Notes-Class-11-Commerce-Book Keeping and Accountancy-Chapter-6-Bank Reconciliation Statements-Maharashtra Board

Topics to be Learn :  Meaning, Definition and Utilities of Accounting Documents Meaning, Definition, Need and Importance of Bank Reconciliation Statement. Reasons for difference between Cash Book balance and Pass Book balance. Specimen of Bank Reconciliation Statement. Preparation of Bank Reconciliation Statement.

Meaning, Importance and Utilities of Accounting Documents :

Introduction :

Accounting documents contain all the basic details of a financial transaction. They show:

• The amount of the transaction
• The person to whom the payment was made
• The purpose of the transaction
• The date of the transaction

These documents are important in bookkeeping because they provide proof that a financial transaction has taken place.

Today, internet banking and mobile banking generate instant records of payments and receipts. However, many people still visit banks personally for transactions. Therefore, bank documents such as cheques, drafts, and deposit slips continue to be important.

Electronic Fund Transfer — Quick Reference

Method	Full Form	Key Feature
IMPS	Immediate Payment Service	Instant, 24×7, any amount
NEFT	National Electronic Funds Transfer	Small transfers (< ₹2 Lakhs)
RTGS	Real Time Gross Settlement	Large transfers (> ₹2 Lakhs)

Meaning, Definition, Need and Importance of Bank Reconciliation Statement. :

Meaning : A businessman records all banking transactions in the bank column of his Cash Book. The bank records the same in the account holder's ledger, which forms the Pass Book. Ideally, the balances in both should match (with opposite signs — Debit in Cash Book = Credit in Pass Book).

However, in practice, the balances often differ. A Bank Reconciliation Statement explains and reconciles these differences.

Key Relationship: • Deposit recorded in Cash Book (Dr. side) → Recorded in Pass Book (Cr. side) • Payment recorded in Cash Book (Cr. side) → Recorded in Pass Book (Dr. side)

Definitions : "A statement which reconciles the Bank balance as per Cash Book and the balance as per Pass Book, showing all causes of difference between the two."

"A statement showing the causes of disagreement between the balance shown by the bank Pass Book and the balance shown by the Cash Book under the bank column at the end of a specific period or month."

Need and Importance of BRS :

1. Explains and clarifies causes of disagreement between Cash Book and Pass Book balances.
2. Helps detect errors and omissions in both books.
3. Reduces chances of fraud by staff dealing in cash.
4. Helps verify that the bank makes proper entries for all transactions.
5. Acts as a moral check on business staff to keep the Cash Book up to date.
6. Serves as an important mechanism of internal control, tracking cash inflow and outflow.

Reasons for difference between Cash Book balance and Pass Book balance :

The common reasons for the difference between the balance as per cash book (bank) column and corresponding pass book balance are as shown below :

Two Main Categories :

I. Time Difference

II. Errors & Omissions

In Cash Book but NOT in Pass Book: •     Cheque issued but not presented for payment •     Cheque deposited but not yet collected/cleared In Pass Book but NOT in Cash Book: •     Interest credited by bank •     Direct collection on behalf of customer •     Direct payment by bank (ECS, standing instructions) •     Bank charges, interest on overdraft, commission •     Dishonour of cheques or Bills of Exchange •     Amount directly deposited by debtor in bank

Committed by businessman or bank: •     Entry recorded on wrong side •     Recording wrong amount •     Wrong balancing or totalling (overcast / undercast) •     Double recording (entry made twice) •     Omission (entry not recorded at all)

Specimen of Bank Reconciliation statement :

Particulars	Amount (₹)	Amount (₹)
Bank Balance / Overdraft as per Cash Book / Pass Book	XXX
Add: Reasons which INCREASE the balance of the other book
1. _______________	xxx
2. _______________	xxx	xxx
Less: Reasons which DECREASE the balance of the other book
1. _______________	xxx
2. _______________	xxx	xxx
Bank Balance / Overdraft as per Pass Book / Cash Book		XXX

Remember: When you start with Cash Book balance, you arrive at Pass Book balance — and vice versa. The answer with a negative sign means OVERDRAFT.

Preparation of Bank Reconciliation Statement (BRS) :

Procedure for Finding the Causes of Difference and Their Effects :

When there is a difference between the balances shown in the Cash Book and the Pass Book, the following steps are followed to find the reasons:

(1) Compare Deposits : Compare the entries on the debit side of the Cash Book with the entries on the credit side (deposit column) of the Pass Book. Put a tick (✓) against the entries that appear in both books.

(2) Compare Withdrawals : Compare the entries on the credit side of the Cash Book with the entries on the debit side (withdrawal column) of the Pass Book. Put a tick (✓) against the matching entries.

(3) List Unticked Items : Prepare a list of all the entries that remain unticked in either book. These entries are the reasons for the difference between the balances of the Cash Book and the Pass Book.

(4) Analyse the Causes : Examine the unticked items and identify the reasons for the difference in balances.

(5) Select the Date : Choose a date for preparing the Bank Reconciliation Statement. It is usually prepared on the last day of the month because the balances of both the Cash Book and Pass Book are easily available on that date.

(6) Start Preparing the BRS : Begin the Bank Reconciliation Statement with either:

• Balance as per Cash Book, or
• Balance as per Pass Book

(7) Adjust the Balance :

• Add or subtract the unticked items to the starting balance.
• If the Cash Book balance is taken as the starting point, adjust it according to the entries appearing in the Pass Book.
• If the Pass Book balance is taken as the starting point, adjust it according to the entries appearing in the Cash Book.

This process helps reconcile the balances shown by the Cash Book and the Pass Book.

(8) Apply the rule of plus and minus.

(a) When balance as per Cash Book is given

• Add credits in Cash Book or in Pass Book.
• Less debits in Cash Book or in Pass Book.

(b) When balance as per Pass Book is given

• Add debits in Cash Book or in Pass Book.
• Less credits in Cash Book or in Pass Book.

(c) When overdraft as per Cash Book is given

• Add debits in Cash Book or in Pass Book.
• Less credits in Cash Book or in Pass Book.

(d) When overdraft as per Pass Book is given

• Add credits in Cash Book or in Pass Book.
• Less debits in Cash Book or in Pass Book.

Reason	Cash Book Dr. Bal (+)	Pass Book Cr. Bal (+)	Overdraft Cash Book (−)	Overdraft Pass Book (−)
Cheque deposited but NOT collected by bank	−	+	+	−
Cheque issued but NOT presented for payment	+	−	−	+
Bank charges debited in Pass Book only	−	+	+	−
Interest credited in Pass Book only	+	−	−	+
Interest debited in Pass Book only	−	+	+	−
Direct payment by bank (Pass Book only)	−	+	+	−
Direct deposit by customer in bank (Pass Book only)	+	−	−	+
Bill discounted — dishonoured (Pass Book only)	−	+	+	−
Cheque deposited — dishonoured (not in Cash Book)	−	+	+	−

The Golden Rule — Simplified :

Starting Balance Type	Rule
Cash Book Dr. Balance (Favourable)	Add: Credits in CB or PB  Less: Debits in CB or PB
Pass Book Cr. Balance (Favourable)	Add: Debits in CB or PB Less: Credits in CB or PB
Cash Book Cr. Balance (Overdraft)	Add: Debits in CB or PB  Less: Credits in CB or PB
Pass Book Dr. Balance (Overdraft)	Add: Credits in CB or PB  Less: Debits in CB or PB

When Cash Book and Pass Book Extracts are for the Same Period :

When the extracts of the Cash Book and Pass Book relate to the same period (usually the same month), consider:

• The opening balances of the Cash Book and Pass Book.
• The uncommon (unticked) items.

Meaning of Uncommon Items :

• Compare the entries in both books and put a tick (✓) against matching entries.

Match:

• Debit side of the Pass Book with the Credit side of the Cash Book.
• Credit side of the Pass Book with the Debit side of the Cash Book.

• The common (ticked) items do not cause any difference and are therefore ignored.
• The unticked items are called uncommon items.
• These uncommon items are the reasons for the difference between the balances of the Cash Book and Pass Book and must be added or subtracted in the Bank Reconciliation Statement.

When Cash Book and Pass Book Extracts are for Different Periods

When the extracts of the Cash Book and Pass Book relate to different periods (usually consecutive months):

• Consider only the common items.
• These common items create differences between the balances shown in the Cash Book and Pass Book.
• Therefore, they need to be adjusted while preparing the Bank Reconciliation Statement.

Key Point :

• Same period → Consider uncommon (unticked) items.
• Different periods → Consider common items.

Note : In the Bank Reconciliation Statement, when we start with the cash book balance, we arrive at balance as per pass book and vice versa.

Reconciliation of Debtors and Creditors : Just as a Bank Reconciliation Statement is prepared to reconcile differences between the Cash Book and Pass Book, reconciliation statements can also be prepared for debtors (customers) and creditors (suppliers/vendors).

In this process, the Debtor's or Creditor's ledger in our books is compared with our account as recorded in the Debtor's or Creditor's books. Any differences found are identified and reconciled.

Procedure

1. Obtain the Ledger Account : Request the debtor or creditor to provide a copy of our account as it appears in their books.
2. Compare the Entries : Compare the entries in:

• Our ledger account, and
• The ledger account maintained by the debtor or creditor.

3. Match the Entries : Tick (✓) the entries that appear in both accounts.
4. Identify Differences : Prepare a list of entries that do not match in the two accounts.
5. Prepare a Reconciliation Statement : Use the unmatched entries to prepare a reconciliation statement and identify the reasons for the differences.

Importance :

1. Helps identify errors and omissions in accounting records.
2. Ensures the accuracy of debtor and creditor balances.
3. Helps maintain correct records with customers and suppliers.
4. Assists in resolving disputes regarding payments and balances.

Key Point :

• Debtor Reconciliation compares our records with the customer's records.
• Creditor Reconciliation compares our records with the supplier's records.
• Any unmatched entries are analyzed and adjusted through a reconciliation statement.