NCERT Solutions For Class 11 Accountancy Chapter 9 Bank Reconciliation Statement

Omission or wrong recording of transactions relating to cheques deposited and wrong totaling etc, committed by the bank while posting entries in the passbook also cause differences between passbook and cashbook balance.

When a bank gives a firm the facility of withdrawing in excess of its deposits, this excess withdrawal is called overdraft. The bank charges interest on this overdraft and debits the firm’s account from such interest time to time.

Bank reconciliation statement is a statement prepared mainly to reconcile the difference between the ‘Bank Balance’ shown by the Cash Book and Bank Pass Book.

Bank Reconciliation Statement if started with debit, i.e.., favourable balance as per cash book, each entry causing difference is analysed to ascertain its effect on cash book balance, i.e., whether it has held to increase or decrease in the Cash Book balance.

Entries that have led to decreased Cash Book balance such as: (Cheque issued but not presented for payment, Interest credited by the bank but not recorded in the cash book, Direct deposit into the bank not recorded in the cash book) are added to the balance as per cash book.

Similarly, entries of differences that have led to increased cash book balance such as (cheques deposited but not credited by bank, bank charges debited by the bank) are deducted from the balance as per Cash Book.

Differences caused by Time Gap in recording transactions:

• Cheques issued but not presented for payment in the bank.
• Cheques paid into the bank for collection but not yet credited by the bank.
• Cheques paid into the bank for collection but dishonoured by the bank.
• Interest allowed by the bank.
• Interest charged by the bank on overdraft.
• Bank charges and commission charged by the bank.
• Interest and dividend collected by the bank.

While preparing bank reconciliation statement, under amended cash balance approach, the balance as per cash book or as per pass book is the starting item. The debit balance as per the cash book means the balance of deposits held at the bank.

Such a balance will be a credit balance as per the pass book. It is also called the favourable balance as per cash book or favourable balance as per pass book. Such a balance exists when the deposits made by the firm are more than its withdrawals.

On the other hand, the credit balance as per the cash book indicates bank overdraft. In other words, the excess amount withdrawal over the amount deposited in the bank. It is also known as unfavorable balance as per cash book or unfavorable balance as per pass book.

The following steps will be followed in preparation of the bank reconciliation statement:

• The first step is to put the balance of cash book or pass book. The first item in the statement is generally the balance as shown by the cash book. Alternatively, the starting point can also be the balance as per pass book. Considering the balance as per cash book, the following further steps will be followed.
• The cheques deposited but not yet collected are deducted.
• All the cheques issued but not yet presented for payment, amounts directly deposited in the bank account are added.
• All the items of charges such as interest on overdraft, payment by bank on standing instructions and debited by the bank in the pass book but not entered in cash book, bills and cheques dishonoured etc are deducted.
• All the credits given by the bank such as interest on dividends collected etc and direct deposits in the bank are added.
• Adjustments for errors are made according to the principles of rectification of errors.

Reconciliation of the cash book and the bank pass book balances amounts to an explanation of differences between them. The difference between the cash book and the bank passbook is caused by:

• Timing differences on recording of the transactions.
• Errors made by the business or by the bank.

Timing Differences:

When a business compares the balance of its cash book with the balance shown by the bank passbook, there is often a difference, which is caused by the time gap in recording the transaction relating either to payments or receipts.

The factors affecting time gap includes:

• Cheques issued by the bank but not yet presented for payment.
• Cheques paid into the bank but not yet collected.
• Direct debits made by the bank on behalf of the customer.
• Amounts directly deposited in the bank account.
• Interest and dividends collected by the bank.
• Direct payments made by the bank on behalf of the customer.
• Cheques deposited/bills discounted dishonoured.

Differences caused by errors:

Sometimes the difference between the two balances may be accounted for by an error on the part of the bank or an error in the cash book of the business. This cause difference between the bank balance shown by the cash book and the balance shown by the bank statement.

Errors committed in recording transaction by the firm: Omission or wrong recording of transactions relating to cheques issued, cheques deposited and wrong totaling, etc. committed by the firm while recording entries in the cash book cause difference between cash book and passbook balance.

Errors committed in recording transactions by the bank: Omission or wrong recoding of transaction relating to cheques deposited and wrong totaling etc. committed by the bank while posting entries in the passbook also cause difference between passbook and cashbook balance.

Bank Reconciliation Statement is a statement prepared to reconcile the bank balance as per Cash Book with the balance as per Bank Statement or Bank Pass Book.

Need and Importance of Bank Reconciliation Statement:

• A bank reconciliation statement locates the errors or commission that may have  committed either on the part of the customer or the bank. The errors so detected can be rectified accordingly.
• By preparing a bank reconciliation statement, the customer becomes sure of the correctness of the bank balance shown by the cash book. It helps him in making further transactions with the bank.
• A reconciliation statement facilitates the preparation of a revised cash book.
• Periodic preparation of this statement reduces the chances of embezzlement by the staff of the firm or even that of the bank.
• A reconciliation statement helps in revealing the unnecessary delay in the collection of cheques by the bank.
• It also helps in keeping a track of cheques which have been sent to the bank for collection.

Bank Reconciliation Statement is prepared starting with the corrected Cash Book Balance taking the following steps:

Step 1: Draw up Cash Bank column only. If favourable balance (Dr. Balance) as per the cash book is given, write the balance on the debit side of the cash book. If unfavourable balance or overdraft as per the cash book is given, write the balance on the credit side of the cash book.

Step 2: Pass entries in the Cash Book in respect of the following items:

Amount recorded in the Pass book but not recorded in the Cash Book that should have been recorded.

Rectifying entries in respect of errors committed in the Cash Book.

At this point, balance as per adjusted cash book is known.

Step 3:

Adjusted balance of the cash book is taken as starting point, Bank Reconciliation Statement is prepared listing the entries causing difference and arriving at the balance as per bank statement or bank pass book.