Bank Reconciliation Statement | CBSE Class 11 Accountancy Notes

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This note covers NCERT Class 11 Accountancy Chapter 5, Bank Reconciliation Statement: why the bank balance in the cash book and the balance in the passbook differ, the causes of the difference, the format of the statement, and how to prepare it for favourable balances, overdrafts and errors. It follows the current NCERT text, and the worked examples are NCERT's own illustrations, with every figure taken from the printed problem statements, so you can check each one against the textbook.

What is a bank reconciliation statement, and why is it needed?

A business keeps a record of its cash and bank transactions in a cash book. The cash book serves the purpose of both the cash account and the bank account, and shows the balance of both at the end of the period. The bank keeps its own record of the same transactions, and gives the customer a copy of it.

The balance shown in the passbook or bank statement must tally with the balance shown in the cash book. In practice the two are usually found to be different. The causes of the difference have to be ascertained and then shown in a statement.

Definition: A bank reconciliation statement is a statement prepared to reconcile the bank balance as per the cash book with the balance as per the passbook or bank statement, by showing the items of difference between the two accounts.

What is needed to prepare it?

To prepare it, two things are needed as on a particular day: the bank balance as per the cash book, and the bank statement, along with the details of both books. If the two balances differ, the entries in both books are compared, and the items that caused the difference are ascertained with their amounts.

Note: Reconciliation amounts to an explanation of the differences between the cash book and the passbook. The statement does not change either book. It only shows why they differ, as on one date.

How do the cash book and the passbook record the same transaction?

Definition: A bank statement or bank passbook is a copy of a bank account as shown by the bank records. It lets the customer check the funds in the bank regularly and update their own records.

The two books record the same transactions from opposite sides. The passbook shows all deposits in the credit column and all withdrawals in the debit column. The cash book records cheques received on its debit side and cheques issued on its credit side.

Table. Columns: Situation · In the cash book (bank column) · In the passbook · Called
Deposits made by the firm are more than its withdrawals — In the cash book (bank column): Debit balance · In the passbook: Credit balance · Called: Favourable balance
The amount withdrawn is more than the amount deposited — In the cash book (bank column): Credit balance · In the passbook: Debit balance · Called: Unfavourable balance, or bank overdraft

A debit balance as per the cash book means the balance of deposits held at the bank. A credit balance as per the cash book indicates a bank overdraft: the excess of the amount withdrawn over the amount deposited.

Note: The debit balance of the bank account in the cash book should equal the credit balance of the business's account in the books of the bank. A debit balance is favourable in the cash book but unfavourable in the passbook. Always read which book the balance comes from before deciding whether it is an overdraft.

Which timing differences make the two balances differ?

NCERT gives two causes of difference between the cash book and the passbook:

timing differences in the recording of transactions, and
errors made by the business or by the bank.

The seven timing differences

A timing difference is caused by the time gap in recording a payment or a receipt in the two books. NCERT lists seven.

Table. Columns: Cause · What happens · Effect
Cheques issued but not yet presented for payment — What happens: A cheque issued to a supplier or creditor is entered at once on the credit side of the cash book. The bank debits the firm's account only when the cheque is actually paid. · Effect: Passbook balance is more than the cash book balance
Cheques paid into the bank but not yet collected — What happens: A cheque received from a customer is recorded at once on the debit side of the cash book. The bank credits the account only when the amount is actually realised. Clearing generally takes a few days, especially for outstation cheques. · Effect: Passbook balance is less than the cash book balance
Direct debits made by the bank on behalf of the customer — What happens: The bank deducts amounts for services without the firm's knowledge: cheque collection charges, incidental charges, interest on overdraft, and unpaid cheques deducted by the bank (stopped or bounced). · Effect: Passbook balance is less than the cash book balance
Amounts directly deposited in the bank account — What happens: A debtor deposits money directly into the firm's bank account. The firm gets no intimation until it receives the bank statement. · Effect: Passbook balance is more than the cash book balance
Interest and dividends collected by the bank — What happens: The bank collects interest and dividend on behalf of the customer and credits the account immediately. The firm records it only when it receives the bank statement. · Effect: Passbook balance is more than the cash book balance
Direct payments made by the bank on behalf of the customer — What happens: On standing instructions, the bank pays telephone bills, insurance premium, rent, taxes and so on, and debits the account. · Effect: Passbook balance is less than the cash book balance
Cheques deposited or bills discounted dishonoured — What happens: A cheque deposited by the firm, or a bill of exchange discounted with the bank, is dishonoured, and the bank debits the customer's account. The firm has no entry until it receives the statement. · Effect: Passbook balance is less than the cash book balance

Note: Sort every item with one question: which book has already recorded it? If only the cash book has recorded a payment, or only the passbook has recorded a receipt, the passbook balance is the higher one. If only the cash book has recorded a receipt, or only the passbook has recorded a payment, the passbook balance is the lower one.

How do errors cause a difference?

Sometimes the difference between the two balances is accounted for by an error on the part of the bank or an error in the cash book of the business.

Table. Columns: Errors made by · Examples given by NCERT
The firm, while recording entries in the cash book — Examples given by NCERT: Omission or wrong recording of transactions relating to cheques issued and cheques deposited; wrong totalling
The bank, while posting entries in the passbook — Examples given by NCERT: Omission or wrong recording of transactions relating to cheques deposited; wrong totalling

Time gap or error?

NCERT's first exercise asks you to sort transactions into time gap and error. The answers, from the chapter's own checklist, are:

Table. Columns: Transaction · Cause of difference
Cheques issued but not presented for payment — Cause of difference: Time gap
A cheque for ₹5,000 issued to M/s. XYZ but recorded as ₹500 in the cash book — Cause of difference: Error
Interest credited by the bank but not yet recorded in the cash book — Cause of difference: Time gap
Cheque deposited into the bank but not yet collected by the bank — Cause of difference: Time gap
Bank charges debited to the firm's current account by the bank — Cause of difference: Time gap

In a bank reconciliation statement, adjustments for errors are made according to the principles of rectification of errors, which NCERT discusses in detail in its chapter on rectification of errors.

What is the format of a bank reconciliation statement?

The Add and Less form

The statement can be drawn up in two forms. In the first, the items to be added are listed under Add and the items to be deducted under Less.

Table. Columns: Particulars · Amount (₹)
Balance as per cash book — Amount (₹): .......
Add: Cheques issued but not presented — Amount (₹): .......
Add: Interest credited by the bank — Amount (₹): .......
Less: Cheques deposited but not credited by the bank — Amount (₹): .......
Less: Bank charges not recorded in the cash book — Amount (₹): .......
Balance as per the passbook — Amount (₹): xxxx

The two-column form

In the second form, the statement has two amount columns, one showing additions (the + column) and another showing deductions (the − column). NCERT says that for convenience this treatment is usually adopted, and all its illustrations use it.

Table. Columns: Particulars · Column · Amount (₹)
Balance as per cash book — Column: Plus (+) · Amount (₹): ......
Cheques issued but not presented — Column: Plus (+) · Amount (₹): ......
Interest credited by the bank — Column: Plus (+) · Amount (₹): ......
Cheques deposited but not credited by the bank — Column: Minus (−) · Amount (₹): ......
Bank charges not recorded in the cash book — Column: Minus (−) · Amount (₹): ......
Balance as per the passbook — Column: Minus (−) · Amount (₹): xxxx

In the two-column form the closing balance is the balancing figure. It is written in whichever column is smaller, so that both columns show the same total. In this note each line of a statement names its column: plus (+) or minus (−).

Two ways of reconciling

After identifying the causes of difference, the reconciliation may be done in two ways:

preparation of the bank reconciliation statement without adjusting the cash book balance, and
preparation of the bank reconciliation statement after adjusting the cash book balance.

NCERT notes that in practice the statement is prepared after adjusting the cash book balance. The method set out in the current chapter, and examined through its illustrations, is the first one.

What are the steps for preparing the statement with a favourable balance?

The four situations

There are four situations in which the statement may have to be prepared.

The debit balance (favourable balance) as per cash book is given, and the balance as per passbook is to be ascertained.
The credit balance (favourable balance) as per passbook is given, and the balance as per cash book is to be ascertained.
The credit balance as per cash book (unfavourable or overdraft balance) is given, and the balance as per passbook is to be ascertained.
The debit balance as per passbook (unfavourable or overdraft balance) is given, and the balance as per cash book is to be ascertained.

The eight steps

NCERT gives eight steps for dealing with favourable balances, starting from the cash book.

The date on which the statement is prepared is written at the top, as part of the heading.
The first item in the statement is generally the balance as shown by the cash book. Alternatively, the starting point can be the balance as per the passbook.
The cheques deposited but not yet collected are deducted.
All the cheques issued but not yet presented for payment, and amounts directly deposited in the bank account, are added.
All the items of charges debited by the bank in the passbook but not entered in the cash book are deducted: interest on overdraft, payments by the bank on standing instructions, bills and cheques dishonoured and so on.
All the credits given by the bank, such as interest or dividends collected and direct deposits in the bank, are added.
Adjustments for errors are made according to the principles of rectification of errors.
The net balance shown by the statement should now be the same as shown by the passbook.

Add or deduct: a ready table

Table. Columns: Item · Starting from the cash book balance (favourable) · Starting from the passbook balance (favourable)
Cheques issued but not presented for payment — Starting from the cash book balance (favourable): Add · Starting from the passbook balance (favourable): Deduct
Amounts directly deposited by customers — Starting from the cash book balance (favourable): Add · Starting from the passbook balance (favourable): Deduct
Interest and dividends collected and credited by the bank — Starting from the cash book balance (favourable): Add · Starting from the passbook balance (favourable): Deduct
Cheques deposited but not yet collected — Starting from the cash book balance (favourable): Deduct · Starting from the passbook balance (favourable): Add
Bank charges and interest on overdraft debited by the bank — Starting from the cash book balance (favourable): Deduct · Starting from the passbook balance (favourable): Add
Payments made by the bank on standing instructions — Starting from the cash book balance (favourable): Deduct · Starting from the passbook balance (favourable): Add
Cheques or bills dishonoured, recorded only in the passbook — Starting from the cash book balance (favourable): Deduct · Starting from the passbook balance (favourable): Add

Note: The treatment of all items is the reverse if the passbook balance is the starting point. Learn the cash book column of this table and reverse it when the question starts from the passbook.

How is the statement prepared when the balance is favourable?

Starting from the cash book

Worked example 1: starting from the cash book (NCERT Illustration 1). From the following particulars of Mr. Vinod, prepare a bank reconciliation statement as on March 31, 2017.
Bank balance as per cash book ₹50,000. Cheques issued but not presented for payment ₹6,000. The bank had directly collected a dividend of ₹8,000 and credited it to the bank account, but it was not entered in the cash book. Bank charges of ₹400 were not entered in the cash book. A cheque for ₹6,000 was deposited but not collected by the bank.
Reasoning: the cheques issued and the dividend make the passbook balance higher, so they are added. The uncollected cheque and the bank charges make the passbook balance lower, so they are deducted.
Working: 50,000 + 6,000 + 8,000 − 6,000 − 400 = 57,600.
Answer: Balance as per passbook = ₹57,600.

Table. Columns: Particulars · Column · Amount (₹)
1. Balance as per cash book — Column: Plus (+) · Amount (₹): 50,000
2. Cheques issued but not presented for payment — Column: Plus (+) · Amount (₹): 6,000
3. Dividends collected by the bank — Column: Plus (+) · Amount (₹): 8,000
4. Cheque deposited but not credited by the bank — Column: Minus (−) · Amount (₹): 6,000
5. Bank charges debited by the bank — Column: Minus (−) · Amount (₹): 400
6. Balance as per passbook — Column: Minus (−) · Amount (₹): 57,600
Total — Column: Both columns · Amount (₹): 64,000 each

Starting from the passbook

Worked example 2: starting from the passbook (NCERT Illustration 3). The bank passbook of M/s. Boss & Co. showed a balance of ₹45,000 on May 31, 2017. Prepare a bank reconciliation statement as on that date.
Cheques issued before May 31, 2017, amounting to ₹25,940, had not been presented for encashment. Two cheques of ₹3,900 and ₹2,350 were deposited into the bank on May 31, but the bank gave credit for them in June 2017. There was also a debit in the passbook of ₹2,500 in respect of a cheque dishonoured on May 31, 2017.
Reasoning: the start is the passbook, so every treatment is reversed. The deposited cheques (3,900 + 2,350 = 6,250) are already in the cash book, so they are added. The dishonoured cheque has reduced only the passbook, so it is added back. The cheques issued have reduced only the cash book, so they are deducted.
Working: 45,000 + 6,250 + 2,500 − 25,940 = 27,810.
Answer: Balance as per cash book = ₹27,810.

Table. Columns: Particulars · Column · Amount (₹)
1. Balance as per passbook — Column: Plus (+) · Amount (₹): 45,000
2. Cheques deposited but not collected by the bank (₹3,900 + ₹2,350) — Column: Plus (+) · Amount (₹): 6,250
3. Cheque dishonoured, recorded only in passbook — Column: Plus (+) · Amount (₹): 2,500
4. Cheques issued but not presented for payment — Column: Minus (−) · Amount (₹): 25,940
5. Balance as per cash book — Column: Minus (−) · Amount (₹): 27,810
Total — Column: Both columns · Amount (₹): 53,750 each

How are overdrafts dealt with?

Businesses sometimes have overdrafts at the bank. An overdraft is where the bank account becomes negative and the business has in effect borrowed from the bank. It is shown in the cash book as a credit balance. In the bank statement, a balance followed by Dr. (or sometimes OD) means that there is an overdraft, and it is called a debit balance as per passbook.

Definition: An overdraft is treated as a negative figure on a bank reconciliation statement. When it is the starting balance it is written in the minus column, and the other items are treated exactly as they are for a favourable balance. An overdraft found as the closing balance is written in the column that balances the statement, as in Illustrations 4 and 6.

Overdraft as per cash book

Worked example 3: overdraft as per cash book (NCERT Illustration 4). On March 31, 2017, Rakesh had an overdraft of ₹8,000 as shown by his cash book. Prepare a bank reconciliation statement.
Cheques amounting to ₹2,000 had been paid in by him but were not collected by the bank. He issued cheques of ₹800 which were not presented to the bank for payment. There was a debit in his passbook of ₹60 for interest and ₹100 for bank charges.
Reasoning: the overdraft goes in the minus column. Uncollected cheques, interest and bank charges are deducted as usual, and unpresented cheques are added.
Working: minus column 8,000 + 2,000 + 60 + 100 = 10,160; plus column 800. The minus column is larger by 9,360, so the passbook also shows an overdraft.
Answer: Overdraft as per passbook = ₹9,360.

Table. Columns: Particulars · Column · Amount (₹)
1. Overdraft as per cash book — Column: Minus (−) · Amount (₹): 8,000
2. Cheques deposited but not yet collected by the bank — Column: Minus (−) · Amount (₹): 2,000
3. Interest charged by the bank — Column: Minus (−) · Amount (₹): 60
4. Bank charges — Column: Minus (−) · Amount (₹): 100
5. Cheques issued but not presented for payment — Column: Plus (+) · Amount (₹): 800
6. Balance as per bank passbook (overdraft) — Column: Plus (+) · Amount (₹): 9,360
Total — Column: Both columns · Amount (₹): 10,160 each

Overdraft as per passbook

Worked example 4: overdraft as per passbook (NCERT Illustration 6). From the following particulars of Asha & Co., prepare a bank reconciliation statement on December 31, 2017.
Overdraft as per passbook ₹20,000. Interest on overdraft ₹2,000. Insurance premium paid by the bank ₹200. Cheque issued but not presented for payment ₹6,500. Cheque deposited but not yet cleared ₹6,000. Wrongly debited by the bank ₹500.
Reasoning: the start is the passbook overdraft, in the minus column. Interest, the insurance premium and the wrong debit have reduced only the passbook, so they are added back, and so is the uncleared cheque, which the cash book has already counted. The unpresented cheque has reduced only the cash book, so it is deducted.
Working: plus column 2,000 + 200 + 6,000 + 500 = 8,700; minus column 20,000 + 6,500 = 26,500. The minus column is larger by 17,800.
Answer: Overdraft as per cash book = ₹17,800.

Table. Columns: Particulars · Column · Amount (₹)
1. Overdraft as per passbook — Column: Minus (−) · Amount (₹): 20,000
2. Interest on overdraft — Column: Plus (+) · Amount (₹): 2,000
3. Insurance premium paid by the bank — Column: Plus (+) · Amount (₹): 200
4. Cheque issued but not presented for payment — Column: Minus (−) · Amount (₹): 6,500
5. Cheques deposited but not yet cleared — Column: Plus (+) · Amount (₹): 6,000
6. Wrongly debited by the bank — Column: Plus (+) · Amount (₹): 500
7. Balance as per the cash book (overdraft) — Column: Plus (+) · Amount (₹): 17,800
Total — Column: Both columns · Amount (₹): 26,500 each

When an overdraft becomes a favourable balance

An overdraft can also turn into a favourable balance. In NCERT Illustration 5, Agrawal Traders had an overdraft of ₹1,18,100 as per cash book. Cheques of ₹12,400 were received and recorded in the cash book but not sent to the bank for collection, and interest of ₹8,800 was charged by the bank, so the minus column totals ₹1,39,300. A customer paid ₹27,300 directly into the bank and cheques of ₹1,75,200 were issued but not presented, so the plus column totals ₹2,02,500. The plus column is larger by ₹63,200, which is a favourable balance as per the passbook.

How are errors adjusted in the statement?

For an error in the book you start from, ask what the wrong entry has done to that book's balance. If it has made that balance too small, add the amount. If it has made it too large, deduct it.

Errors in the cash book

Worked example 5: errors in the cash book (NCERT Illustration 7). Prepare a bank reconciliation statement as on March 31, 2017.
(a) Debit balance as per cash book is ₹10,000. (b) A cheque for ₹1,000 was deposited but not recorded in the cash book. (c) A cash deposit of ₹200 was recorded in the cash book as if there were no bank column. (d) A cheque issued for ₹250 was recorded as ₹205 in the cash column.
(e) The debit balance of ₹1,500 as on the previous day was brought forward as a credit balance. (f) The payment side of the cash book was undercast by ₹100. (g) A cash discount allowed of ₹112 was recorded as ₹121 in the bank column. (h) A cheque of ₹500 received from a debtor was recorded in the cash book but not deposited in the bank for collection. (i) One outgoing cheque of ₹300 was recorded twice in the cash book.
Reasoning: items (b), (c), (e) and (i) have made the cash book balance too small, so they are added: 1,000, 200, 3,000 (a debit of 1,500 carried as a credit is wrong by twice the amount) and 300.
Items (d), (f), (g) and (h) have made it too large, so they are deducted: 250, 100, 121 and 500.
Working: plus column 10,000 + 3,000 + 300 + 200 + 1,000 = 14,500; minus column 100 + 250 + 121 + 500 = 971. 14,500 − 971 = 13,529.
Answer: Credit balance as per passbook = ₹13,529.

Table. Columns: Particulars · Column · Amount (₹)
1. Debit balance as per cash book — Column: Plus (+) · Amount (₹): 10,000
2. Error in carrying forward — Column: Plus (+) · Amount (₹): 3,000
3. Cheque recorded twice in cash book — Column: Plus (+) · Amount (₹): 300
4. Cash deposit not recorded in bank column — Column: Plus (+) · Amount (₹): 200
5. Cheque deposited but not recorded — Column: Plus (+) · Amount (₹): 1,000
6. Undercasting of payment side — Column: Minus (−) · Amount (₹): 100
7. Cheque issued but not entered in bank column — Column: Minus (−) · Amount (₹): 250
8. Cash discount wrongly recorded in bank column — Column: Minus (−) · Amount (₹): 121
9. Cheque recorded but not deposited — Column: Minus (−) · Amount (₹): 500
10. Credit balance as per passbook — Column: Minus (−) · Amount (₹): 13,529
Total — Column: Both columns · Amount (₹): 14,500 each

Errors made by the bank

Errors made by the bank are handled in the same way, starting from the passbook. In NCERT Illustration 8 the passbook of Shri Krishan showed ₹10,000. A cheque of ₹500 collected for him was wrongly credited to another account (add 500). A credit balance of ₹1,500 was carried as a debit balance (add 3,000). The payment of a cheque of ₹350 was recorded twice (add 350). A cash deposit of ₹1,589 was recorded as ₹1,598 (deduct 9). The withdrawal column was undercast by ₹100 (deduct 100). A cheque of ₹1,000 deposited by another customer was credited to him (deduct 1,000). The plus column is 13,850 and the minus column is 1,109, so the debit balance as per cash book is ₹12,741.

Can you solve these NCERT practice questions?

These are from the numerical questions at the end of the NCERT chapter. The answers are NCERT's, and the working shows how each is reached.

Table. Columns: Question · Working · NCERT answer
Balance as per cash book ₹3,200; cheque issued but not presented ₹1,800; cheque deposited but not collected ₹2,000; bank charges debited by bank ₹150 — Working: 3,200 + 1,800 − 2,000 − 150 · NCERT answer: Balance as per passbook ₹2,850
Cash book balance ₹3,700; cheques for ₹700, ₹300 and ₹180 not presented for payment; a cheque of ₹1,200 deposited but not credited — Working: 3,700 + 700 + 300 + 180 − 1,200 · NCERT answer: Balance as per passbook ₹3,680
Cash book balance ₹7,800; cheque deposited but not credited ₹3,000; cheque issued but not presented ₹1,500; insurance premium paid by the bank ₹2,000; bank interest credited ₹400; bank charges ₹100; directly deposited by a customer ₹4,000 — Working: 7,800 − 3,000 + 1,500 − 2,000 + 400 − 100 + 4,000 · NCERT answer: Balance as per passbook ₹8,600
Balance as per passbook of Mr. Kumar ₹3,000; cheques paid in but not cleared ₹1,000 and ₹500; bank charges ₹300; cheques issued but not presented ₹2,000 and ₹500; interest entered in the passbook only ₹100 — Working: 3,000 + 1,000 + 500 + 300 − 2,000 − 500 − 100 · NCERT answer: Balance as per cash book ₹2,200

The fourth question starts from the passbook, so each item is treated in reverse: uncleared cheques and bank charges are added, and unpresented cheques and the interest credited by the bank are deducted.

Glossary

Bank reconciliation statement — A statement that reconciles the bank balance as per cash book with the balance as per passbook by showing the items of difference.
Cash book — The book in which a business records its cash and bank transactions; it serves as both cash account and bank account.
Passbook — A copy of the customer's bank account as shown by the bank records; also issued as a bank statement.
Favourable balance — A debit balance as per the cash book, or a credit balance as per the passbook, showing deposits held at the bank.
Bank overdraft — The excess of the amount withdrawn over the amount deposited; a credit balance in the cash book or a debit balance in the passbook.
Timing difference — A difference caused by the time gap between recording a receipt or payment in the cash book and in the passbook.
Cheques issued but not presented — Cheques credited in the cash book when issued, which the bank has not yet paid and debited.
Cheques deposited but not collected — Cheques debited in the cash book on deposit, which the bank has not yet realised and credited.
Direct debit — An amount deducted by the bank from the account for its services, such as collection charges or interest on overdraft.
Standing instructions — Instructions given by a customer to the bank to make certain payments regularly on stated days to third parties.
Dishonoured cheque — A deposited cheque that is not paid, which the bank debits to the customer's account.
Undercast — A total that has been added up to less than the correct amount, as in the payment side of a cash book.

Common errors and misconceptions

Misconception: A credit balance in the cash book is a favourable balance. Correct: A credit balance as per the cash book indicates a bank overdraft. The favourable balance is a debit balance in the cash book.
Misconception: A debit balance in the passbook means money in the bank. Correct: A debit balance as per passbook is an overdraft. Money in the bank shows as a credit balance in the passbook.
Misconception: Cheques issued but not presented reduce the passbook balance. Correct: The bank has not yet paid them, so the passbook balance is higher than the cash book balance. They are added when starting from a favourable cash book balance.
Misconception: Items are treated the same way whichever book you start from. Correct: The treatment of all items is reversed when the passbook balance is the starting point.
Misconception: With an overdraft, the add and deduct rules are swapped. Correct: The overdraft is simply treated as a negative figure, written in the minus column when it is the starting balance. The other items keep the same treatment.
Misconception: When cheques are deposited but not collected, the overdraft as per passbook is less than the overdraft as per cash book. Correct: It is more, because the bank has not yet credited the cheques. In Illustration 4 the uncollected cheques of ₹2,000, with the interest and bank charges and less the ₹800 of unpresented cheques, take the overdraft from ₹8,000 to ₹9,360.
Misconception: The bank reconciliation statement corrects the cash book. Correct: It only explains the difference between the two balances as on a date. Entries in the books are made separately.
Misconception: A balance carried forward on the wrong side is wrong by its own amount. Correct: It is wrong by twice the amount. A debit of ₹1,500 brought forward as a credit needs an adjustment of ₹3,000.

Exam-style questions with model answers

Q1. What is a bank overdraft? [1 mark]

A bank overdraft is the excess of the amount withdrawn over the amount deposited in the bank. It appears as a credit balance in the cash book and a debit balance in the passbook.

Q2. State the need for preparing a bank reconciliation statement. [2 marks]

The bank balance as per the cash book and the balance as per the passbook should tally, but in practice they usually differ.
The statement ascertains the causes of the difference, timing differences and errors, and shows them so that the two balances are reconciled.

Q3. Explain "favourable balance as per cash book". [2 marks]

It is a debit balance in the bank column of the cash book, which means the balance of deposits held at the bank.
It exists when the deposits made by the firm are more than its withdrawals, and it appears as a credit balance in the passbook.

Q4. Explain "wrongly debited by the bank" with an example, and state its treatment. [3 marks]

It is an error by the bank in which an amount that does not relate to the customer's account is debited to it, for example a cheque drawn on the customer's savings account debited to his current account.
The wrong debit makes the passbook balance lower than the cash book balance, or the passbook overdraft higher.
Starting from the passbook, the amount is added back. In NCERT Illustration 6, ₹500 wrongly debited by the bank is placed in the plus column against an overdraft as per passbook.

Q5. State any three causes of difference that arise from the time gap in recording transactions. [3 marks]

Cheques issued by the firm but not yet presented for payment: the cash book is credited at once, but the bank debits only on payment.
Cheques paid into the bank but not yet collected: the cash book is debited at once, but the bank credits only when the amount is realised.
Direct debits made by the bank, such as collection charges, incidental charges and interest on overdraft, which the firm learns of only from the bank statement. (Direct deposits, interest and dividends collected, payments on standing instructions and dishonoured cheques are also acceptable.)

Q6. From the following particulars of Anil & Co., prepare a bank reconciliation statement as on August 31, 2017: balance as per cash book ₹54,000; bank incidental charges of ₹100 debited by the bank but not recorded in the cash book; cheques for ₹5,400 deposited but not yet collected; a cheque for ₹20,000 issued but not presented for payment. [3 marks]

Heading: Bank Reconciliation Statement of Anil & Co. as on August 31, 2017. Balance as per cash book: ₹54,000 in the plus column. Add cheques issued but not presented: ₹20,000. Plus column total ₹74,000.
Deduct cheques deposited but not credited by the bank: ₹5,400. Deduct bank incidental charges: ₹100.
Balance as per passbook = 74,000 − 5,400 − 100 = ₹68,500. Both columns total ₹74,000.

Q7. Explain the reasons why the balance shown by the passbook does not agree with the balance shown by the bank column of the cash book. [5 marks]

Cheques issued but not presented for payment are credited in the cash book at once but debited by the bank only when paid, so the passbook balance is higher.
Cheques paid into the bank but not yet collected are debited in the cash book at once but credited by the bank only when realised, so the passbook balance is lower.
Direct debits by the bank (collection charges, incidental charges, interest on overdraft) and payments made on standing instructions (telephone bills, insurance premium, rent, taxes) appear only in the passbook, so its balance is lower.
Amounts directly deposited by customers, and interest and dividends collected by the bank, appear only in the passbook, so its balance is higher. Cheques deposited or bills discounted that are dishonoured are debited by the bank, making its balance lower.
Errors by the firm in the cash book or by the bank in the passbook, such as omission, wrong recording or wrong totalling, also cause the two balances to differ.

Q8. Prepare a bank reconciliation statement as on December 31, 2017: overdraft as per cash book ₹10,000; bank charges debited in the passbook ₹100; interest on overdraft debited in the passbook ₹380; cheques issued but not encashed ₹2,150; interest on investment collected by the bank and credited in the passbook ₹600; cheques paid into the bank but not cleared ₹1,100. [5 marks]

Heading: Bank Reconciliation Statement as on December 31, 2017. Overdraft as per cash book: ₹10,000 in the minus column.
Minus column also takes bank charges ₹100, interest on overdraft ₹380 and cheques paid in but not cleared ₹1,100. Minus column total = 10,000 + 100 + 380 + 1,100 = ₹11,580.
Plus column takes cheques issued but not encashed ₹2,150 and interest on investment collected by the bank ₹600. Plus column total = ₹2,750.
The minus column is larger, so the passbook shows an overdraft of 11,580 − 2,750 = ₹8,830.
Overdraft as per passbook = ₹8,830, written in the plus column so that both columns total ₹11,580.

Key takeaways

A bank reconciliation statement reconciles the bank balance as per cash book with the balance as per passbook by showing the items of difference.
A favourable balance is a debit balance in the cash book and a credit balance in the passbook; an overdraft is the reverse in each book.
The two causes of difference are timing differences in recording transactions and errors made by the business or by the bank.
Starting from a favourable cash book balance, add cheques issued but not presented, direct deposits, and interest or dividends collected by the bank.
Starting from a favourable cash book balance, deduct cheques deposited but not collected, bank charges, payments on standing instructions and dishonoured cheques.
The treatment of every item is reversed when the passbook balance is taken as the starting point.
An overdraft is treated as a negative figure, so a starting overdraft is written in the minus column; the treatment of the other items does not change.
For an error in the book you start from, add the amount if it made that balance too small and deduct it if it made that balance too large.

Test yourself

In which column does a passbook show deposits?

A passbook or bank statement shows all deposits in the credit column and all withdrawals in the debit column.

What kind of balance does a credit balance in the cash book indicate?

A credit balance as per the cash book indicates a bank overdraft, which is an unfavourable balance.

Starting from a favourable cash book balance, how are cheques issued but not presented treated?

They are added, because the bank has not yet paid them and the passbook balance is therefore higher than the cash book balance.

Starting from a favourable passbook balance, how are cheques issued but not presented treated?

They are deducted, because the treatment of every item is reversed when the passbook balance is the starting point.

Give two examples of payments a bank makes on standing instructions.

On standing instructions a bank may pay telephone bills and insurance premium directly; rent and taxes are other examples given by NCERT.

How is an overdraft shown on a bank reconciliation statement?

An overdraft is treated as a negative figure, so an overdraft taken as the starting balance is written in the minus column of the statement.

A cheque for ₹5,000 is recorded as ₹500 in the cash book. Is this a time gap or an error?

It is an error made by the business in recording the transaction, not a difference caused by a time gap.

In NCERT Illustration 1, what is the balance as per passbook?

The balance as per passbook is ₹57,600, reached as 50,000 + 6,000 + 8,000 − 6,000 − 400.

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