques deposited but not yet collected ₹3,500; bank charges debited by bank ₹200; a customer directly deposited ₹2,000 into the account, not recorded in the cash book.
4 marks- Start: Balance as per Pass Book (Cr.) = ₹40,000.
- Reverse the cash-book directions: LESS cheques issued but not presented ₹5,000 → 35,000.
- LESS amount directly deposited by customer ₹2,000 (already in pass book, not in cash book) → 33,000.
- ADD cheques deposited but not credited ₹3,500 → 36,500.
- ADD bank charges ₹200 → 36,700.
- Balance as per Cash Book (Dr.) = ₹36,700.
On 31 December 2025, the bank column of Rahul's cash book shows an OVERDRAFT of ₹18,000. Prepare a BRS to find the pass book balance. (i) Cheques issued but not presented ₹7,000; (ii) cheques deposited but not yet credited ₹4,000; (iii) bank charges ₹300; (iv) interest on overdraft charged by bank ₹1,200; (v) a cheque of ₹2,500 deposited and entered in the cash book was dishonoured.
6 marks- Write the overdraft as a negative figure: Overdraft as per Cash Book = (₹18,000).
- Items that INCREASE the overdraft are added; items that REDUCE it are subtracted.
- LESS cheques issued but not presented ₹7,000 (reduce overdraft): −18,000 + 7,000 = (11,000).
- ADD cheques deposited but not credited ₹4,000 (increase overdraft): −11,000 − 4,000 = (15,000).
- ADD bank charges ₹300 (increase overdraft): (15,300).
- ADD interest on overdraft ₹1,200 (increase overdraft): (16,500).
- ADD dishonoured cheque ₹2,500 (increase overdraft): (19,000).
- Result is negative, so Overdraft as per Pass Book = ₹19,000 (a debit balance in the pass book).
Worked example (full BRS in correct format). On 31 March 2025, Priya's cash book (bank column) shows a debit balance of ₹28,500 while her pass book shows ₹27,700. Reconcile using the bank/pass-book (statement) method: (a) a customer's cheque of ₹2,200 deposited on 29 March not yet credited; (b) a supplier's cheque of ₹1,800 issued on 28 March not yet presented; (c) bank charges of ₹400 not yet entered in the cash book.
6 marks- Heading: Bank Reconciliation Statement of Priya as on 31 March 2025.
- Particulars — Plus (+) / Minus (−) columns:
- Balance as per Cash Book (Dr.) ........................ + 28,500
- Add: Cheque issued but not yet presented (b) .......... + 1,800
- Less: Cheque deposited but not yet credited (a) ....... − 2,200
- Less: Bank charges not recorded in cash book (c) ...... − 400
- Balance as per Pass Book (Cr.) ........................ = 27,700
- Check: 28,500 + 1,800 − 2,200 − 400 = 27,700, which equals the given pass book balance, so the statement reconciles.
- Note for posting: bank charges ₹400 are not a timing difference; the firm must pass a journal entry — Bank Charges A/c Dr 400; To Bank A/c 400 — to bring the cash book up to date. The two cheques are timing differences and need no entry.
Exam tips
- Always write a proper heading with the firm's name and the date: 'Bank Reconciliation Statement as on …'.
- First read the question to identify (a) which balance is given — cash book or pass book — and (b) whether it is favourable or an overdraft; this decides every sign.
- Golden rule: whatever you ADD when starting from the cash book, you SUBTRACT when starting from the pass book (and vice versa). For an overdraft, the signs flip once more.
- For overdrafts, the cleanest method is to put a minus sign on the opening overdraft and add/subtract algebraically; a negative answer is still an overdraft, a positive answer is a favourable balance.
- Use two amount columns (Plus and Minus) so the marker can follow your additions and subtractions clearly.
- Show working notes for any item that is recorded for a different (wrong) amount — state by how much and on which side the balance is over/understated.
- Remember which items need a journal entry (charges, interest, standing orders, dishonoured cheques, cash-book errors) and which do not (unpresented and uncredited cheques).
Quick revision
- BRS reconciles the cash book bank balance with the pass book balance on a given date; it is a working, not a ledger account.
- Favourable: Dr in cash book = Cr in pass book. Overdraft: Cr in cash book = Dr in pass book.
- Three causes of difference: timing differences, items recorded by bank not yet by firm, and errors.
- Cheques issued but not presented and direct credits make the PASS BOOK higher → add to a favourable cash book balance.
- Cheques deposited but not credited, bank charges, standing orders and dishonoured cheques make the CASH BOOK higher → subtract from a favourable cash book balance.
- Starting from the pass book balance reverses all the above signs; an overdraft reverses them once more.
- Adjusted cash book method: post bank-recorded items and errors into the cash book first, then reconcile only the unpresented/uncredited cheques to the pass book.
- Timing differences self-correct next period and need no entry; charges, interest, standing orders, dishonoured cheques and cash-book errors do need a correcting entry.
The full picture
Your business keeps a cash book — a running record of every deposit and payment through your bank account. The bank keeps its own record, called a passbook or bank statement. Both books track the same account, yet on any given date their closing balances almost never match. That mismatch is not an error to panic over; it is normal, and the Bank Reconciliation Statement (BRS) is the tool you use to explain it completely.
Why do the two balances differ? The most common reason is timing. Suppose you write a cheque to your stationery supplier on Monday and immediately record it in your cash book. Your balance drops. But the supplier only deposits that cheque at his bank on Friday, and it clears your account on Saturday. Until Saturday, the bank's records still show that money in your account — so the bank statement shows a higher balance than your cash book. This is called an unpresented cheque or outstanding cheque. The opposite happens when you deposit a customer's cheque late on a working day — you record it immediately, but the bank credits it only on the next business day, creating a deposit in transit.
A second category of differences comes from items the bank records before you do. Standing instructions (for example, an automatic EMI payment for a business loan), bank charges, interest earned, or direct credit of dividends — all appear on your bank statement as soon as they happen. You find out only when the statement arrives. Until you post them in your cash book, they sit as reconciling items. Mistakes in either set of records — wrong amounts, wrong account debited — create a third, less common, category.
There are two standard methods for preparing a BRS. In the adjusted cash book method, you bring your own cash book up to date first by adding things like bank interest and deducting bank charges; then you prepare the BRS starting from this corrected cash book balance and adjusting for timing differences (cheques not yet presented, deposits not yet credited) to arrive at the bank statement balance. In the bank statement method, you start directly with the bank statement balance and work backwards: add deposits in transit (bank has not yet credited them, so its balance is low), deduct unpresented cheques (bank has not yet paid them, so its balance is inflated). Either method must produce the same true, agreed balance.
Here is a complete example that shows both methods converging. Sunita runs a garment shop in Jaipur. On 31 March, her cash book shows ₹45,000 and the bank statement shows ₹42,500. Five items explain the gap: (1) a customer's cheque of ₹3,000 deposited on 31 March but not yet credited by the bank (deposit in transit); (2) a cheque of ₹1,200 issued to a fabric supplier on 25 March, not yet presented (unpresented cheque); (3) bank service charges of ₹300 debited by the bank but not yet entered in Sunita's cash book; (4) a standing order of ₹1,000 for shop insurance paid by the bank but not yet recorded by Sunita; (5) bank interest of ₹600 credited by the bank directly to Sunita's account, not yet recorded in her cash book. Bank statement method: ₹42,500 + ₹3,000 (deposit in transit) − ₹1,200 (unpresented cheque) = ₹44,300. Adjusted cash book method: ₹45,000 − ₹300 (bank charges) − ₹1,000 (standing order) + ₹600 (bank interest) = ₹44,300. Both sides reach ₹44,300 — this is the true cash balance. The lesson: every reconciling item belongs on exactly one side, and when you have listed them all correctly the two methods always agree.
When you finally identify all differences and both sides agree, the BRS is complete. The true balance you arrive at is what you would see in your accounting records after all adjustments are posted. Items that are only timing differences — like unpresented cheques and deposits in transit — will correct themselves automatically in the next statement period, so you need no journal entry for them. But cash book errors, bank charges, and standing orders all require journal entries to update your books.
An Indian example
Ravi owns a small electronics repair shop in Pune and checks his cash book on 30 April. His cash book shows ₹38,000; his bank statement shows ₹36,200. Ravi lists what is different: he deposited a customer's cheque of ₹2,500 on 29 April that the bank hasn't credited yet (deposit in transit); he issued a ₹1,800 cheque to his spare-parts supplier on 27 April that the supplier hasn't deposited (unpresented cheque); and the bank quietly deducted ₹500 in annual locker charges that Ravi forgot to record. Bank statement method: ₹36,200 + ₹2,500 (deposit in transit) − ₹1,800 (unpresented cheque) = ₹36,900. Adjusted cash book: ₹38,000 − ₹500 (locker charges) = ₹37,500. These don't match — Ravi hunts further and finds the bank credited ₹600 of interest directly, which he hadn't entered. He adds it to his cash book: ₹37,500 + ₹600 = ₹38,100. Still off. He rechecks and finds that his ₹1,200 payment to an electrician was incorrectly entered as ₹1,020 in his cash book (understated by ₹180 — so his cash book balance is overstated by ₹180). Correcting: ₹38,100 − ₹180 = ₹37,920. Still off — the bank side stands at ₹36,900, so ₹1,020 remains unexplained. Ravi scans the statement one last time and spots a standing order of ₹1,020 for his business loan EMI that the bank paid on 28 April but he never recorded. A standing order paid by the bank but missing from the cash book is a cash-book-side deduction, so he subtracts it: ₹37,920 − ₹1,020 = ₹36,900. Now both sides agree: the bank statement method already gave ₹36,200 + ₹2,500 (deposit in transit) − ₹1,800 (unpresented cheque) = ₹36,900, and the fully adjusted cash book is ₹36,900 too. The BRS is closed. What this story shows: real reconciliations take patience, a systematic list, and the courage to keep looking when the first attempt doesn't balance.
Key concepts covered
- Reasons for differences
- Adjusted cash book
- BRS preparation
Common misconceptions to watch for
- Many students think: if the cash book balance is HIGHER than the bank statement, the bank has made an error or owes you money. Correction: the most likely explanation is that you have deposits in transit — cheques or cash you deposited and recorded in your cash book, but the bank has not yet credited them. Your cash book already shows the inflow, but the bank statement still shows a lower amount because the credit hasn't been processed yet. The bank isn't wrong; it simply hasn't processed those inflows yet.
- Students often believe that the bank statement balance is the 'real' or 'correct' balance and the cash book only needs to be updated to match it. Correction: neither balance alone is fully correct before reconciliation. The true cash balance is what both sides arrive at AFTER adjusting for all timing differences and errors — it may equal neither the original cash book figure nor the original bank statement figure.
- A very common exam mistake is to treat unpresented cheques (cheques you issued but the payee hasn't deposited) and deposits in transit (cheques you deposited but the bank hasn't credited) as adjustments in the same direction. Correction: they move in opposite directions. An unpresented cheque makes the bank statement balance too HIGH (the money hasn't left the bank yet), so you deduct it from the bank side. A deposit in transit makes the bank statement balance too LOW (the money hasn't arrived at the bank yet), so you add it to the bank side.
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Questions
Priya's bookshop in Bangalore recorded a cash book balance of ₹28,500 on 30 June 2025. Her bank statement shows ₹27,700. A customer cheque of ₹2,200 was deposited on 29 June but not yet credited by the bank; a supplier cheque of ₹1,800 issued on 28 June has not yet been presented; bank charges of ₹400 appear on the statement but have not yet been entered in Priya's cash book. Prepare a bank reconciliation statement using the bank statement method.
- 1Start with the bank statement balance
Bank statement balance = ₹27,700
Under the bank statement method, we begin with the passbook balance and adjust for timing differences. The bank charges of ₹400 are already reflected in this figure (the bank deducted them), so they do not appear on the bank statement side of the reconciliation.
Question 1 of 5 · easy
Arun's cash book shows ₹50,000 on 15 October. His bank statement shows ₹48,500. A cheque of ₹1,500 was deposited on 14 October but not yet credited by the bank. Using the bank statement method, what adjustment is made?
Quiz
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Question 1 of 5 · easy
Arun's cash book shows ₹50,000 on 15 October. His bank statement shows ₹48,500. A cheque of ₹1,500 was deposited on 14 October but not yet credited by the bank. Using the bank statement method, what adjustment is made?
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