Account 6 Marks Question

Note: Cheque dated 15th April, 2019 issued to M & Co. dishonoured will have no impact as this statement is as on 31st March 2019.

Solution is as follow:

Bank Reconciliation Statement can be prepared with the adjusted/ amended bank column of the Cash Book by the below given steps.
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 column of the Cash Book that are only in the credit column of the Pass Book.
Step 4: Enter those transactions in the credit column of the Cash Book that are only in the debit column of the Pass Book.
Step 5: After completing the above steps, the balance or the overdraft, as per amended Cash Book, arrives, with which Bank Reconciliation Statement can be prepared.
The performa of Bank Reconciliation Statement through amended balance is given below.

Solution is as follow:

Note: In Cash Book cheque received from G. Basu & Co is debited with ₹ 1,000 and at the time of dishonour entry is reversed by crediting G. Basu & Co with ₹ 1,000. Therefore its net effect is nil in Cash Book.

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.

Note:
Transaction no. (iv) will have no effect on the bank balance as the issued cheque was recorded in the cash column and was not presented for payment till the date of preparation of Bank Reconciliation Statement.

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Solution is as follow:

Bank Reconciliation Statement is a statement prepared by the account holder on a particular date to reconcile the bank balance as per Cash Book with the balance as per Bank Statement or Bank Pass Book showing entries because of which differences between the two balances exist.
By Patil- "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.''
Need and Importance of Bank Reconciliation Statement
It is essential to prepare a bank reconciliation statement due to the following reasons:

1. A bank reconciliation statement locates the errors or omissions that may have been committed either on the part of the customer or the bank. The errors so detected can be rectified accordingly.
2. 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. For example, suppose the cash book shows a bank balance of ₹ 20,000, whereas the balance shown by the pass book is ₹ 15,000. By reconciling the two, it is disclosed that cheques for ₹ 5,000 were deposited into the bank but have not been collected so far (or some of these have been dishonoured). In such a case, further cheques will be issued by assuming the bank balance of ₹ 15,000 only.
3. A reconciliation statement facilitates the preparation of a revised cash book. For example, the entries relating to bank charges, interest allowed or charged by the bank, direct payment by the bank on our behalf etc. will be recorded in the pass book but for which there is no entry in the cash book. Such entries will now be recorded in the cash book as well.
4. Periodic preparation of this statement reduces the chances of embezzlement by the staff of the firm or even that of the bank. For example, if a cashier merely makes an entry in the cash book but does not deposit the cash and cheques into the bank, it will be disclosed by preparing a bank reconciliation statement.
5. A reconciliation statement helps in revealing the unnecessary delay in the collection of cheques by the bank.
6. It also helps in keeping a track of cheques which have been sent to the bank for collection.

Note: Overdraft balance has credit balance but taken as debit balance, so to correct the error credit cash book by double amount.
Therefore, 1,000 should be shown in the minus side.

Note: Point (vii) will have no affect on the statement as error in recording cash deposit entry is already rectified.