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Published on:

June 30, 2024

Viraaj Vashishth

What is a Bank Reconciliation Statement (BRS)? A Step-by-Step Guide

At times does your company’s financial record look somewhat different from your bank statement? Enter the Bank Reconciliation Statement (BRS). Financial management necessitates this tool, for purposes of linking up your internal bookkeeping with bank records. In this guide, we will talk about what BRS is, its importance and how it can be prepared.

What is a Bank Reconciliation Statement?

A bank account reconciliation, also known as a bank reconciliation statement (BRS), compares the cash balance in a company’s balance sheet with the amount of money indicated on its bank statement so that any differences can be harmonized. For this reason, one has to tally what is recorded in the firm’s books and what is captured by the bank to ensure accuracy in recording all transactions made and eliminating any disparities.

The principal reason behind developing a BRS is to detect and correct discrepancies such as errors, omissions or unauthorized transactions. Outstanding checks, deposits in transit, service charges from banks, interest earned, direct debits and mistakes committed either by the company or the bank itself are some of the common causes of these problems.

The preparation of BRS plays an important role in maintaining accurate accounting records that promote transparency and prevent fraud. It is usually prepared monthly to have updated financial records which can then assist during financial statements preparation.

The Significance of Bank Reconciliation Statement

We can’t have accurate financial records if we don’t have BRS. This helps you to ensure a true representation of finances at hand by reconciling accounts and identifying any variations that may exist between the cash book and the bank statement. These could be as a result of deposits in transit, outstanding checks, etc.

That is why BRS is important as it brings them out into the open and enables rectification to be done on time. It also minimizes fraud cases because when reconciliation is regularly done some unusual happening or unauthorized transactions can be noticed earlier. Thus, a reconciled account illuminates cash flow for better financial planning and decision-making purposes.

Components of a Bank Reconciliation Statement

An Opening Balance is a starting point to open the book reconciling process, showing either the ledger balance or bank statement balance at the beginning of the period. The correction part covers all types of corrections that are needed for two accounts to be similar to each other e.g. additions for deposits in transit and deductions for outstanding checks etc. The Final Balance amount stands as a final reconciliation figure which ought to be arrived at after considering all other items explained above.

Types of Bank Reconciliation Statement

The types of bank reconciliation statements (BRS) can be classified according to the method and format. Below are the major categories:

1. Adjusted Method of Cash Book

This method applies adjustments to a company’s cash book for it to agree with the balance on the bank statement. Such adjustments refer to items like interest charges, direct debits not yet entered in the cash book and discounts given by banks. The final adjusted balance of the cash book should tally with that shown on the statement.

2. Adjusted Method of Bank Statement

In this method, records which have not been accounted for by the banks are reconciled against their official statements. These adjustments include deposits in transit, uncollected checks, and errors made by the bank. Upon adjustment of these figures, an equalization with the company's accounting system should be achieved.

3. Proof of Cash Method

Proof of cash reconciles opening balances and closing balances between bank statements and the cash book over a period. This type is used to ascertain that cash receipts; and disbursements are recorded accurately as compared through comparing them with each other from different sources such as the company’s books among others to detect any irregularities or mistakes during a specific period.

4. Partial Reconciliation

While full reconciliation compares the cash book with all entries contained in the bank statement, partial reconciliation focuses on single differences. This kind is used when there are issues known or disputes that have occurred or it is necessary to identify specific errors.

5. Full Reconciliation

Involving a comprehensive comparison of every item listed in the bank statement and those found in the cash book, full reconciliation ensures that every transaction is accounted for and any discrepancies are fully investigated and resolved.

6. Corrected Cash Book Method

This method involves correcting all differences found during the process of reconciliation by adjusting the cash book accordingly. To this effect, adjustments are recorded to bring into line with the bank statement’s figures while making sure that the corrected balance equals the bank balance.

7. Book to Bank Method

It reconciles book balance with bank balance by listing out all differences and explaining them; hence giving reasons behind each reconciling item as well as making financial records clear and accurate.

How to Prepare Bank Reconciliation Statement

Bank reconciliation statement (BRS) preparation is a process of steps followed sequentially to find and fix the differences between bank statements and the company's cash book. Here is a simple guide on how to prepare a BRS.

1. Gather Documents:

a. Collect the bank statements for the period being reconciled.

b. Get hold of the company’s cash book or ledger.

2. Compare Balances:

a. Take note of the end balance from the bank statement.

b. Take note of the end balance from the cash book.

3. Identify Unrecorded Transactions:

a. Find deposits in transit (deposits made but not yet recorded by the bank).

b. Spot outstanding checks (checks issued but not cleared by the bank yet) and follow the bank reconciliation statement formula given below.

4. Adjust Bank Statement Balance:

a. Add up deposits in transit.

b. Subtract outstanding checks.

c. Include/Exclude any bank errors.

‍Adjusted Bank Balance = Bank Statement Balance + Deposits in Transit − Outstanding Checks ± Bank Errors

5. Adjust Cash Book Balance:

a. Add any interest earned (if not yet recorded).

b. Deduct bank charges and fees.

c. Lower NSF (Not Sufficient Funds) checks.

d. Balance out for book errors.

Adjusted Cash Book Balance = Cash Book Balance + Interest Earned − Bank Charges − NSF Checks ± Book Errors

6. Reconcile Balances:

a. Match the adjusted cash book balance with the adjusted balance in the bank.

b. They ensure that the adjusted balances are equal to each other.

Sample Bank Reconciliation Statement

Bank Balance	Rs. 5,22,210	Book Balance	Rs. 5,02,510
Add: Deposits in transit, items recorded on book balance		Add: Interest revenue, other income recorded on bank balance
Less: Outstanding checks, items recorded on book balance	Rs.19,750	Less: Service charges, fees recorded on bank balance	Rs. 50
Adjusted bank balance	Rs. 5,02,460	Adjusted book balance	Rs. 5,02,460

Conclusion

A Bank Reconciliation Statement is an important tool that helps maintain proper records and facilitate the smooth running of business finances. Understanding why BRS is important, following this step-by-step guide, including the best practices, allows you to get valuable insights into cash flow patterns and the firm’s financial health which would help you make informed decisions on how to manage your money within organizations. You can also find relevant information and guidelines on their official website: Reserve Bank of India - Guidelines on Banking Operations

FAQs

1. Who prepares a bank reconciliation statement?

A bank reconciliation statement is prepared by a company's accountant or finance department.

2. Why is a bank reconciliation statement prepared?

It is made so that the company’s (cash book) records will agree with those of the banks (bank statement) as regards its financial transactions to identify any discrepancies or errors which need correction.

3. Why is bank reconciliation important?

Bank reconciliations ensure accurate financial records and detect discrepancies in case of errors or frauds hence assisting in managing cash flows and maintaining reliable financial statements too.

4. How often should bank reconciliation be performed?

It is usually done monthly but depending on transaction volumes and risk management practices companies might do it more frequently.

5. What are the possible causes of such discrepancies?

Some of such reasons include; outstanding checks, deposits in transit, bank fees, wrong postings or recording transactions and fraudulent acts on the bank accounts.

6. Can you give me some advice on what to do if I detect fraud?

Go straight to your banker and inform him/her about it. The type of fraud determines the liability rules applied in each case. By reporting in time, you can often reduce or even eliminate any liability arising from unauthorized use.

7. Is there anything wrong with not reconciling my bank statements?

Therefore, failure to reconcile implies that such a system might be investigating errors without being aware, could have been fraudulent activities could have occurred and financial statements may be incorrect leading to poor financial decision-making and tax reporting..

Updated on:

August 28, 2024