The firm records all transactions relating to its bank account in the cash book. All deposits are shown in the bank column on the debit side of the cash book and all withdrawals on the credit side. The bank also maintains a separate account in its ledger for every customer. It credits the customer's account with all deposits made by him and debits it with all withdrawals. Thus, what is shown on the debit side of the cash book appears on the credit side of the customer's account in bank's ledger, and vice versa.

We have also learnt that the bank gives a pass book to every customer. The pass book is nothing but a copy of the customer's account in bank's ledger. It shows all deposits and withdrawals made by the customer. The customer sends the pass book to the bank from time to time and gets it updated. In case the bank does not provide a pass book, it sends a statement of account periodically to every customer. This serves the same purpose as the pass book. Normally, entries in the pass book (or the bank statement) would tally with those in the cash book, and their balances should also be the same.

But, in practice, they would generally differ. This may be because of some mistakes committed either by the firm or by the bank in recording the transactions. But the main reason why, on a particular date, the balance shown in the pass book differs from the balance shown in the cash book is that many transactions are not recorded on the same date in both of these books. 

For example, when the firm receives a cheque from a party and deposits it in the bank for collection, the entry is immediately made in the cash book. But the bank will credit the amount to the firm's account on the date when payment is received. Similarly, when a cheque is issued in favour of some party, the entry is immediately made in the cash book. But the bank will debit the customer's account only when the cheque is presented to the bank for payment. Thus, there is always some time lag between the date of recording the transaction in the cash book and the date on which it is recorded in customer's account in bank's ledger. So, on a particular date, the balances in these two books are bound to be different.

Let us assume that a firm in New Delhi opened a bank account on November 1, 1987 with Rs. 40,000. The bank gave them a pass book immediately. At this moment, both the cash book and the pass book would show the same balance i.e., Rs. 40,000. On November 2, the firm issued a cheque for Rs. 8,000 to a party in Bombay and sent it by registered post. The firm would record the appropriate entry immediately in the cash book. So his cash book balance on November 2, would stand reduced to Rs. 32,000. The party in Bombay received the cheque on November 4 and deposited it in their bank account on November 5. Let us assume it was received by the paying bank in New Delhi on November 8. The bank would debit firm's account on November 8. This means the balance in bank's ledger would continue to remain unchanged at Rs. 40,000 till November 8. So, if you compare the balance in the cash book with that of the pass book between November 2 and November 8, they will differ.

Now we can appreciate that the difference in balances of these two books has arisen simply because of the time lag. In any case, when you find that the balance in the pass book differs from the balance as per cash book, it becomes necessary to ascertain the exact causes of difference and reconcile the two balances. Only then you can be sure of the accuracy of entries in both the books. Therefore, every firm compares the entries in the cash book with those in the pass book periodically, and lists various causes of disagreement in the form of a statement called 'Bank Reconciliation Statement'.

Thus, Bank Reconciliation Statement can be defined as a statement which I reconciles the balance as per cash book and the balance as per pass book showing all causes of difference between the two.