I 9.8 Advantages of Bank Reconciliation Statement

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1 1 UNT 9 BANK RECONCLATON STATEMENT Structure 9.0 Objectives 9.1 ntroduction 9.2 Need for Reconciliation 9.3 Causes of Difference Transactions that Usually Appear in the Cash Book but not in the Pass Book Transactions that Usually Appear in the Pass Book but not in the Cash Book 9.4 Procedure for Ascertaining the Causes of DifFetence and Effects thereof Preparation of Bank Reconciliation Statement 9.6 Preparation of Bank Reconciliation Statement when there is Overdraft 9.7 Adjusting the Cash Book Balance 9.8 Advantages of Bank Reconciliation Statement 9.9 Let Us Sum Up 9.10 Key Words Some Useful Books Answers to Check Your Progress Exercises 9.13 Terminal Questions/Exercises 9.0 OBJECTVES After going through this unit, you should be able to: appreciate the need for reconciliation of cash book and pass book balances compare the cash book with the pass book and locate the causes of difference in their balances analyse the effect of each item causing the difference prepare a bank reconciliation statement adjust the cash book balance and prepare bank reconciliation statement with the adjusted balance explain the importance of a bank reconciliation statement 9.1 NTRODUCTON n Unit 8 you learnt about the advantages of maintaining a bank account and the methog of recording various banking transactions in Three Column Cash Book. You know that the bank gives a pass book or a statement of account which shows all entries in customer's account in bank's ledger. When the businessman receives the pass book he compares the entries shown in the pass book with those in his cash book. Quite often the balance shown in the pass book differs from the balance as per the cash book. n this unit, you will learn about the causes of this difference and the method of reconciling the balances of these two books with the help of a Bank Reconciliation Statement. 9.2 NEED FOR RECONCLATON t 36 You know that the firm records all transactions relating to its bank account in the

2 i.. 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. t 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. You 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 accowit in bank's ledger. t 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. n 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 bdoks are bound to be different. Let us assume that a firm in New Delhi opened a bank account on November 1, 1987 with 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., 40,000. On November 2, the firm issued a cheque for 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 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 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 you can appreciate that the difference in balances of these two books has arisen simply because of the time lag. n 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 reconciles the balance as per cash book and the balance as per pass book showing all causes of difference between the two. 9.3 CAUSES OF DFFERENCE The causes that lead to the disagreement of the balances in the cash book and the pass book can be classified as follows: Bank Reconciliation Statement 1 Transactions that usually appear in the cash book, but not in the pass book. 2 Transactions that usually appear in the pass book, but not in the cash book. 3.:

3 ~ooks of ~ccount-11 Let us, now discuss in detail the nature of these transactions and show how they cause the difference in the balances of these two books Transactions that Usually Appear in the Cash Book, but not in the Pass Book When you compare the cash book entries with their corresponding entries in the pass book, you will find a number of transactions which appear in the cash book but not in the pass book. Such transactions have been discussed below. a) Cheques deposited into bank but not yet collected: When a payment is received by cheque, the firm sends it to the bank for collection and records it immediately on the debit side of the cash book. This increases the bank balance as per cash book. But the bank will not credit the firm's account till the cheque is actually collected. So, the balance in the pass book remains unaffected till the proceeds of the cheque are collected and credited. Thus, on a particular date, it is possible that certain cheques which were sent for collection might not have been collected by the bank and so not shown in the pass book. All such cheques pending collection would make the cash book balance different from the pass book balance. For example, the firm sends a cheque of 2,000 on December 28, to the bank for collection. The cheque is collected on January 6. Now, if the balances as on December 3 1 are compared, they will be different because the credit of 2,000 will not appear in the pass book by December 3 1. b) Cheques issued but not yet presented for payment: Whenever a payment is made by cheque, the cash book is immediately credited. This reduces the balance in the cash book. But, it would always take some time before those cheques are actually presented for payment. The bank would debit the firm's account only when it actually pays the cheques. Hence, on a particular date, if there are some cheques still to be presented for payment, the pass book will not show their entries. Consequently, the balance in the pass book will be higher than the balance as per cash book on that date. 1 c) Cheques dishonoured but no entry made in the cash book: When cheques are sent to the bank for collection, they are entered in the cash book immediately. But, no entry appears in the pass book till such cheques are actually collected by the bank. Sometimes, for one reason or the other, the cheques deposited for collection get dishonoured. The bank returns such cheques to the firm. On receiving the dishonoured cheques from the bd, reverse entry must be passed in the cash book (refer section 8.6 in Unit 8). But, quite often, the firm fails to pass an entry for the dishonour of the cheque, or does so much later. n such a situation, the cash book will be showing a higher balance because no corresponding entry will appear in the pass book. d) Errors in the cash book: t is quite possible that while recording transactions in the cash book some errors have been committed. These errors can be a source of a disagreement between the balances in the two books. Examples of such errors are: i) A transaction, whether on the debit side or on the credit side, recorded more than once. ii) iii) iv) A transaction to be recorded on the debit side has been wrongly recorded on the credit side, or vice versa. Sometimes the firm maintains more than one bank account. t is possible that a cheque issued on one account has been wrongly recorded to the debit of another account. This would affect both the bank accounts. Errors committed in balancing the cash book, or carrying forward the balance to another page. a Transactions that Usually Appear in the Pass Book, but not in thecashbook There are many transactions which are initially recorded by the bank in its ledger. The firm records them in the cash book only when it receives the intimation from i i 1

4 the bank or when it notices them while going through the pass book. Thus, it is possible when the.pass book and the cash book are compared upto a particular date, there may be some entries which appear in the pass book but not in the cash book. Such transactions have been discussed below. a) nterest allowed by the bank,'if any: The banks normally do not allow any interest on the current account balances. Some banks may however allow nominal interest. When interest is allowed, the bank credits it to the customer's account. This increases the balance in the pass book. The firm would pass the corresponding entry in the cash book only when it receives the intimation from the bank or notices it in the pass book. Hence, the cash book balance will be lower till such entry is made. b) Amounts collected by the bank as per the standing instructio~~s: The businessman often issues standing instructions authorking his banker to collect on his behalf certain amounts due to lum, such as interest, dividends, etc. The bank credits the customer's account as and when it collects such amounts and sends the necessary intimation to him. The firm will pass the corresponding entry in the cash book when it receives such intimation. Sometimes the intimation may be misplaced and no entry is passed in cash book. Thus, as on the date of reconciliation, the balances as per the cash book will.be lower than the balance as per the pass book. c) Direct payments into the bank made by firm's customers: Sometimes, a, customer may directly deposit an amount into a firm's bank account. firm shall record it in the cash book only when it learns about such deposit. But the pass book would show the entry on the date of deposit itself. f by the date of reconciliation, such entry has not been passed in the cash book, the balance shown by pass book will be higher than the balance as per cash,book. Bank Reconciliation Statement d) Bank charges: Thc banks usually charge thc~r customers for various service\ provided by them. They may charge for collection of outstation cheques, for making or collecting payments on standing instructions, and so on. The bank debits the customer's account for such charges from time to time. However, the firm will know about these charges only when it goes through the pass book. So, on the date of reconciliation the pass book balance may differ from the balance as per cash book. e) nterest on overdraft: When a firm avails of an overdraft facility, the bank charges some interest which it debits to the firm's account periodically. This would reduce the balance or add to the overdraft depending upon the nature of balance in the bank. However, the corresponding entry for interest on overdraft would be passed in the cash book only when the pass book is received. So, there may be a disagreement of the two balances on the date of reconciliation. f) Payments made by the bank as per the standing instructions: The businessman issues standing instructions to his banker to make certain payments on his behalf such as insurance premium, rent, etc. When the banker makes such payments, he would immediately debit the customer's account. So, the balance in the pass book would get reduced. f the corresponding entries ayments have not been recorded in the cash book, the balance as per would remain unchanged. g) Discounted chequesfiills receivable dishonoured subsequently: Sometimes, when the businessman deposits some outstation cheques and wants payment immediately, he may request the bank to credit his account immediately withoub waiting for the actual collection. The bank usually obliges him by discounting the cheque. This means the bank deducts certain amount towards interest (called discount) and credits the remaining amount to his account. Subsequently, if for some reason, such a cheque is dishonoured, the bank would immediately debit the firm's account. But, the firm would pass the entry for the dishonour only when it receives the intimation from the bank. Thus, the balance as per cash book would d~ffer from the balance as per pass book till such entry has been passed. The same thing may happen when a discounted

5 Books of Account-11 bill receivable is dishonoured. h) Emrs in the pass book: The bank may also commit errors while recording the transactions in custo~ner's accounts which may lead to disagreement of the two balances. ~xaeles of such errors are: i) Omitting to record certain transactions in customer's account. ii) Recording of a transaction on the wrong side of firm's account. iii) Recording of a transaction in the wrong account where the firm has more than one account in the bank. iv) Recording of transactions which belong to some other customer in the firm's account. Check Your Progress-A 1 Give two examples of transactions which are usually recorded first in the cash book and later in the pass book. 2 Give two examples of transactions which are usually recorded first in the pass book and later in the cash book State whether each of the following statements is True or False. a) The-transactions recorded on the debit side of the cash book are entered on the credit side of the customer's account in the bank's ledger.... b) The debit balance in the bank column of the cash book should be equal to the debit balance in customer's account in the bank's ledger... c) The balance shown by the pass book and the balance shown by the bank column of the cash book generally differ.... d) Cheques deposited into the bank but not yet collected will increase the balance in the cash book as compared to the pass book...., e) Cheques issued but not yet presented for payment will reduce the balance in the pass book.... f) Direct payments by customers into the firm's bank account will increase the balance in the pass book as compared to the cash baok. g) Payments made by the bank on behalf of its customers will increase the balance in the pass book as compared to the cash book.... h) Bank charges are credited to customer's account in the bank's ledger PROCEDURE FOR ASCERTANNG THE CAUSES OF DFFERENCE AND EFFECTS THEREOF When you find a difference between the balance shown by the pass book and the balance as per the cash book, take the following steps to idenhfy the causes of the difference: i) Compare the items appearing on the debit side of the cash book with those on the credit side of the pass book (deposits column), and place a tick mark agabt items appearing in both the books.

6 ii) Compare the items appearing on the credit side of the cash book with those on Bank Reconciliation Statement the debit side of the pass book (withdrawals column), and place a tick mark against items appearing in both the books. n the process, you will observe that some items remained unticked. This means they do not appear in both the books. These will now be considered as those responsible for the difference in the balances of the two books. Look at llustration 1. t shows the cash book with the complete entries. Tick mark has been placed against each item appearing in both the books. Then the causes of difference have been analysed. llustration 1 Siyararn started his business on October 1,1987. He opened an account with State Bank of ndia with 40,000. Certain transactions took place during the month of October and were duly recorded in the cash book. He sent his pass book to the bank on October 3 1, and got it back duly completed. His cash book and the pass book are given below. dentify the causes of difference in the balances of these two books. Cash Book

7 Books omccount -11 Pass Book Solution: On comparing the cash book with the pass book, it is observed that the balance as per cash book is 13,000, while the balance as per pass book is 26,470. After making an entrywise comparison and pliicing a tick mark on all items appearing in both the books, we find the following: i) There is an unticked item of 3,000 on 0ctober-29 on the debit side of the cash book. t relates to a cheque received from Mr. Gupta which was deposited in the bank for collection. This does not appear in the deposits column of the pass book. t means the cheque had not been collected by October 3 1, and so not entered into the pass book. ii) n the deposits column of the pass book, there is an unticked item of 1,000 on October 31 for interest on securities collected by the bank as per standing instructions. This does not appear on the debit side of the cash book. iii) There is an unticked item of 16,000 on October 28, on the credit side of the cash book. t relates to a cheque issued in favour of Mr. Misra. This does not appear in the debit column of the pass book. iv) n the debit column of the pass book there are two unticked items on October 30:(1) payment of insurance premium by the bank as per standing instructions, 500, and (2) bank charges debited by the bank, 30. But there are no corresponding entries on the credit side of the cash book for these two items. Each of the above items appear only in one book i.e., either in the cash book or in the pass book. As such, these are the items which are responsible for the difference in the balances of the two books as on October Effect on Cash Book and Pass Book Balances You have identified the causes of difference in llustration 1. Let us now study the effect of each item on the balance as per cash book and the balance as per pass book. i) Cheque for 3,000 deposited in the bank but not yet collected: t has been duly entered on the debit side of the cash book. This increased the cash book balance immediately. Since it had not been collected by October 3 1, the pass

8 book balance remained unaffected, it did not increase. Hence the balance shown by the cash book would be higher by 3,000. ii) nterest on securities 1000, collected by the bank but not yet recorded in the cash book: 1t'has been entered in deposit column of the pass book. This increased the pass book balance immediately. Since the entry for this amount has not been made in the cash book by October 3 1, the cash book balance remained unaffected, it did not increase. Hence, the balance shown by the cash book would be lower by 1,000. iii) Cheque for 16,000 issued but not yet presented for payment: t has been duly entered on the credit side of the cash book. This decreqsed the cash book balance immediately. Since it had not been presented to the bank for payment by October 3 1, the pass book balance remained unaffected, it did not decrease. Hence, the balance shown by the cash book would be lower by 16,000. iv) nsurance Premium 500 paid by the bank but not recorded in the cash book: t has been entered in the withdrawal column of the pass book. This decreased the pass book balance immediately. Since it has not been credited in the cash book by October 3 1, the cash book balance remained unaffected, it did not decrease. Hence, the balance shown by the cash book would be higher by 500. v) Bank charges 30 debited by the bank but not yet recorded in the cash book: the effect of this item is similar to that of item no.(iv). The balance shown by the cash book would be higher by 30. We have analysed the effect of each item on the balances of these two books. Now you can reconcile the balance as per cash book with the balance as per pass book. You can do this in two ways: a) Take the balance as per cash book as the starting point. Adjust the effect of each item causing the difference, and you will arrive at the balance as per pass book. b) Take the balance as per book as the starting point. Adjust the effect of each item causing the difference, and you will arrive at the balance as per cash book. Generally, firms adopt the first method because the Bank Reconciliation Statement is primarily prepared for verification of the bank balance as per cash book. n case you start with cash book balance, all that you have to do is to add items which have been responsible for a lower balance in the cash book, and deduct those responsible for a higher balance. n llustration 1, for example, the cash book balance is less by 1,000 because interest on securities collected by the bank had not been recorded in the cash book. f you now add 1,000 to the existing cash book balance, it will have the same effect as if it had been duly recorded in cash book. Similarly, the cash book balance is higher by 3,000 because a cheque deposited in bank on October 24 had been immediately recorded in the cash book but it did not appear in the pass book. you now deduct 3,000 from the cash book balance, it shall have the same effect as if it had not been recorded in the cash book at all. n llustration 1, the existing cash book balance is 13,000 and the pass book. balance is 26,470. Let us now reconcile these two balances by taking cash book balance as the starting point and adjust the amounts on the lines?t:aested above. Balance as per Cash Book Add the amounts of item@) item@) 13,000 Bank Reconciliation Statement Deduct the amounts of 30, Balance as per Pass Book 26,470

9 Thus, after adjusting the unticked items in the cash book balance you find that the resultant figure of 26,470 is the same as the balance as per pass book. f we take the pass book balance as the starting point, you have to follow a similar process. Add the amounts of items which have been responsible for a lower balance in the pass book and deduct those responsible for a higher balance in the pass book. This is illustrated below. Pass Book Balance Add the amounts of item@) item(iv) item(v) Deduct the amounts of item(ii) item(%) Balance as per Cash Book The above analysis will help you to prepare a proper Bank Reconciliation Statement. Let us, for convenience sake, list the items which would generally be added and those which would generally be deducted when cash book balance is used as a starting point. To be added: 1 Cheques issued but not yet present4 2 nterest allowed by the bank 3 nterest and dividends collected but not recorded in the cash book 4 Direct deposits by customers in the firm's account in the bank To be deducted: 1 Cheques deposited but not yet collected 2 Bank charges 3 nterest on overdraft 4 Amount paid by a bank under standing instructions but not recorded in the cash book 5 Cheques dishonoured but no entry made in the cash book for the Jishonour f the pass book baiance is taken as the starting point, just reverse the above process. Add those which are deducted from the cash book balance as given above, and deduct those which are to be added. Check Your Progress-B On May 31,1987, the cash book of Sinha showed a bank balance of 12,000. A comparison of the cash book and the pass book revealed the following: a)- Cheques for 12,600 had been issued during the month of May. Of these, cheques for 3,600 were presented in the month of June. b),a cheque of 1,500 was deposited in the bank on May 28, but it had not been collected by May 3 1. c) ' As per Mr. Sinha's standing orders, the bank paid an insurance premium amountiig to 360 and calls on shares amounting to 540 which were not

10 entered in the cash book. d) There is a credit in the pass book for 1,500, being cash directly deposited by Manoj, a customer. e) Dividend of 600 was collected on behalf of Mr. Sinha buf there was no entry in the cash book. f) Bank charges of 150 debited in the pass book. 1 State, in respect of each item given above, whether it led to a higher or a lower balance in Sinha's cash book. tem No. Higher or Lower a). "...".."..."."..."... b) ".."..."."."."."..."."--" :..."..."."...".".""...".". ".".".."."...., n order to arrive at the pass book balance, state whether you will 'add' the amount of each item to, or 'deduct' from the balance as per cash book. :;. tem No. Higher or Lower c). dl Keeping in view the various causes of disagreement in Sinha's cash book and the pass book, and after making the adjustments suggested in (2) above, state the balimce as per pass book. Bank ReconclUation Statement 9.5 PREPARATON OF BANK RECONCLATON STATEMENT Now let us see how the items shown in llustration 1 will be presented in the form of a Bank Reconciliation Statement. Bank Reconciliation Statement aa on October 31,1987 Balance as per Cash Book 13,000 Add: 1 nterest on Securities collected by the bank but not yet recorded in the cash book 1,000 2 Cheque issued but not yet presented for payment 16,000-17,000 - Less: 1 Cheque deposited but not yet collected by bank ,000 2 nsurance premium paid by bank but not yet recorded in the cash book Bank charges debited in the bank but not yet recorded in cash book Balance as per Pass Book 26,470 Note: The statement bears a heading 'Bank Reconciliation Statement' and mentions the date for which reconciliation is done. So, whenever you prepare a Bank Reconciliation Statement, make sure that t beam this heading along with the date of reconclllation. Hs.

11 Books of Account-1 You will notice that there are two amount columns in the above statement. The first column, called the inner column, is meant for writing the amounts of the items to be added or deducted so that the total mount of addition or deduction can be easily worked out. These totals are then camed over to the second column, called outer column, for hal addition and subtraction. Alternatively, we can have two separate columns for additions and deductions. The first column can be called 'plus column' and the second column can be called 'minus column'. n that case the Bank Reconciliation Statement will be prepared as follows: Bank Reconciliation Statement as on October 31,1987 Particulars Plus Minus Column Column Balance as per Cash Book 13,000 i) Cheque deposited but not yet collected by the bank 3,000 ii) nterest on securities collected by bank but not yet recorded in the Cash Book 1,000 iii) Cheque issued but not yet presented for payment 16,000 iv) nsurance premium paid by Bank but not yet recorded in the cash book 500 v) Bank charges debited by bank but not yet recorded in the cash book 30 Total 30,000 3, Balance as per Pass Book 26,470 As started earlier, the Bank Reconciliation Statement can also be prepared by srarting with the pass book balance. n such a situation: the items which were added when cash book balance was the starting point, would now be subtracted, and vice versa. The Bank Reconciliation Statement for llustration 1 is given below with pass book as the starting point. Bank Reconciliation Statement as on October 31,1987 Particulars Plus Minus Column Column Balance as per Pass Book 26,470 i) Cheque deposited but not yet collected by the bank 3,000 ii) nterest on securities collected by bank but not yet recorded in the cash book 1,000 iii) Cheque issued but not yet presented for payment 16,000 iv) nsurance premium paid by bank but not yet recorded in the cash book 500 v) Bank charges debited by bank but not yet recorded in the cash book Total 30,000 17,000 Balance as per Cash Book. 13,000 llustration 2 On November 30,1987, the cash book of Mr. Sharma showed a bank balance of

12 28,000. A comparison of the cash book with the pass book, revealed the following. 1 Cheque deposited but not collected by November 30,1987, 20, nterest on investments collected by the bank as per standing instructions, appearing in the pass book only, 2, Cheques for a total amount of 80,000 were issued during the month of November. Of these, cheques for 65,000 only were presented for payment by the end of the month.!4 The bank has made a direct payment of 1,000 towards insurance premium, as per the standing instructions. This payment has not yet been recorded in the cash book. 5 A customer has made a direct deposit of 5,000 in the bank account. There was no corresponding entry for this in the cash book. 6 Bank charges appearing only in the pass book A debit of 2,000 in respect of dishonoured cheque (this,was discounted earlier) appear in the pass book only. 8 A cheque of 3,000 deposited in the bank, was entered twice in the cash book. From the above particulars, prepare a Bank Reconciliation Statement as on November 30,1987 and ascertain the pass book balance as on that date. Bank Reconciliation Statement as on November 30,1987 Bank Reconciliation SlPtement Particulers Plus Mius Column Column Balance as per Cash Book 28,000 1 Cheque deposited but n& yet collected 20,000 2 nterest on investments collected by bank but not yet recorded in the Cash Book 2,000 3 Cheques issued but not yet presented for payment 1 5,000 4 nsurance premium paid by Bank but not recorded in the cash book 1,000 5 Direct deposit by a customer into the bank account 5,000 6 Bank charges debited by bank but not yet recorded in the cash book Dishonoured cheque not recorded in the cash book 2,000 8 Amount debited twice in the cash book 3,000 Total ,000 26, Balance as per Pass Book 23, PREPARATON OF BANK RECONCLATON STATEMENT WHEN THERE S OVERDRAFT When the businessman requires more funds than are available to him in the bank account, he may request the bank to extend him an overdraft facility. The bank, after completing various formalities, permits the businessman to withdraw more than the amount available in his account, subject to certain conditions. When the businessman actually withdraws more than the available amount, he is said to have utilised the overdraft facility. An overdraft implies that the businessman has

13 BOO~S of Account-11 borrowed money from the bank. The bank, therefore, charges interest on the amount overdrawn and debits the same to businessman's account periodically. When the businessman has favourable balance in the bank, the cash book shows a debit balance and the pass book a credit balance. But in case of overdraft (an unfavourable balance), the cash book will be showing a credit balance and the pass book a debit balance. This is because now the firm owes to the bank. For the firm, the bank is a creditor, and for the bank the firm is a debtor. t is very important to note as to which book shows what type of balance (debit or credit) when (i) there is a favourable balance, and (ii) when there is an overdraft. Table 9.1 presents a clear picture. Table 9.1 Nature of Debit and Credit Balances Nature of Balance Cash Book Shows Pass Book Shows i) Favourable balance. Debit balance Credit balance ii) Unfavourable balance or Overdraft Credit balance Debit balance The preparation of the Bank Reconciliation Statement does not differ much whether there is a favourable balance or an overdraft, specially when you follow 'plus and minus method'. You know a favourable balance is shown in the plus column of the Bank Reconciliation Statement (refer llustration 1). But, if there is an overdraft, it will be shown in the minus column. This is the main point you have to remember when there is an overdraft. The treatment with regard to items causing difference in the balances of the two books remains the same. Look at llustration 3. t starts with an overdraft as per cash book. This is shown in minus column of the Bank Reconciliation Statement. Other items have been treated in the same way as in llustration 2. llustration 3 On April 30,1987, the cash book of Srikanth showed an overdraft balance of 37,200. Prepare a Bank Reconciliation Stateinent using the following information. 1 Out of the two cheques issued to Kurnar on April 25,1987 (one for 1,500 and another for 3,750), the cheque for 3,750 was cashed on May 5, A wrong credit for 375 relating to some other account was found in the pass book. 3 Three cheques for 4,500, Rs, 6,000 and 7,500 were deposited in the bank for collection on April 22,1987. Only the cheque for 6,000 was collected by April 30, There is a debit of 1,200 for interest and 225 for bank charges in the pass book. These have not been entered in the cash book. 5 The pass book showed that the bank had collected 9,000 as interest on securities. But there was no entry for interest in the cash book. 6 A bill receivable for 7,500 (discounted with the bank in March) was dishonoured on April 28,1987. t was debited in the pass book but no entry was made in the cash book for the dishonour of the bill.

14 Solution: Bank Reconciliation Statement Bank Reconciliation Statement as on April 30,1987 Particulars Plus Minus Column Column Overdraft as per Cash Book 37,200 1 Cheques issued but not yet presented for payment 3,750 2 Amount wrongly credited in the pass book Cheques deposited but not yet collected by the bank Rs ,500) 12,000 4 nterest on overdraft debited by bank but not yet recorded in the cash book 1,200 5 Bank charges debited by bank but not yet recorded in the cash book nterest on securities collected by bank but not yet recorded in the cash book 9,000 - Total 13,125 58, Dishonoured bill receivable not recorded in the cash book 7,500 Overdraft as per Pass Book 45,000 Note: Since total of the minus column is more than the total of the plus column, the difference is treated as an overdraft and shown in the minus column. However, if the total of plus column exceeds the total of the minus column, the difference is regarded as a favourable balance and shown in the plus column. llustration 4 The pass book of Roshan showed a credit balance of 12,000 on March 31, 1987, while the bank column of his cash book showed an overdraft of 9,000. Starting with the pass book balance, prepare the Bank Reconciliation Statement using the following information. 1 Of the cheques amounting to 8,000 deposited in the bank upto March 31, 1987, a cheque of 1,800 was collected by the bank on April 3, Cheque of 2,500 issued to Harish was wrongly entered twice in the cash book. 3 Cheques issued during the month amounted to 8,000 of which cheques for 1,000 were not presented to the bank upto March 31, The pass book showed a credit of 100 as interest for which there was no entry in the cash book. 5 The pass book showed a payment of 500 as life insurance premium for which no entry was made i~ the cash book. 6 The pass book showed a direct deposit of 10,000 from Mahesh on March 28, t was entered in the cash book only on April 2, A cheque for 3,100 issued to a creditor was entered in th~ bank column of the cash book as 13, The bank debited Roshan's account with a cheque for 200 received from Ajay which had been returned dishonoured. N- entry for dishonour was passed in the cash book.

15 Books of Account-1 Solution: Bank Reconciliation Statement ason March 31,1987 Particulars Balance as per Pass Book 1 Cheque deposited but not yet collected by the bank 2 Cheque issued wrongly recorded twice in the cash book 3 Cheques issued but not yet presented for payment 4 nterest allowed by bank not yet recorded in the cash book 5 Life insurance premium paid by bank not yet recorded in the cash book 6 Direct deposit by a customer not yet recorded in the cash book 7 Excess amount recorded in the cash book by mistake for a cheque issued 8 Dishonoured cheque not recorded in the cash Total Plus Column Rs. 12,000 1, ,500 Minus Column 2,500 1, ,000 9,900 23,500 Overdraft as per Cash Book 9,000 Note: n this illustration you find that the total of the minus column exceeds the total of the plus column. Hence the difference of 9,000 is treated as an overdraft as per cash book 9.7 ADJUSTNG THE CASH BOOK BALANCE When you look at various items that normally cause the difference between the cash book balance and the pass book balance, you find a number of items which appear only in the pass book. Why not record such items in the cash book before preparing the Bank Reconciliation Statement? This shall reduce the number of items responsible for the difference. So, as soon as the pass book is received, the firm may record all those items in the cash book which appear only in the pass book and work out a fresh balance of the cash book. This is called 'adjusted balance' or 'corrected balance' as per cash book. Similarly, it may pass correcting entries for errors committed in the cash book. This will also change the cash book balance. When you work out an adjusted balance of the cash book as above, the Bank Reconciliation Statement may be prepared with this adjusted balance. t would reduce the number of items shown in the Bank Reconkiliation Statement. As a matter of fact, this is exactly what is done in practice. The items which can usually be adjusted in the cash book are: SO 1 nterest allowed by bank 2 Amounts collected by bank as per standing instructions 3 Payments made by bank as per standing instructions 4 Bank charges 5 nterest on overdraft 6 Direct deposits by customers 7 ish honoured cheques or bills rectiable 8 Errors committed in the cash book

16 , Look at llustration 1 once again. You will find that out of five items causing the Bank Reconciliation Statement difference, three items appeared only in the pass book. These are: i) nterest on securities collected by bank 1,000 ii) nsurance premium paid by bank 500 iii) Bank charges debited by bank 30 These items can be adjusted in the cash book as follows: Dr. Cash Book (Bank Column only) Cr. Date Particulars L.F. Amount Date Particulars L.F. Amount Oct. 31 To Balance b/d 13,000 Oct. 31 By nsurance A/c 500 " 3 1 To nterest on " 31 To Bank Charges Securities A/c 1,000 A/c 30 " 31 - To Balance c/d 13,470-14,000 14,000 - Nov. 1 To Balance b/d 13,470 The adjusted balance as per cash book is 13,470. Now, if we prepare the Bank Reconciliation Statement with the adjusted balance, it will appear as follows: Bank Reconciliation Statement as on October 31,1987 Particulars Plus Minus Column Column Balance as per Cash Book 13,470 1) Cheques issued but not yet presented for payment 16, Total 29,470 3, ) Cheques deposited but not yet collected by the Bank 3,000 Balance as per Pass Book 26,470 Thus, you observe that the Bank Reconciliation Statement prepared with the adjusted balance included only two items. These are (i) unpresented cheques, and (ii) uncollected cheques. Both of these items could not be adjusted in the cash book because they had already been recorded in the cash book correctly. The difference arose only on account of the time lag. t may, however, be emphasised that you should concentrate on preparing the Bank Reconciliation Statement in the normal manner. The statement with an adjusted balance of the cash book is to be prepared only when it is specifically asked for. 5 1

17 Check Your Progress-C Choose one of the alternatives and tick (4 the correct answer. a) Bank Reconciliation Statement is i) a part of the cash book ii) a statement showing the causes of difference between the cash book and pass book balances iii) a ledger account b) Bank Reconciliation Statement is prepared by i) business ii) bank iii) debtor c) Debit balance in the cash book means i) overdraft ii) favourable balance iii) neither of the two d) Debit balance in the pass book means i) overdraft ii) favourable balance iii) neither of the two e) Overdraft as per cash book means i) debit balance in the cash book ii) credit balance in the cash book iii) nil balance in the cash book f) When balance as per cash book is the starting point, unpresented checpes are i) added ii) deducted iii) neither of the two g) When balance as per pass book is the starting point, uncollected cheques are i) added ii) deducted iii) neither of the two h) When balance as per pass book is the starting point, direct deposits by customers are i) added ii) deducted iii) neither of the two 9.8 ADVANTAGES OF BANK RECONCLATON STATEMENT The main purpose of preparing Bank Reconciliation Statement is to account for the difference between the cash book and the pass book balances. This would ensure the accuracy of entries made in the cash book as well as those in the pass book. Regular comparison of these two books is necessary for preparing the Bank Reconciliation Statement. This helps in the detection of errors and taking timely action to correct them. t is quite possible that the bank wrongly debits firm's account for cheques drawn by someone else. f reconciliation is not done, such mistakes will not be detected. Preparation of Bank Reconciliation Statement also helps in preventing frauds in banking transactions. The cashier, for example, may omit to deposit some bearer cheques in the bank and encash them himself. Such fraud is sure to be detected at the time of reconciliation when it is investigated as to why certain cheques remained uncollected. Thus it acts as a moral check on the staff to refrain from indulging in such activities. Bank Reconciliation Statement is also required for audit purposes. The auditor has to verify the bank balance befcre he would certify the account. For tnis he would

18 'insist on the Bank Reconciliation Statement and ensure that the bank balance shown Bank Reconciation Statement in the cash book is correct LET US SUM UP 1 When the cash book and the pass book are compared, it is often found that the balances shown by these two books do not agree. The difference is mainly due to time lag i.e., transactions are not recorded in both the books on the same date. t can also arise on account of errors committed either in the cash book or in the pass book. 2 As the balances in these two books may not agree, they are compared periodically and items of disagreement listed. A reconciliation statement is prepared to explain thedifference and take necessary follow up action. 3 The Bank Reconciliation Statement can be prepared either by taking cash book balance as the starting point, or by taking pass book balance as the starting point. 4 The effect of each item causing the difference in the two balances is analysed. Then, the amount involved in each item is added to or subtracted from the known balance in order to arrive at the unknown balance. 5 When the businelman has overdrawn his account, his cash book shows a credit balance, representing an overdraft. n such a situation, the pass book will be showing a debit balance. However, there is no change in the procedure of preparing the Bank Reconciliation Statement, provided 'plus and minus' method is followed. 6 The pass book usually contains certain items for which corresponding entries in the cash book have not yet been passed. These entries can be made in the cash book and a fresh balance called 'adjusted balance' is arrived at. n practice, Bank Reconciliation Statement is usually prepared with adjusted balance of the cash book as the starting point KEY WORDS r Bank Reconciliation Statement: A statement reconciling the bank balance as shown by the cash book with that of the pass book. Favourable Balance : Balance indicating that the businessman has got money in his account with the bank. Overdraft An unfavourable balance indicating that the businessman has withdrawn more than what he has in his account. Standing nstructions: nstructions to the bank for making certain payments and collections regularly on behalf of the account holder SOME USEFUL BOOKS Frank Wood. Book-Keeping and Accounts (London: Pitman, 1986) Chapter 24. Grewal, T.S. Double Entry Book-Keeping (New Delhi: Sultan Charid & Sons, 1987) Chapter 5. Harold Bierman, Jr. and Drebin, Allan R. Financial Accounting: An ntroduction (London: W.B. Saunders, 1978) C@pter 7. Maheshwari, S.&. Principles and Practice of Accountancy (New Delhi: Arya Book Depot, 1986) Chapter 10. t Patil, V.A. and Korlahalli, J.S. Principles and Practice of Book-Keeping (New Delhi: t! P - 985) Chapter 10.

19 Books of Account-11 c.~.j 9.12 ANSWERS TO CHECK YOUR PROGRESS A 3 B 1 B 2 B3 C (a) True (e) False (a) lower (d) lower (a) add (d) add 15,150 (a) ii (e) (b) higher (e) lower (b) deduct (e) add (c) True (g) False (c) higher (f) higher (c) deduct (f) deduct (c) ii (a) i (d) True (h) False (4 i (h) ii 9.13 TERMNAL QUESTONS/EXERCSES Questions 1 What is a Bank Reconciliation Statement? Why is it prepared? 2 State various causes of disagreement between the balances shown by the cash book and the pass book. 3 Explain the procedure for preparing the Bank Reconciliation Statement. 4 Why is Cash Book adjusted? Explain how Bank Reconciliation Statement is prepared with an adjusted balance of cash book. Exercises 1 The businessman's cash book showed a bank balance of 38,010 as on May 31,1987. The balance as per pass book is 31,675. The following items of difference were detected: a) Cheques issued to Rahul but not yet presented for payment, 2,340. b) Cheques deposited but not yet collected by the bank. Shyam 1,500 and Rakesh 7,500. c) Bank charges debited in the pass book only 75 d) nsurance premium paid by the bank as per standing instructions, 1,250. e) nterest on Government Securities collected by the bank on behalf of the businessman 1,650. Prepare a Bank Reconciliation Statement as on May 31, On May 3 1,1987, the cash book of Gautam showed a bank balance of 17,000. A comparison of the pass book and the cash book revealed the following: a) Cheque deposited but not yet cleared by May 31,1987, 2,000. b) nterest on investments collected by the bank on behalf of Mr. Gautam but not yet recorded in the cash book 800. c) Cheques for 10,200 were issued during the month of May but of these, cheques for 2,400 were presented in the month of June, d) The bank has made a direct payment of a promissory note for 1,200 as per Mr. Gautam's standing instructions. This has not been entered in the cash book. e) A customer deposited 300 directly into the bank, but not yet entered in the cash book. f) Bank charges debited the pass book but not yet recorded in the cash book 100

20 g) A debit of 800 in respect of a dishonoured chequeappears only in the Bank Reconciliation Statement pass book. Prepare a Bank Reconciliation Statement as on May 3 1, (Answer: Balance as per Pass Book 16,400) 3 From the following particulars prepare a Bank Reconciliation Statemedt of Raghuram as on March 31,1987. Balance as per pass book on March 31,1987, was 22,000. Cheques amounting to 9,000 were deposited in the bank during March but credit was given only for 7,000:The Bank paid insurance premium of 300 on March 20, but it was not entered in the cash hook. A discounted bill receivable of 1,500 was returned dishonoured to the bank on ~tle March 27, but the corresponding entry was made in the cash book in April. A cheque for 800 received on March 29, was entered in the cash book but lt was sent to the bank on April 3. Of the cheques arnount~ng to 3,000 ~ssuctl. cheques amounting to 1,800 only were prcwnted for payment. The bank charges debited in the pass book amount to 50. nterest on secuntlcs collected ;md credited by the bank amounting to l$)00, were not entered in the cash boak. (Answer: Balance as per Cash Book 24,45!)) 4 When Madhav & Co. Ltd. received its bank statement for the period ending on June 30,1987, the balance therein did not agree with the balancc as per cash book. The bank statement showed a balance of 12,000. Thc f;)llowing discrepancies were noticed. a) A cheque of 400 paid on June 10, was not credited by thc bank until July 2. b) Bank charges amounting to 20 were not entered in thc cash book. c) A debit of 70 appeared in the cash book in respect of a chequc which had been returned by the bank marked 'out of date'. The cheque was revalidated by the customer and received by Madhav & Co. Ltd. in July. t was deposited into the bank again on July 6. d) A standing instruction for paymcnt of annual subscription amounting to 40 was not entered in the cash book. e) On June 26, the Managing Director gave the cashier a cheque for 800 to pay into his personal account at the bank. The cashier paid it into the company's account by mistake. f) On June 29, two customers paid 700 and 800 directly into the company's bank account. The concerned advices had not been received by the company until July 3. g) 250 paid into the bank was entered twice in the cash book. 1 r h) Cheques amounting to 3,500 we're issued but not yet presented for payment. i) A customer of the company who received a cash discount of 1.5% on his ' account of 1,000 paid the company by cheque on June 10. The casher, by mistake, entered the gross amount in the bank column of the cash book. Prepare the Bank Reconciliation Statement. (Answer: Balance as per Cash Book 6,995)