Understanding Bank Reconciliation Statement (BRS)

A Bank Reconciliation Statement (BRS) is a process that explains the difference between the balance shown in a company's Cashbook and the balance shown in the bank statement (Passbook) on a particular date. Differences arise due to various transactions that are recorded by one party (either the company or the bank) but not yet by the other.

Direct Payment by Customers Explained

One common reason for differences is a direct payment made by a customer into the company's bank account. In this situation:

• The customer deposits money directly into the bank.
• The bank records the deposit immediately, increasing the balance in the company's bank account (Passbook balance increases).
• The company is unaware of this deposit until they receive the bank statement or are otherwise notified. Therefore, the Cashbook balance does not reflect this receipt immediately (Cashbook balance remains lower).

Adjusting Balances in Bank Reconciliation

When preparing the BRS, we start with either the Cashbook balance or the Passbook balance and adjust it to arrive at the other balance.

Adjusting Passbook Balance

If you start with the balance as per Passbook and want to reach the balance as per Cashbook:

• The Passbook balance is higher because the direct payment has been added by the bank.
• The Cashbook balance is lower because the company hasn't recorded the receipt yet.
• To reconcile from the higher Passbook balance to the lower Cashbook balance, you must subtract the amount of the direct payment from the Passbook balance.
• Therefore, the Passbook balance will have to be decreased.

Adjusting Cashbook Balance

If you start with the balance as per Cashbook and want to reach the balance as per Passbook:

• The Cashbook balance is lower because the direct payment has not been recorded by the company.
• The Passbook balance is higher because the bank has recorded the deposit.
• To reconcile from the lower Cashbook balance to the higher Passbook balance, you must add the amount of the direct payment to the Cashbook balance.
• Therefore, the Cashbook balance will have to be increased.

Applying to the Question

The question asks: "While preparing Bank Reconciliation Statement, balance as per Passbook will have to be _____ or balance as per Cashbook _____ by the amount of direct payment by customers into Trader’s A/c with the banker."

Based on our analysis:

• Balance as per Passbook will have to be decreased.
• Balance as per Cashbook will have to be increased.

So the blanks should be filled with "decreased" and "increased" respectively.