Chapter 5 Bank Reconciliation Statement NCERT SOLUTION CLASS 11 ACCOUNTS/ EDUGROWN NOTES

Short Answer type Question:

Q.1 State the need for the preparation of bank reconciliation statement?

ANSWER: The need to prepare Bank Reconciliation Statement are given below.

1. It helps in finding out the errors and omissions committed in the Cash Book and the Pass Book.
2. It shows uncleared cheques, which have already been debited in the Cash Book but have not been yet recorded in the Pass Book.
3. It helps in checking embezzlement of money from the bank account.
4. It helps in measuring the accuracy of the transactions recorded in the Cash Book.
5. It facilitates in preparing revised Cash Book that reflects true bank balance.

Q.2 What is a bank overdraft?

ANSWER: Bank overdraft is a liability to an account holder. When the account holder withdraws excess amount over his/her available bank balance, he/she runs a negative bank balance. The negative bank balance is an obligation to the account holder and is called bank overdraft. In other words, bank overdraft is the excess of withdrawal over deposits.

Q.3 Briefly explain the statement ‘wrongly debited by the bank’ with the help of an example.

ANSWER: Amount wrongly debited by the bank implies a situation when the  bank wrongly debits a Pass Book. The following are the common mistakes that occur in the Pass Book when bank wrongly debits the Pass Book.

1. Mistake occurs when any two account holders’ names are identical. For example, a cheque of Rs 2,000 issued by Mr. Prem Singh was wrongly paid through Mr. Prem Kumar’s account.
2. Mistake occurs in case a person has more than one account in a bank. For example, a cheque of Rs 1,000 issued from his Current Account was wrongly paid through his Savings Account.
3. Sometimes amounts of cheques are wrongly recorded. For example, payment of Rs 2,000 through cheque was wrongly debited in the Pass Book as Rs 20,000.

Q.4 State the causes of difference occurred due to time lag.

ANSWER: The causes of difference that occur due to time lag are given below.

1. When issued cheques are not presented for payment in the period for which Bank Reconciliation Statement is being prepared, i.e., date of issue and the date of presenting the cheques are not same.

Cheques are credited in the Cash Book on the date that is mentioned on it, while in the Pass Book, cheques are debited when they are presented for the payment. Sometimes, the holder of a cheque does not present the cheque for payment on date ehich is mentioned on Cheque. The time gap between the date of issue and the date of presenting cheque for payment in the bank may lead to difference between the Cash Book and the Pass Book balances.

2. When deposited cheques are not cleared in the period for which the Bank Reconciliation Statement is being prepared.

Usually, date of deposit of cheque and date of clearance are not same as the clearance of cheque takes time. The difference between the Cash Book and the Pass Book balances arise when a cheque is deposited at the end of a period for which the Bank Reconciliation Statement is prepared and the cheque gets clearance in the subsequent period.

Q.5 Briefly explain the term favourable balance as per cash book

ANSWER: Favourable balance (Debit Balance), as per the Cash Book, is an asset to an account holder. It is also known as debit balance as per the Cash Book. Favourable balance is the excess of total of debit side over total of credit side of a bank column of a Cash Book. In other words, favourable balance means excess of deposits over withdrawals.

Q.6 Enumerate the steps to ascertain the correct cash book balance.

ANSWER: Generally, differences between the Cash Book and the Pass Book arise due to the reason that items have not been recorded in the Cash Book. In order to ascertain the correct Cash Book balance, we need to prepare Corrected (Adjusted) Cash Book. The below given steps are involved in the preparation of Corrected (Adjusted) Cash Book.

Step 1: Note down the bank balance as per the Cash Book.

Step 2: Rectify all the errors committed in the Cash Book.

Step 3: Enter those transactions in the debit of the Cash Book, which are only in the credit of the Pass Book.

Step 4: Enter those transactions in the credit of the Cash Book that are only in the debit of the Pass Book.

Step 5: The Cash Book is totalled and balancing figure is calculated. This balancing figure is use for preparing BRS.

Long Answer Type Questions

Q1. What is a bank reconciliation statement? Why is it prepared?
Solution:
Business organisations maintain the cash book for recording cash and bank transactions. It shows the balance of both the accounts at the end of an accounting period.
Similarly, the bank also maintains an account for each customer in its book. All deposits made by the customer are recorded on the credit side of the account and all withdrawals are recorded on the debit side of the account.
A copy of this is sent to the customer by the bank. This is called pass book or bank statement. This statement is used by the firm to tally its bank transactions as recorded by the bank with the cash book. The balance of the cash book must tally with that of the pass book.
But as both the books are maintained by two different parties, the bank balances as shown by the cash book and that shown by the pass book do not always match. The entries in both the books are, thus, compared and the items because of which the difference has occurred are determined and rectified. Thus, to reconcile the balances of the cash book and the pass book, a statement is prepared. This statement is called the bank reconciliation statement.
Specimen of Bank Reconciliation Statement:

Q2. Explain the reasons where the balance shown by the bank passbook does not agree with the balance as shown by the bank column of the cash book.
Solution:
The reason for the error in balance between the cash book and pass book can be stated as follows:
Timing difference on recording of the transactions
While comparing the balances of both the accounts, transactions found usually appear only in the cash book or only in the pass book. Such differences are caused by the time gap in recording the transactions in the books relating to either receipts or payments.

• Transactions which appear in the cash book but not in the pass book:
  1. Cheques issued but not presented for payment at the bank
     The firm/customer issues cheques to its suppliers and creditors, but not all these cheques are presented to the bank. The entry in the cash book is made immediately on issue of the cheque but the bank will not pass an entry until the cheque is presented for payment.
  2. Cheques paid or deposited but not collected and credited by the bank
     Entry is passed by the firm in the cash book when it receives cheques from its debtors which increase the balance as per the cash book. But the bank credits the firm’s account only when they receive the payment from the customer’s bank or in other words, once the cheque is collected by the bank.
• Transactions which appear in the pass book but not in the cash book:
  1. Direct bank charges, commission and interest debited by the bank
     Bank provides us various services for which it levies some charges which is directly debited from the firm’s account. The firm will know of these charges only after she/he verifies the entries with the bank statement.
     Example: Interest on overdraft, unpaid cheques and cheque collection charges
  2. Expenses directly paid by the bank on behalf of the customers
     Depending upon the standing instruction of the customer, the bank makes regular payment on behalf of the customer. The bank debits the customer’s account when the payment is made but the firm will pass the entry in his book only after he receives the bank statement. Thus, the balance as per the pass book will be less than the balance in the cash book.
     Example: Insurance premium, telephone bills and rent
  3. Amounts directly deposited in the customer’s account
     There are times when the firm’s debtors deposit money or make payments directly into the firm’s bank account. This results in an increase in the balance of the bank account. As no intimation is received by the firm, there will be no record of the same in the cash book.
  4. Incomes directly collected by the bank on behalf of customer but not recorded in cash book
     As per the agreement between the customer and the bank, the bank directly accepts payments such as dividends and rents and credits the same into the customer’s account. This increases the balance as per the pass book and causes a decrease in the balance in the pass book.
  5. Cheques deposited dishonoured or bills discounted dishonoured
     The bank sometimes allows the facility of discounting the bills of the customers. If such a bill is dishonoured on its date of maturity, the same is debited to customers account. As this information is not available to the firm, there will be no entry in the cash book. Similarly, when a cheque deposited by the firm in the bank is dishonoured, the same is debited to the customer’s account. As a result, there is a difference between the balances of the cash book and the pass book.

Errors in recording transactions by the firm or by the bank
Errors such as wrong recordings relating to cheques deposited/issued, wrong totaling or omission can be committed by the bank or the firm which can cause a difference between the cash book and the pass book balance.
Example: Wrong recording can be passed by the bank because of the similarity in names of its customers or some error caused by the clerk of the bank.

Cheques received by the firm are sent to the bank without passing an entry in the cash book or cheques received from the customers are omitted to be sent to the bank but an entry has been passed in the cash book.

Q3. Explain the process of preparing bank reconciliation statement with amended cash balance.
Solution:
The below given steps are involved in the preparation of adjusted cash book.
Step 1: The bank balance as per the cash book is noted.
Step 2: All the errors committed in the cash book to be recorded are rectified.
Step 3: Transaction present only on the credit side of the pass book needs to be recorded on the debit side of the cash book.
Step 4: Transaction present only on the debit side of the pass book needs to be recorded on the credit side of the cash book.
Step 5: Total the cash book and find the balancing figure. This balancing figure is used for preparing the bank reconciliation statement.
The proforma of the bank reconciliation statement through amended balance is given below: