Chapter Notes - Preparation of Bank Reconciliation Statement, Ledger and Trial Balance - Accountancy | EduRev Notes

Accountancy Class 11

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Commerce : Chapter Notes - Preparation of Bank Reconciliation Statement, Ledger and Trial Balance - Accountancy | EduRev Notes

The document Chapter Notes - Preparation of Bank Reconciliation Statement, Ledger and Trial Balance - Accountancy | EduRev Notes is a part of the Commerce Course Accountancy Class 11.
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LEARNING OBJECTIVES
(1) Meaning of Bank Reconciliation statement.
(2) Causes of Differences in Bank Balance as per Cash Book and Pass Book.
(3) Importance of Bank Reconciliation Statement.
(4) Procedure of preparation of bank Reconciliation statement
(5) Preparation of Adjusted Cash Book.

Definition :  A schedule showing the items of difference between the bank statement and the bank column of Cash Book is known as Bank Reconciliation Statement. Bank Reconciliation Statement is prepared to reconcile the difference between the bank balance shown by the Cash Book and Bank Pass Book.

Need and importance
(1) It helps in locating and rectifying the errors or omissions committed either by the firm or by the bank.
(2) Customer becomes sure of the correctness of the bank balance shown by the cash book.
(3) Facilitates the preparation of amended or revised Cash Book
(4) Reduces the chances of fraud by the staff of the firm or bank.
(5) Helps in keeping a track of the cheques deposited for collection.

Causes of Differences in Cash Book and Pass Book:
(A) Transactions recorded in Cash Book but not in Pass Book.
(B) Transactions recorded in Pass Book but not in Cash Book.
(C) Other transactions errors.

(A) Transactions recorded in Cash Book but not in Pass Book
(i) Cheques issued but not presented for payment in the bank.
(ii) Cheques deposited or paid into the bank for collection but not yet credited by bank.
(iii) Cheques deposited but dishonoured.
(iv) Wrongly Debit or credit entered.

(B) Transactions recorded in Pass Book but not in Cash Book
(i) Interest allowed by the Bank.
(ii) Interest on overdraft, bank charges and commission etc. charges by Bank.
(iii) Direct deposit by the customers into Bank.
(iv) Interest, dividend etc. collected by the Bank.
(v) Direct payment made by the Bank on behalf of costumer as per standing instruction.

(C) Other transactions
(i) Error in totaling or balancing of Cash Book.
(ii) Transactions recorded twice in Cash Book.
(iii) Transactions recorded twice in Pass Book.
(iv) Error of recording by wrong amount.
(v) Error of recording in wrong side like Debit instead of credit and vice-versa.

Procedure of Preparing Bank Reconciliation Statement (BRS) 
A Bank Reconciliation Statement is prepared when we get the duly completed Pass Book from the Bank.
(1) First of all, tally the Debit side entries of the cash book with the Credit side entries of the Pass Book and vice versa.
(2) Tick the items appearing in both the books.
(3) Unticked items will be the points of differences.
(4) A BRS is then prepared by taking either the balance as per Cash Book or Pass Book as a starting point.

Important Points 
(1) If the Starting point is Cash Book Balance then the ending point will be Pass Book Balance.
(2) If the starting point is Pass Book Balance then the ending point will be the Balance as per Cash Book.
(3) Debit Balance as per Cash Book or Credit Balance as per Pass Book, means that the firm has that much amount of deposit at the bank (also called favourable balance) write the amount under (+) items.
(4) Credit Balance as per Cash Book or Debit Balance as per Pass Book, means that this much amount has seen withdrawn in excess of deposit (also called overdraft or unfavorable balance) write the amount under (-) items.

Method of Preparing BRS Starting with the Balance/overdraft as per Bank Column of Cash Book.
Bank Reconciliation Statement as on................................

Chapter Notes - Preparation of Bank Reconciliation Statement, Ledger and Trial Balance - Accountancy | EduRev Notes

Note

  • If total of (+) Items is more than the total of (-) items then Difference is Credit Balance or favourable balance as per Pass Book.
  • Where as if the(-)total is more than the (+) items total then Difference is Debit Balance or overdraft as per Pass Book.
  • If BRS is started with Balance as per Cash Book then ending point is Balance as per Pass Book and Vice-Versa.
  • Debit balance of Cash Book means favourable balance or(+) Balance
  • Debit balance of Pass Book means unfavourable balance or (-)balance.
  • Credit balance of Pass Book means favourable balance or(+) balance
  • Credit Balance of cash Book Means unfavourable balance or (-) Balance.
Ready Reference
Items which increase the Pass Book Balance or decreases the Cash Book Balance
(1) Cheques issued but not yet presented.
(2) Credits made by the bank for Interest.
(3) Amount directly deposited by the customers in our bank A/c. 
(4) Interest and dividend collected by the bank. 
(5) Cheques paid into the bank but omitted to be recorded in the Cash Book.

Items which, decreases the Pass Book Balance or increase the Cash Book Balance
(1) Cheques sent to the bank for collection but not yet credited by the bank.
(2) Cheques paid into the bank but dishonoured.
(3) Direct payments made by the bank.
(4) Bank charges, commission etc. debited by the bank.
(5) Cheques issued but omitted to be recorded in the Cash Book.

Example 1: Balance as per Cash Book is given Prepare Bank Reconciliation statement as on 31st July 2016.
(1) Dr. Balance as per Cash Book is Rs. 20.000 as on 31 st July 2016.
(2) Cheques for Rs. 5000 were deposited into the Bank in the month of July but only Cheques for Rs. 1000 were credited by bank till 31 st July 2016.
(3) Cheques issued for Rs. 33000 in July, out of which a cheque for Rs. 13,800 was presented for payment on 3rd August, 2016.
(4) Bank charged Rs. 150 as Bank charges and credited interest of Rs. 400.
(5) A Customer directly deposited Rs. 2,500 in firms's bank A/C.
(6) Bank paid the insurance Premium of Rs. 1200 as per standing instruction on 25.7.2016.

Solution:
Bank Reconciling Statement as on 31st July 2016

Chapter Notes - Preparation of Bank Reconciliation Statement, Ledger and Trial Balance - Accountancy | EduRev Notes

Explanation
1. Balance as per Cash Book means favourable Balance, hence (+) Item. If nothing (i.e. Debit or Credit) is written the Balance given, it is treated as favourable.
2. Cheques were deposited into the bank for Rs. 5,000 but credited by the bank for Rs. 1,000 in the month of July, implies that cheques for Rs.4,000 (5,000-1,000) are entered in the Cash Book but not in the Pass Book, Increasing the Cash Book Balance by Rs.4,000 as compared to Pass Book. Hence, to get pass Book Balance from the Cash Book Rs.4,000 will have to be deducted.
3. Cheques issued but not presented for payment till 31st July is for Rs.13800 which is entered on the credit side of Cash Book as compared to Pass Book (Cash book Balance is less by Rs. 13.800 as compared to Pass Book Item)
4. (a) Bank charges of Rs. 150 entered in the Pass Book will decrease the Balance of Pass Book. To reach Pass Book Balance from Cash Book Balance, this item has to be deducted i.e. minus item.(b) Interest credited by the Bank. Rs.400 interest in Pass Book increases the balance of Pass Book, hence to reach the Balance from cash book and this item is to be added to (+) item.
5. Direct deposit by a customer Rs.2,500 Increase the Pass Book Balance and this item is to be added to (+) item.
6. Payment made by the bank for insurance premium decreases the Pass Book Balance Minus Item. To reach Pass Book Balance from Cash Book Balance, this item has to be deducted i.e. minus item.
7. Plus items total Rs.36,700 is more than Minus item total Rs.5,350 by Rs.31,350 Hence the difference of Rs.31,350 will be (+) item i.e. Favourable Balance or Cr. balance as per Pass Book.

Example 2: When overdraft as per Cash Book is given.
(1) Overdraft as per Cash Book is Rs.40,500 on 30th June 2016.
(2) Cheques deposited but not yet collected Rs. 12.000.
(3) Cheques issued but not yet presented for payment of Rs.2,800.
(4) Bank Charges of Rs. 50 and Interest on overdraft of Rs. 250 are charged by the bank.
(5) A customer directly deposited Rs. 1.200 into the Bank.
(6) Insurance Premium of Rs. 1.500 is paid by the bank as per standing instructions.

Prepare Bank Reconciliations Statement for the month of June 2016.

Bank Reconciliations Statement as on 30th June 2016

Chapter Notes - Preparation of Bank Reconciliation Statement, Ledger and Trial Balance - Accountancy | EduRev Notes

Overdraft means unfavorable balance or Negative Balance Hence put it under (-ive) items.
Explanation for all other items is similar as example 1 except the following.

1. Item No. 4 (b)- Interest on overdraft decreases the Pass Book Balance hence it is to be deducted from Cash Book Balance to reach at Pass Book Balance (- item)
2. This time the total of (-) items Rs. 54,300 is more than the total (+) items Rs.50,300 by Rs.4,000.
3. At the end (+) item and (-) item are totalled.
(a) If total of (+) items is more than the total of (-) items Difference is favourable Balance or Debit Balance as per Cash Book.
(b) Where as if the total of (-) items is more than the total of (+) items. Difference is unfavourable or overdraft as per Cash Book.

READY REFERENCE
Items which increases the Cash Book Balance or decreases the Pass Book Balance
(1) Cheques deposited into the bank but dishonoured.
(2) Cheques sent for collection but not yet collected.
(3) Direct Payments made by the bank.
(4) Bank charges, commission etc. debited by the bank.
(5) Cheques issued but omitted to be recorded in the Cash Book.

 Items which decreases the Cash Book Balance or increase the Pass Book Balance
(1) Cheques issued but not yet presented.
(2) Credits made by the bank for interest.
(3) Amount directly deposited by the customers into the Bank.
(4) Interest and dividend collected by the Bank.
(5) Cheques paid into the bank but omitted to be recorded in the Cash Book.

Examples 3 : Balance as per Pass Book is given
Given (1) Balance as per Pass Book is Rs. 70,000 Point No. (2) to (6) are same as given in example (1) Prepare Bank Reconciliation Statement as on July 31.2016

Solution: Bank Reconciliation Statement as on 31st July 2016

Chapter Notes - Preparation of Bank Reconciliation Statement, Ledger and Trial Balance - Accountancy | EduRev Notes

Important Points:

  • Starting and Ending points are reversed compared to Example No. 1 Hence (+) items (-) items are interchanged.
  • Favourable balance whether of Cash Book or Pass Book is always a (+) items.
  • If (+) items total is more than (-) items total then the difference in the two totals is always a favourable Balance
  • Where as if + items total is less than the (-) items total then the difference in the two totals is overdraft.

Example 4: Overdraft as per Pass book is Rs. 45,000 Rest of the contents (points 2 to 6) are same as given example No. 2 Prepare Bank Reconciliation Statement as on June 30.2016

Bank Reconciliations Statement as on 30th June 2016

Chapter Notes - Preparation of Bank Reconciliation Statement, Ledger and Trial Balance - Accountancy | EduRev Notes

Important Points 

  • Overdraft whether as per Cash Book or Pass Book is always a (-) items.
  • Starting and Ending points are interchanged as compared to Example No. 2 hence (+) items and (-) are also interchanged.
  • Here (-) items total is more as compared to(+) items total, therefore, the difference in the two balance is a negative items i.e. overdraft as per Cash Book.

Amended Cash Book Method

Introduction : So far we have studied the preparation of Bank Reconciliation Statement simply by reconciling the causes of differences between the Cash Book and Pass Book. In actual practice, adjustments are done in the Cash Book by comparing the Bank column of Cash Book with the Bank Statement and after that, B.R. Statement is prepared. It is called Amended Cash Book Method.

Procedure
(1) Adjusted Cash book is prepared starting with the Balance of the Cash Book given in the question.
(2) All errors that have been committed in the Cash Book will have to be rectified by passing adjusting entries in the Cash Book. Usual General Errors are-

  • Overcasting or Under casting of Debit/Credit Column of Cash-Book.
  • Cheques deposited or Issued but omitted to be entered in the Cash Book.
  • Incorrect amount (if any) entered in the Cash Book.
  • Entries on the correct side or in the wrong column of Cash Book.
  • Any amount recorded twice in the Cash Book.

(3) Certain amounts for which Bank has debited our A/c will be recorded on the Credit side of Cash Book. Such items are-
• Interest charged by the bank on overdraft, etc.
• Debits made by the bank for the bank charges, commission etc.
• Direct payments made by the Bank on behalf of the A/c holder
• Cheques sent for collection but dishonoured.

(4) Cash Book is then balanced: And the new Balance of the Cash book is taken as the starting point for preparing the B.R. Statement.
Important: It should be noted that the following items must not be recorded in the Amended Cash Book.

  • Cheques deposited into the Bank but not yet credited by the Bank.
  • Cheques Issued but yet not presented for payment.
  • Any wrong Entry in pass Book.

Example: The cash Book of Mr. Sharma showed a balance, of Rs. 3,560 as on 31st Dec. 2015 at the bank where as Pass Book showed a balance of Rs.4,230. Comparison of the Cash Book and Pass Book revealed the following:
(1) The Bank has debited Mr. Sharma With Rs. 460. the annual premium of his life Policy according to his standing instructions and Rs. 20 as Bank charges.
(2) Mr. Sharma paid into the Bank cheques totalling Rs.3,100 on Dec. 26, 2015 of which those for Rs.2,500 were collected in December. One cheque for Rs.200 was returned dishonored on 2nd Jan. 2016
(3) The Bank has credited Mr. Sharma by Rs.1,600. the proceeds of a bill.
(4) Cash collected, on 31 st Dec. 2015 totaling Rs.850 was entered in the Cash Book in the Bank column on the same date but banked on 2.1.2016
(5) Mr. Sharma issued cheques totalling Rs.2,300 in the month of Dec. out of which cheques for Rs. 1,000 have not been presented for payment for payment till 31 st Dec.

Solution:
Back Reconciliation Statement

Chapter Notes - Preparation of Bank Reconciliation Statement, Ledger and Trial Balance - Accountancy | EduRev Notes

Amended Cash Book (Bank Column only) as on 31st Dec. 2015

Chapter Notes - Preparation of Bank Reconciliation Statement, Ledger and Trial Balance - Accountancy | EduRev Notes

POINTS TO REMEMBER
Amended or adjusted Cash Book is started with the given balance of bank as per Cash Book.

  • Closing Balance of the adjusted Cash Book is the opening balance of bank Reconciliations statement.
  • Entry for the dishonour of the cheques of Rs. 200 is not done.
    (a) In the Cash Book as it was dishonoured after 31st Dec.
    (b) In Bank Reconciliation Statement it is included in the adjustment (Rs.3,100-Rs.2,500).
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