Banking concept & bank reconciliation statement

A cross cheque is a cheque on which two parallel lines are drawn across the face, usually with the words "Account Payee". It cannot be encashed over the counter and the amount can only be credited to the bank account of the payee, which makes it safer against theft and misuse.

Bank Reconciliation Statement (starting from the balance as per cash book)

Working notes: the cheques of Rs 75,000 deposited, of which the bank has credited only Rs 20,000, leave $75{,}000 - 20{,}000 = \text{Rs } 55{,}000$ not yet credited. Items (d) and (e) are not yet in the cash book. Item (c) is a cheque issued but not presented. Item (f) is a cheque recorded in the cash book but not yet deposited.

Check: adjusted cash book $= 80{,}000 + 44{,}000 - 500 = 1{,}23{,}500$; then $1{,}23{,}500 + 10{,}000 - 55{,}000 - 12{,}000 = \text{Rs } 66{,}500$.

Bank Reconciliation Statement (starting from the balance as per cash book)

Working notes: of the two cheques issued, only Rs 10,000 was presented, so Rs 4,000 is still unpresented. Of the three cheques sent for collection, only the Rs 5,000 cheque is uncollected. Items (iv), (v) and (vi) are not yet recorded in the cash book.

Check: adjusted cash book $= 20{,}000 + 7{,}000 - 6{,}000 + 4{,}000 = 25{,}000$; then $25{,}000 + 4{,}000 - 5{,}000 = \text{Rs } 24{,}000$.

Two advantages of maintaining a bank account are:

1. Safety of money: cash is kept safe from theft, loss and fire.
2. Convenient and safe payments: payments can be made through cheques, drafts and electronic transfers, and the bank statement serves as a ready record of receipts and payments.

A cheque is a written, unconditional order by an account holder to his or her bank to pay a certain sum of money to a named person or the bearer on demand. A bank draft is an order issued by a bank, drawn on another branch of the same bank or on another bank, to pay a specified sum to a named person; it is bought from the bank by paying the amount and a small commission, so it carries no risk of dishonour.

Bank Reconciliation Statement (starting from the balance as per cash book)

Working notes: cheques issued but not presented $= 48{,}000 - 30{,}000 = \text{Rs } 18{,}000$; cheques deposited but not credited by the bank $= 65{,}000 - 42{,}000 = \text{Rs } 23{,}000$. Interest collected by the bank, bank charges and the customer's direct deposit are not yet in the cash book.

Check: adjusted cash book $= 95{,}000 + 4{,}500 + 15{,}000 - 1{,}200 = 1{,}13{,}300$; then $1{,}13{,}300 + 18{,}000 - 23{,}000 = \text{Rs } 1{,}08{,}300$.

Bank Reconciliation Statement (starting from the balance as per cash book)

Working notes: the cheque of Rs 2,000 was entered in the cash book as a bank receipt but was not deposited, so the bank has not credited it. Cheques deposited but not yet credited also reduce the pass book balance relative to the cash book.

Check: adjusted cash book $= 90{,}000 + 45{,}000 - 500 = 1{,}34{,}500$; then $1{,}34{,}500 + 15{,}000 - 20{,}000 - 2{,}000 = \text{Rs } 1{,}27{,}500$.

Bank Reconciliation Statement (starting from the balance as per cash book)

Working notes: the bank wrongly credited Rs 10,000, so the pass book balance is overstated by Rs 10,000 and this is added when moving from the cash book to the pass book. The cheque of Rs 20,000 sent for collection is already in the cash book but not yet credited by the bank. The insurance premium paid by the bank is not yet in the cash book.

Check: correct bank balance $= 50{,}000 - 1{,}000 + 30{,}000 - 20{,}000 = 59{,}000$; adding the bank's wrong credit of Rs 10,000 gives the pass book balance of Rs 69,000.

Bank Reconciliation Statement as on Magh 30 (starting from the balance as per pass book)

Working notes: the pass book balance is taken as a credit (favourable) balance. Interest debited by the bank is not yet in the cash book. Cheques sent for deposit but not credited $= 20{,}000 - 17{,}000 = \text{Rs } 3{,}000$. The interest on investment is taken as already credited by the bank. The cheque received but not sent to the bank was entered in the cash book as a bank receipt.

Check: adjusted cash book $= 26{,}300 - 2{,}500 + 1{,}200 - 2{,}000 = 23{,}000$ (the cheque not sent to the bank is not yet a bank receipt); adjusted pass book $= 25{,}000 + 3{,}000 - 5{,}000 = 23{,}000$. Both agree.

Bank Reconciliation Statement (starting from the balance as per cash book)

Check: adjusted cash book $= 25{,}000 - 2{,}000 - 800 = 22{,}200$; then $22{,}200 + 4{,}500 - 3{,}500 = \text{Rs } 23{,}200$.

(c) Credit balance of cash book

A bank overdraft is a liability — the bank has paid out more than the balance in the account — so the bank column of the cash book shows a credit balance. (In the pass book it appears as a debit balance.)

Objectives of Preparing a Bank Reconciliation Statement

1. To reconcile the difference between cash book and pass book balances: It identifies the causes of disagreement between the bank balance shown by the cash book and that shown by the bank pass book, and brings the two into agreement.

2. To detect errors and omissions: It helps locate errors or omissions committed either by the business in the cash book or by the bank in the pass book, such as wrong entries, wrong totalling, or transactions recorded in one book but not in the other.

3. To ascertain the correct bank balance: It determines the true and reliable balance of cash at bank on a particular date, which is necessary for preparing the balance sheet and for accurate financial reporting.

4. To prevent fraud and misappropriation: Regular reconciliation acts as a check on the dishonest practices of employees handling cash and cheques, as any manipulation in the cash book is quickly detected.

5. To ensure timely collection of cheques and control over bank transactions: It reveals cheques deposited but not yet collected, cheques issued but not yet presented, and standing instructions, thereby helping management keep proper control over banking operations and improve cash management.

Causes of Difference between Cash Book and Bank Statement

The cash book (bank column) and the bank statement (pass book) are two records of the same bank transactions, yet their balances usually do not agree. The main causes of difference are explained below:

1. Cheques issued but not yet presented for payment When a business issues a cheque to a supplier or creditor, it immediately credits the bank column of the cash book. However, the bank debits the customer's account only when the cheque is presented and paid. Until then, the bank statement shows a higher balance than the cash book. Such cheques are called cheques issued but not yet presented.

2. Cheques deposited but not yet collected or credited When a business deposits cheques into the bank, it debits the bank column of the cash book at once. But the bank credits the account only after collecting the amount from the drawer's bank. In the meantime, the cash book shows a higher balance than the pass book. These are cheques paid in but not yet credited.

3. Amount directly deposited into the bank by customers Sometimes debtors or customers deposit money directly into the business's bank account without the knowledge of the business. The bank records the receipt immediately, but the business does not record it until it receives intimation. This makes the pass book balance higher than the cash book balance.

4. Amount directly paid by the bank on standing instructions The bank may make payments on behalf of the customer under standing instructions, such as insurance premium, loan instalment, rent or subscription. The bank debits the account at once, but the business records the payment only when it receives the bank statement. This makes the cash book balance higher than the pass book balance.

5. Bank charges, interest and commission charged by the bank The bank deducts charges such as bank charges, commission, collection charges, and sometimes interest on overdraft from the customer's account. These amounts are debited by the bank but are not recorded in the cash book until the statement is received. Hence the cash book shows a higher balance than the pass book.

Other causes (briefly): interest allowed by the bank credited in the pass book only; cheques dishonoured but not recorded in the cash book; errors committed by the business in the cash book or by the bank in the pass book; and direct payment into the bank by a customer.

Thus, the difference between the two balances arises mainly because entries are recorded in the two books at different times, or because some transactions are recorded by one party only.

Bank Reconciliation Statement as on Chaitra 31, 2080

(Starting from the balance as per cash book)

Working:

• Items 3 to 6 are not yet in the cash book: bank charges (Rs 500) and the dishonoured cheque (Rs 3,000) reduce the cash book balance, while interest (Rs 2,000) and the direct deposit (Rs 4,000) increase it. The adjusted cash book balance is $25{,}000 + 2{,}000 + 4{,}000 - 500 - 3{,}000 = \text{Rs } 27{,}500$.
• Items 1 and 2 are timing differences in the bank statement: cheques issued but not presented (Rs 6,000) are still in the bank's balance, so they are added; cheques deposited but not yet credited (Rs 8,000) are not yet in the bank's balance, so they are deducted. $27{,}500 + 6{,}000 - 8{,}000 = \text{Rs } 25{,}500$.

Hence the balance as per the bank statement is Rs 25,500 (Cr.).