Preparation of Bank Reconciliation Statement without adjusting Cash Book Balance

The Core Idea

A Bank Reconciliation Statement (BRS) is a statement that explains why the bank balance shown in the cash book differs from the balance shown in the passbook. The method described here — preparing the BRS without first adjusting the cash book balance — takes the balance as it stands in one book (either the cash book or the passbook) as the starting point, and then adds or subtracts items to arrive at the balance shown by the other book.

This approach does not correct the cash book itself. It simply reconciles the two balances by listing the items that cause the difference. The cash book is left untouched; only the statement is prepared.

---

Understanding Favourable and Unfavourable Balances

Before you begin, you must be clear about what each balance means.

Favourable balance means the business has money in the bank. In the cash book, this is a debit balance (because bank is an asset, and an increase in an asset is debited). In the passbook, this same situation appears as a credit balance (because from the bank's perspective, the customer's account is a liability — the bank owes the customer that money).

Unfavourable balance means the business has overdrawn its account — it owes the bank. In the cash book, this is a credit balance (bank overdraft is a liability). In the passbook, this appears as a debit balance (often marked 'Dr' or 'OD').

---

The Four Possible Starting Situations

When preparing a BRS without adjusting the cash book, you can face any of these four cases:

1. Debit balance (favourable) as per cash book is given — you need to find the balance as per passbook.
2. Credit balance (favourable) as per passbook is given — you need to find the balance as per cash book.
3. Credit balance (unfavourable/overdraft) as per cash book is given — you need to find the balance as per passbook.
4. Debit balance (unfavourable/overdraft) as per passbook is given — you need to find the balance as per cash book.

---

General Steps for Dealing with Favourable Balances

When the starting balance is favourable (money in the bank), follow these steps:

1. Write the date of the statement at the top.
2. Start with the balance as per cash book (or, alternatively, as per passbook — the choice is yours).
3. Deduct cheques deposited but not yet collected by the bank.
4. Add cheques issued but not yet presented for payment.
5. Add amounts directly deposited into the bank account by customers or others.
6. Add credits given by the bank (e.g., interest collected, dividends collected).
7. Deduct charges debited by the bank but not recorded in the cash book (e.g., bank charges, interest on overdraft, insurance premium paid on standing instructions).
8. Deduct cheques or bills dishonoured.
9. Make adjustments for any errors found in either book.
10. The resulting balance should match the balance as per the other book.

---

Dealing with Overdrafts (Unfavourable Balances)

An overdraft is treated as a negative figure. When the starting point is an overdraft, the logic of addition and subtraction is the same as for favourable balances, but you must be careful with the arithmetic.

---

Dealing with Errors

Errors in either the cash book or the passbook must be corrected in the BRS. The principle is: if an error has increased the balance in the book you are starting from, you must reverse its effect; if it has decreased the balance, you must add it back.

---

Key Points to Remember …