Bank Reconciliation Statement | ISC Class 11 Accounts Notes

This note covers bank reconciliation statements for Class 11 Accounts: the meaning and need for reconciliation, the timing differences and errors that cause the cash book and passbook balances to differ, how to prepare a bank reconciliation statement starting from a favourable cash book or passbook balance, how to prepare one when there is an overdraft, how to work from extracts of both books together, and how to prepare an amended cash book and reconciliation statement after adjusting the cash book balance.

What is a bank reconciliation statement and why is it prepared?

A business records its receipts and payments through the bank in its cash book, the book in which the bank column shows both the cash account and the bank account of the firm and gives the balance of both at the end of a period.

The bank keeps its own record of the same account and periodically sends the customer a copy of it, called a passbook or bank statement.

A bank statement or passbook is a copy of the bank account as shown in the bank's own records, and it lets the customer check the funds at the bank regularly and update their own records of transactions that have occurred.

The balance of the bank column in the cash book should, in theory, agree with the balance shown by the passbook on the same date, because both are records of the same account.

In practice, however, the two balances usually differ. The bank reconciliation statement is the statement prepared to reconcile, that is to tally, the bank balance as per cash book with the balance as per passbook (or bank statement), by listing the items on account of which the difference has arisen, with the amounts involved.

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

Reconciliation is needed so that a business can be certain that no cheque, deposit or bank charge has gone unrecorded in either book, so that any error by the firm or by the bank can be detected and corrected, and so that the firm knows the correct balance of funds available at the bank on a given date. This is a standard periodic check carried out by businesses wherever a current account is maintained.

Why do the cash book and the passbook show different balances?

A bank statement shows deposits in the credit column and withdrawals in the debit column, so if deposits exceed withdrawals the account shows a credit balance, and if withdrawals exceed deposits it shows a debit balance, which is called an overdraft.

Differences between the cash book and the passbook arise from two broad causes: timing differences in recording transactions, and errors made by the business or by the bank.

A timing difference occurs because one side (the firm or the bank) records a transaction immediately, while the other side records the same transaction only after a time gap. The main timing differences are set out below.

Cheques issued but not yet presented

When the firm issues a cheque to a supplier or creditor, it is entered immediately on the credit side of the cash book, but the bank debits the firm's account only when the receiving party actually presents the cheque for payment.

The time gap between issue and presentation causes the cash book balance to fall before the passbook balance does.

Cheques deposited but not yet collected

When the firm receives a cheque from a customer, it is recorded immediately on the debit side of the cash book, increasing the cash book balance.

The bank credits the firm's account only when the cheque is actually realised, and clearing can take a few days, especially for outstation cheques or cheques paid into a branch other than the one where the account is held.

Direct debits and other bank-only entries

The bank sometimes deducts amounts without the firm's knowledge, such as cheque collection charges, incidental charges, interest on overdraft, or an unpaid (stopped or bounced) cheque.

The firm learns of these only on receiving the bank statement, so the passbook balance falls below the cash book balance until the firm records them.

Direct deposits, interest and dividends collected, and standing payments

Debtors may deposit money directly into the firm's bank account, or the bank may collect interest or dividends on the firm's behalf and credit them at once, without the firm knowing until the statement arrives; in both cases the passbook balance exceeds the cash book balance until the firm records the entry.

Conversely, where the firm has given the bank standing instructions to pay, say, a telephone bill, insurance premium or rent directly, the bank debits the account immediately, and the passbook balance falls below the cash book balance until the firm records the payment.

Cheques or bills dishonoured

If a cheque deposited by the firm, or a bill of exchange discounted with the bank, is dishonoured, the bank debits the customer's account on the date of dishonour.

As the firm does not learn of this immediately, there is no entry in its cash book, and the passbook balance falls below the cash book balance until the firm is informed.

What errors cause differences between cash book and passbook?

Besides timing differences, the two balances may differ because of an actual error, either in the firm's own cash book or in the bank's passbook.

An error by the firm includes the omission of a cheque issued or deposited, or a wrong recording such as incorrect totalling in the cash book.

An error by the bank includes the omission or wrong recording of a transaction relating to a cheque deposited, or wrong totalling, while posting entries in the passbook.

Both types of error must be traced and corrected (rectified) as part of preparing the reconciliation statement, applying the usual principles of rectification of errors.

What are a favourable balance and an overdraft balance?

The debit balance shown by the bank column of the cash book means that the firm has deposits held at the bank, because the firm has deposited more than it has withdrawn; this balance appears as a credit balance in the passbook.

Such a balance is called the favourable balance as per the cash book, or the favourable balance as per the passbook.

A credit balance in the cash book, on the other hand, indicates a bank overdraft, that is, an excess of amounts withdrawn over amounts deposited; it is also called the unfavourable balance as per cash book or as per passbook.

In the bank statement itself, a balance marked "Dr." or "OD" indicates an overdraft.

Definition: Overdraft. A credit balance in the cash book's bank column (shown as a debit balance in the passbook), arising when withdrawals from the bank exceed deposits; it is treated as a negative figure in the bank reconciliation statement.

Four separate situations can therefore arise when preparing the statement: a debit (favourable) cash book balance, from which the passbook balance is found; a credit (favourable) passbook balance, from which the cash book balance is found; a credit (overdraft) cash book balance, from which the passbook balance is found; and a debit (overdraft) passbook balance, from which the cash book balance is found.

Favourable Bal = Cash Book Dr. Bal = Passbook Cr. Bal

How is a bank reconciliation statement prepared from a favourable cash book balance?

When the cash book shows a favourable (debit) balance, the following steps are generally followed to arrive at the passbook balance.

1. Write the date on which the statement is prepared at the top, as part of the heading.
2. Start with the balance shown by the cash book.
3. Deduct cheques deposited but not yet collected by the bank.
4. Add cheques issued but not yet presented for payment, and amounts directly deposited in the bank account.
5. Deduct items of charge debited by the bank but not yet entered in the cash book, such as bank charges, interest on overdraft, standing-instruction payments, and dishonoured cheques or bills.
6. Add items credited by the bank but not yet entered in the cash book, such as interest or dividends collected and direct deposits.
7. Adjust for any errors found in either book, following the usual principles of rectification.
8. The resulting net balance should equal the balance shown by the passbook.

Passbook Bal = Cash Book Bal + Adds − Deducts

If the passbook balance is taken as the starting point instead, every item above is treated the opposite way (an item that was added is now deducted, and vice versa), so that the net figure equals the cash book balance.

Worked example 1. From the following particulars of Mr. Vinod, prepare a bank reconciliation statement as on 31 March 2017: (1) Bank balance as per cash book ₹50,000. (2) Cheques issued but not presented for payment ₹6,000.

(3) The bank had directly collected a dividend of ₹8,000 and credited it to the bank account, but this was not entered in the cash book. (4) Bank charges of ₹400 were not entered in the cash book.

(5) A cheque for ₹6,000 was deposited but not collected by the bank.

Answer: Start with the cash book balance of ₹50,000. Add the cheques issued but not presented, ₹6,000, giving ₹56,000. Add the dividend collected by the bank, ₹8,000, giving ₹64,000. Deduct the cheque deposited but not yet collected, ₹6,000, giving ₹58,000.

Deduct the bank charges not entered in the cash book, ₹400. The balance as per passbook is ₹57,600.

How is a bank reconciliation statement prepared from a favourable passbook balance?

When the passbook balance (or bank statement) is used as the starting point, every step above is reversed: items that were added when working from the cash book are now deducted, and items that were deducted are now added, so that the net figure equals the cash book balance.

Cash Book Bal = Passbook Bal + Deducts − Adds

Worked example 2. The bank passbook of M/s. Boss & Co. showed a balance of ₹45,000 on 31 May 2017. (1) Cheques issued before 31 May 2017, amounting to ₹25,940, had not been presented for encashment.

(2) Two cheques of ₹3,900 and ₹2,350 were deposited into the bank on 31 May but the bank gave credit for the same only in June 2017.

(3) There was also a debit in the passbook of ₹2,500 in respect of a cheque dishonoured on 31.5.2017.

Answer: Start with the passbook balance of ₹45,000. Add the cheques deposited but not yet collected by the bank, ₹3,900 + ₹2,350 = ₹6,250, giving ₹51,250. Add the cheque dishonoured and recorded only in the passbook, ₹2,500, giving ₹53,750.

Deduct the cheques issued but not presented for payment, ₹25,940. The balance as per cash book is ₹27,810.

The table below sets out the general proforma for a bank reconciliation statement in the two-column (add/less) form, filled in with the figures from Worked example 1, using the two-amount-column layout.

How is a bank reconciliation statement prepared when there is an overdraft?

Businesses sometimes have an overdraft at the bank, which is a credit balance in the cash book and a debit (or "Dr."/"OD") balance in the passbook.

The overdraft is treated as a negative figure in the statement, and the direction in which each item is added or deducted is the reverse of the favourable-balance case: an unpresented cheque, for instance, is now deducted from the cash book overdraft, because the bank has not yet paid it out and so the overdraft in the passbook is smaller, while an uncollected cheque is added, because the bank has not yet credited it and so the overdraft in the passbook is larger.

Overdraft Bal = Cash Bk OD ± Items

Worked example 3. On 31 March 2017, Rakesh had an overdraft of ₹8,000 as shown by his cash book. 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.

Answer: Start with the overdraft as per cash book, ₹8,000. Deduct the cheques issued but not presented for payment, ₹800, giving ₹7,200. Add the cheques deposited but not yet collected, ₹2,000, giving ₹9,200.

Add the interest debited by the bank, ₹60, and the bank charges, ₹100. The overdraft as per the bank passbook is ₹9,360.

How is the statement prepared from a passbook overdraft balance?

When the starting point is an overdraft as per the passbook (a debit balance in the passbook), the aim is to find the overdraft as per the cash book, and every item is treated the opposite way to the cash book overdraft case above.

Cheques issued but not presented for payment are added, because the firm has already recorded them as paid but the bank has not yet paid them, so the firm's overdraft is larger than the bank's; cheques deposited but not yet collected are deducted, because the firm has already recorded them but the bank has not yet credited them.

Interest on overdraft, bank charges and other amounts debited only in the passbook are deducted, since they have increased the overdraft the bank records but not yet the firm's; amounts credited only in the passbook, such as interest collected or a direct deposit by a customer, are added.

An amount wrongly debited by the bank is deducted, since it has wrongly increased the bank's overdraft, and an amount wrongly credited by the bank is added, following the principles of rectification of errors.

Worked example 4. From the following particulars of Asha & Co., prepare a bank reconciliation statement on 31 December 2017: overdraft as per passbook ₹20,000; interest on overdraft ₹2,000; insurance premium paid by the bank ₹200; cheques issued but not presented for payment ₹6,500; cheques deposited but not yet cleared ₹6,000; amount wrongly debited by the bank ₹500.

Answer: Start with the overdraft as per passbook, ₹20,000. Deduct the interest on overdraft, ₹2,000, giving ₹18,000. Deduct the insurance premium paid by the bank, ₹200, giving ₹17,800. Deduct the amount wrongly debited by the bank, ₹500, giving ₹17,300.

Add the cheques issued but not presented for payment, ₹6,500, giving ₹23,800. Deduct the cheques deposited but not yet cleared, ₹6,000. The overdraft as per the cash book is ₹17,800.

How is a bank reconciliation statement prepared from extracts of both books?

Where only extracts (a selected period's entries) of the cash book and the passbook are given, rather than a single final balance with a list of differences, the same method is used, but the extracts must first be compared entry by entry.

Each cheque or deposit entered in one book is checked against the other book to see whether it also appears there, and on what date.

1. List the entries that appear in the cash book extract but not in the passbook extract (unpresented or uncollected cheques, items not yet sent to the bank).
2. List the entries that appear in the passbook extract but not in the cash book extract (direct credits or debits, bank charges, interest, dishonoured cheques).
3. Check the running totals and the closing balance shown in each extract for arithmetic accuracy.
4. Take either the cash book extract's closing balance or the passbook extract's closing balance as the starting point of the statement, and add or deduct the items found in steps 1 and 2, following the usual favourable-balance or overdraft rules.
5. Confirm that the resulting figure equals the closing balance of the other extract.

This approach is the same reconciliation procedure as in the single-balance illustrations above; the only extra work is identifying, from the two extracts, which entries are common to both books and which appear in only one.

Worked example 5. Naman's cash book shows a bank balance of ₹40,960 on 31 March 2017. Comparing it entry by entry with the passbook, the following are found: (a) bank charges of ₹100 debited in the passbook on 31 March 2017 are not entered in the cash book; (b) on 21 March 2017 a debtor paid ₹2,000 directly into the bank, but no entry was made in the cash book; (c) cheques totalling ₹12,980 were issued and recorded in the cash book before 31 March 2017 but were not presented at the bank until after that date; (d) a bill for ₹6,900 discounted with the bank is entered in the cash book without recording the discount charge of ₹800; (e) ₹3,520 entered in the cash book as paid into bank on 31 March 2017 was not credited by the bank until the following day; (f) no entry was made in the cash book for the dishonour on 15 March 2017 of a cheque for ₹650 received from Bhanu.

Answer: Start with the cash book balance of ₹40,960. Add the cheques issued but not presented, ₹12,980, giving ₹53,940. Add the direct deposit by the debtor, ₹2,000, giving ₹55,940. Deduct the amount paid in but not yet credited by the bank, ₹3,520, giving ₹52,420.

Deduct the bank charges, ₹100, giving ₹52,320. Deduct the discount charge on the discounted bill, ₹800, giving ₹51,520. Deduct the dishonoured cheque, ₹650. The balance as per passbook is ₹50,870.

How is an amended cash book prepared before reconciliation?

In practice, a bank reconciliation statement is usually prepared only after the cash book balance has first been amended (corrected), rather than by listing every difference in the statement itself.

The reason is that some items, such as bank charges, interest or dividends collected by the bank, direct deposits, and dishonoured cheques, are genuine transactions that belong in the firm's own books and should be entered in the cash book sooner or later; they are not merely timing gaps that will clear themselves.

Items such as cheques issued but not yet presented, or cheques deposited but not yet collected, are true timing differences and do not need any entry in the cash book, since the bank will record them in due course.

The amended cash book is therefore prepared first, by entering the omitted bank-recorded items (charges, interest, dividends, direct deposits, dishonoured cheques), to arrive at the correct, up-to-date cash book balance.

The bank reconciliation statement is then prepared starting from this adjusted balance, using only the remaining timing differences, namely unpresented and uncollected cheques, to reach the passbook balance.

Adj Cash Bk = Old Bal + Bank Credits − Bank Debits

Worked example 6. Using the data of Mr. Vinod above (cash book balance ₹50,000; dividend of ₹8,000 collected by the bank but not entered in the cash book; bank charges of ₹400 not entered in the cash book; cheque issued but not presented ₹6,000; cheque deposited but not collected ₹6,000), prepare the amended cash book balance and the bank reconciliation statement from it.

Answer: First amend the cash book: opening balance ₹50,000, add the dividend collected by the bank, ₹8,000, giving ₹58,000, then deduct the bank charges, ₹400. The adjusted cash book balance is ₹57,600.

Next prepare the statement from this adjusted balance: add the cheque issued but not presented, ₹6,000, giving ₹63,600, then deduct the cheque deposited but not collected, ₹6,000.

The balance as per passbook is ₹57,600, the same figure as the passbook balance found in Worked example 1, confirming that the two methods agree.

Set out in ledger form, the bank column of the amended cash book in Worked example 6 reads as follows.

Note that the unpresented and uncollected cheques are not entered in the amended cash book, because they are timing differences, not omissions; only the bank-recorded items that the firm did not yet know about are entered in the amended cash book.

Definition: Amended cash book. The cash book re-balanced to include items the bank has already recorded (such as charges, interest, dividends, direct deposits or dishonoured cheques) but which the firm had not yet entered, so that it shows the firm's true, up-to-date bank balance.

Going beyond the syllabus

These ideas extend the unit and are not needed for the questions on it.

What does a bank statement look like?

A bank statement for a current account typically shows columns for the date, particulars, cheque number, debit, credit and balance, often with a remark such as "+" against each balance.

On a statement where every entry carries a "+" against the running balance, the account stayed in a favourable (credit) position throughout, with deposits recorded "BY CLG" (by clearing) in the credit column and withdrawals recorded "TO SELF" or against named parties in the debit column, alongside a deduction headed "TO SERVICE CHARGES" for the bank's own fee.

Plot the transaction dates along the horizontal axis and the running balance (₹) after each entry along the vertical axis, as a step line that rises on each day marked "BY CLG" (a cheque collected) and falls on each day marked "TO SELF" or "TO SERVICE CHARGES" (a withdrawal or bank charge); every point on such a statement stays above zero, which is why each balance carries a "+" remark rather than "Dr." or "OD".

Recognising these column headings and remarks on an actual bank statement is useful when comparing it against a firm's cash book, even though the reconciliation method itself does not depend on the exact layout used by a particular bank.

Different banks arrange these columns slightly differently on their printed statements, and some now issue only an electronic (e-) passbook rather than a paper one, but the underlying entries, namely deposits in the credit column, withdrawals in the debit column, and a running balance after each transaction, remain the same.

A student preparing a bank reconciliation statement from a real bank statement should first identify which balances carry the "+" mark and which, if any, carry "Dr." or "OD", before applying the usual addition and deduction rules set out above. This habit of reading the statement carefully before starting the reconciliation reduces the chance of treating an overdraft as a favourable balance by mistake, and vice versa, which is one of the commonest slips students make in this topic.

How are balances plotted over a reconciliation period?

Plot "days" on the horizontal axis and "bank balance (₹)" on the vertical axis, with two lines, one for the cash book balance and one for the passbook balance. The two lines run apart on the days a cheque is issued or deposited (a timing difference opens a gap), and converge back to the same value once the cheque is presented or collected, which is the point the reconciliation statement explains.

Glossary

• Bank reconciliation statement — a statement prepared to reconcile the bank balance as per the cash book with the balance as per the passbook, showing the items causing the difference.
• Cash book — the book in which a firm records its cash and bank transactions, with a bank column showing the balance held at the bank.
• Passbook — a copy of the bank's own record of a customer's account, also called a bank statement.
• Favourable balance — a debit balance as per the cash book (or credit balance as per the passbook), showing funds available at the bank.
• Overdraft — a credit balance in the cash book's bank column (debit balance in the passbook), arising when withdrawals exceed deposits.
• Timing difference — a difference between the two balances caused by one book recording a transaction before the other does.
• Unpresented cheque — a cheque issued by the firm and entered in the cash book, but not yet presented to the bank for payment.
• Uncollected cheque — a cheque deposited by the firm and entered in the cash book, but not yet cleared (collected) by the bank.
• Direct credit — an amount, such as a direct deposit by a debtor or collected dividend, credited by the bank without the firm's immediate knowledge.
• Direct debit — an amount, such as a standing-instruction payment, debited by the bank without the firm's immediate knowledge.
• Bank charges — fees deducted by the bank for services such as cheque collection, debited to the account without prior notice to the firm.
• Dishonoured cheque — a cheque or discounted bill that the bank is unable to realise, and so debits back to the customer's account.
• Amended cash book — the cash book re-balanced to include bank-recorded items the firm had not yet entered.
• Adjusted cash book balance — the correct, up-to-date balance of the cash book after amending it for omitted bank-recorded items.

Common errors and misconceptions

• Misconception: an unpresented cheque should be deducted when starting from a favourable cash book balance. Correct: it is added, because the cash book has already reduced the balance for an amount the bank has not yet paid out.
• Misconception: an uncollected cheque should be added when starting from a favourable cash book balance. Correct: it is deducted, because the cash book has already increased the balance for an amount the bank has not yet credited.
• Misconception: every item treated as an addition from the cash book is also an addition from the passbook. Correct: when the passbook balance is the starting point, every item is treated the opposite way to when the cash book balance is the starting point.
• Misconception: for an overdraft, items are added and deducted in the same direction as for a favourable balance. Correct: the direction of every addition and deduction reverses when the balance is an overdraft.
• Misconception: all differences between the two books are due to bank or firm errors. Correct: most differences are simple timing differences, which will disappear once the delayed entry is recorded by both sides.
• Misconception: timing-difference items, such as unpresented cheques, must be entered in the amended cash book. Correct: only genuine omissions already recorded by the bank (charges, interest, dishonoured cheques, direct deposits) are entered in the amended cash book; timing differences are left to clear themselves.
• Misconception: the bank reconciliation statement changes the cash book balance. Correct: the statement itself does not alter any book; only the separate amended cash book entries change the cash book balance.

Exam-style questions with model answers

Q1. A bank reconciliation statement is prepared by: (a) the creditors (b) the bank (c) the account holder in a bank (d) the debtors. Choose the correct option. [1 mark]

1. (c) the account holder in a bank, because the statement compares the firm's own cash book with the passbook it receives from the bank.

Q2. State whether the following statement is true or false, giving a reason: "Cheques issued but not presented for payment will reduce the balance as per the passbook." [2 marks]

1. False.
2. Cheques issued but not presented have already been entered on the credit side of the cash book, but the bank has not yet paid them, so the passbook balance is higher than the cash book balance; they are added when starting from the cash book balance.

Q3. Distinguish between a favourable balance and an overdraft, as shown in the cash book. [3 marks]

1. A favourable balance is a debit balance in the cash book's bank column, meaning the firm has deposited more than it has withdrawn.
2. An overdraft is a credit balance in the cash book's bank column, meaning withdrawals have exceeded deposits.
3. A favourable balance in the cash book appears as a credit balance in the passbook, while an overdraft appears as a debit balance (marked "Dr." or "OD") in the passbook.

Q4. Explain any four reasons why the balance shown by the passbook may not agree with the balance shown by the cash book, giving one example of each. [4 marks]

1. Cheques issued but not presented for payment: the cash book shows the payment, but the bank has not yet debited it.
2. Cheques deposited but not yet collected: the cash book shows the receipt, but the bank has not yet credited it.
3. Bank charges or interest on overdraft debited by the bank but not yet entered in the cash book, so the passbook balance is lower than the cash book balance until recorded.
4. Interest or dividends collected directly by the bank and credited to the account but not yet entered in the cash book, so the passbook balance is higher than the cash book balance until recorded.

Q5. The cash book of a trader shows a balance of ₹54,000 on 31 August. Cheques issued but not presented for payment amount to ₹20,000. A cheque of ₹5,400 deposited in the bank has not yet been collected. Bank incidental charges of ₹100 have been debited by the bank but not entered in the cash book. Prepare a bank reconciliation statement showing the balance as per passbook. [5 marks]

1. Start with the balance as per cash book, ₹54,000.
2. Add the cheque issued but not presented for payment, ₹20,000, giving ₹74,000.
3. Deduct the cheque deposited but not yet collected, ₹5,400, giving ₹68,600.
4. Deduct the bank incidental charges not entered in the cash book, ₹100.
5. The balance as per the passbook is ₹68,500.

Q6. The cash book of a firm showed a balance of ₹1,18,100 as an overdraft on 31 March. Cheques received and recorded in the cash book but not sent to the bank for collection amounted to ₹12,400. A payment of ₹27,300 was received directly by the bank from a customer but not entered in the cash book. Cheques issued for ₹1,75,200 had not been presented for payment. Interest of ₹8,800 charged by the bank had not been entered in the cash book. Prepare a bank reconciliation statement showing the balance as per passbook. [6 marks]

1. Start with the overdraft as per cash book, ₹1,18,100.
2. Add the cheques received and recorded in the cash book but not sent for collection, ₹12,400, since these have not yet reduced the overdraft in the bank's records.
3. Add the interest charged by the bank but not yet entered in the cash book, ₹8,800, since it increases the overdraft as the bank sees it.
4. Deduct the payment received directly by the bank but not entered in the cash book, ₹27,300, since it reduces the overdraft as the bank sees it.
5. Deduct the cheques issued but not presented for payment, ₹1,75,200, since the bank has not yet paid them out.
6. The resulting figure, after these additions and deductions, is a favourable balance as per the passbook of ₹63,200.

Q7. The cash book of a trader shows a bank balance of ₹30,000 on 31 March. The bank has collected interest of ₹1,200 and paid an insurance premium of ₹800 under standing instructions; neither entry appears in the cash book. A cheque for ₹2,500 deposited by the trader has not yet been collected, and cheques for ₹4,000 issued by the trader have not yet been presented. Prepare the amended cash book, and from its adjusted balance prepare the bank reconciliation statement showing the balance as per passbook. [6 marks]

1. Amended cash book: start with ₹30,000, add the interest collected by the bank, ₹1,200, giving ₹31,200.
2. Deduct the insurance premium paid by the bank, ₹800, giving an adjusted cash book balance of ₹30,400.
3. Bank reconciliation statement: start with the adjusted cash book balance, ₹30,400.
4. Add the cheques issued but not presented, ₹4,000, giving ₹34,400.
5. Deduct the cheque deposited but not yet collected, ₹2,500.
6. The balance as per passbook is ₹31,900.

Q8. From the following extracts of the cash book and the passbook of a trader for March, prepare a bank reconciliation statement as on 31 March and state the balance as per passbook. Cash book extract: opening bank balance ₹18,000; cheque deposited on 28 March ₹5,000; cheque issued on 29 March ₹3,000; closing balance ₹20,000. Passbook extract: opening balance ₹18,000; cheque of ₹3,000 debited on 30 March; bank charges of ₹150 debited on 31 March; closing balance ₹14,850. [6 marks]

1. Compare the two extracts: the cheque of ₹5,000 deposited on 28 March appears in the cash book but not in the passbook, so it is a cheque deposited but not yet collected.
2. The cheque of ₹3,000 issued on 29 March appears in both books, so it is not a cause of difference.
3. The bank charges of ₹150 appear only in the passbook, so they are an item recorded by the bank but not yet entered in the cash book.
4. Start with the cash book balance, ₹20,000.
5. Deduct the cheque deposited but not yet collected, ₹5,000, giving ₹15,000; deduct the bank charges, ₹150.
6. The balance as per passbook is ₹14,850, which agrees with the closing balance of the passbook extract.

Q9. The passbook of Mr. Murli shows an overdraft of ₹20,000 on 31 March 2017. Bank charges debited in the passbook are ₹500. Cheques recorded in the cash book but not sent to the bank for collection are ₹2,500. A payment of ₹4,600 was received by the bank directly from a customer. Cheques issued but not presented for payment are ₹6,980. Interest credited by the bank is ₹100. An LIC premium of ₹2,500 was paid by the bank. Cheques deposited with the bank but not collected are ₹3,500. Prepare a bank reconciliation statement showing the balance as per cash book. [6 marks]

1. Start with the overdraft as per passbook, ₹20,000.
2. Add the payment received by the bank directly from the customer, ₹4,600, since the bank has credited it but the cash book has not, giving ₹24,600.
3. Add the cheques issued but not presented for payment, ₹6,980, giving ₹31,580, and the interest credited by the bank, ₹100, giving ₹31,680.
4. Deduct the bank charges debited in the passbook, ₹500, giving ₹31,180.
5. Deduct the cheques recorded in the cash book but not sent to the bank, ₹2,500, giving ₹28,680.
6. Deduct the LIC premium paid by the bank, ₹2,500, giving ₹26,180; deduct the cheques deposited but not collected, ₹3,500. The overdraft as per cash book is ₹22,680.

Q10. The cash book of a firm shows a bank overdraft of ₹6,920 on 31 December 2017. The bank has debited ₹200 as interest on overdraft and ₹50 as charges for collecting bills. Cheques drawn but not encashed before 31 December 2017 amount to ₹4,000. The bank has collected interest of ₹600 and credited it in the passbook. A bill receivable of ₹700 previously discounted with the bank has been dishonoured and debited in the passbook. Cheques paid into bank but not collected before 31 December 2017 amount to ₹6,000. Prepare a bank reconciliation statement and ascertain the balance as per passbook. [6 marks]

1. Start with the overdraft as per cash book, ₹6,920.
2. Add the interest on overdraft, ₹200, and the charges for collecting bills, ₹50, giving ₹7,170.
3. Add the bill receivable dishonoured and debited in the passbook, ₹700, giving ₹7,870.
4. Deduct the cheques drawn but not encashed, ₹4,000, giving ₹3,870.
5. Deduct the interest collected and credited by the bank, ₹600, giving ₹3,270.
6. Add the cheques paid into bank but not collected, ₹6,000. The overdraft as per passbook is ₹9,270.

Key takeaways

• A bank reconciliation statement tallies the bank balance as per the cash book with the balance as per the passbook, by listing the items causing the difference.
• Differences arise mainly from timing differences in recording transactions, and sometimes from errors made by the firm or by the bank.
• A debit cash book balance (favourable balance) appears as a credit balance in the passbook; a credit cash book balance (overdraft) appears as a debit balance in the passbook.
• Unpresented cheques are added, and uncollected cheques are deducted, when starting the statement from a favourable cash book balance.
• Every addition and deduction reverses when the passbook balance, rather than the cash book balance, is the starting point.
• Every addition and deduction also reverses when the balance in question is an overdraft rather than a favourable balance.
• Items the bank has already recorded, such as charges, interest, dividends or dishonoured cheques, should be entered first in an amended cash book, not left as items in the reconciliation statement.
• Timing differences, such as unpresented or uncollected cheques, do not need any entry in the cash book, since they will clear themselves in due course.
• Comparing extracts of the cash book and passbook entry by entry is the same reconciliation method, applied to a selected period rather than a single final balance.

Test yourself

What is a passbook?

A passbook is a copy of the bank's own record (ledger account) of a customer's account, also called a bank statement.

Why does a debit balance in the cash book appear as a credit balance in the passbook?

Because the two books record the same account from opposite points of view: the firm's deposits held at the bank are an asset to the firm (debit) but a liability the bank owes the firm (credit).

If cheques issued but not presented amount to ₹6,000 and the cash book shows a favourable balance of ₹50,000, what adjustment is made to reach the passbook balance?

The ₹6,000 is added, since the cash book has already reduced the balance for an amount the bank has not yet paid out.

Name two causes of difference that are errors rather than timing differences.

A wrong amount recorded for a cheque in the cash book, and wrong totalling or wrong posting of an entry in the passbook.

What does "Dr." or "OD" against a passbook balance indicate?

It indicates that the balance is an overdraft, that is, withdrawals from the bank have exceeded deposits.

Should a cheque deposited but not yet collected be entered in an amended cash book?

No, because it is a timing difference, not an omission already recorded by the bank; it is left to clear itself and is adjusted only in the reconciliation statement.

Why is a bank reconciliation statement usually prepared after the cash book has first been amended?

Because genuine bank-recorded items, such as charges or collected interest, should be corrected in the cash book itself, leaving only true timing differences for the statement.

When the passbook shows an overdraft, how are cheques issued but not presented for payment treated?

They are added to the passbook overdraft to find the cash book overdraft, because the firm has already recorded them as paid but the bank has not yet paid them, so the firm's overdraft is larger than the bank's.