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This page contains solutions to theoretical questions (Test your understanding questions, Short answers and Long answers) for the chapter 5 Bank Reconciliation Statement. If you’re looking for solutions to numberical questions, you can find them at
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Test Your Understanding – I
I. Read the following transactions and identify the cause of difference on the basis of time gap or errors made by business firm/bank. Put a sign (✔) for the correct cause.
S.No.
Transactions
Time Gap
Errors made by Business/Bank
1.
Cheques issued to customers but not presented for payment.
✔
2.
Cheque amounting to ₹ 5,000 issued to M/s.XYZ but recorded as ₹ 500 in the cash book.
✔
3.
Interest credited by the bank but yet not recorded in the cash book.
✔
4.
Cheque deposited into the bank but not yet collected by the bank.
✔
5.
Bank charges debited to firm’s current account by the bank.
✔
II. Fill in the blanks :
(i)
Passbook is a copy of as it appears in the ledger of the bank. (Customer account)
(ii)
When money is with drawn from the bank, the bank the account of the customer. (Debit)
(iii)
Normally, the cash book shows a debit balance, passbook shows balance. (Credit)
(iv)
Favourable balance as per the cash book means balance in the bank column of the cash book. (Debit)
(v)
If the cash book balance is taken as starting point the items which make the cash book balance smaller than the passbook must be for the purpose of reconciliation. (Added)
(vi)
If the passbook shows a favourable balance and if it is taken as the starting point for the purpose of bank reconciliation statement then cheques issued but not presented for payment should be . to find out cash balance. (Deducted)
(viii)
When the cheques are not presented for payment, favourable balance as per the cash book is than that of the passbook. (Less)
(viii)
When a banker collects the bills and credits the account passbook overdraft shows balance. (Less)
(ix)
If the overdraft as per the passbook is taken as the starting point, the cheques issued but not presented are to be in the bank reconciliation statement.(Added)
(x)
When the passbook balance is taken as the starting point items which makes the passbook balance than the balance in the cash book must be deducted for the purpose of reconciliation. (Higher)
Test Your Understanding – II
Select the correct answer:
1.
A bank reconciliation statement is prepared by:
(a)
Creditors
(b)
Bank ✔
(c)
Account holder in a bank
(d)
Debtors
2.
A bank reconciliation statement is prepared with the balance :
(a)
Passbook
(b)
Cash book
(c)
Both passbook and cash book ✔
(d)
None of these
3.
Passbook is a copy of :
(a)
Copy of customer Account ✔
(b)
Bank column of cash book
(c)
Cash column of cash book
(d)
Copy of receipts and payments
4.
Unfavourable bank balance means :
(a)
Credit balance in passbook ✔
(b)
Credit balance in cash book
(c)
Debit balance in cash book
(d)
None of these
5.
Favourable bank balance means :
(a)
Credit balance in the cash book
(b)
Credit balance in passbook
(c)
Debit balance in the cash book ✔
(d)
Both b and c
6.
A bank reconciliation statement is mainly prepared for :
(a)
Reconcile the cash balance of the cash book.
(b)
Reconcile the difference between the bank balance shown by the cash book and bank passbook ✔
(c)
Both a and b
(d)
None of these
Test Your Understanding – III
State whether each of the following statements is True or False
1.
Passbook is the statement of account of the customer maintained by the bank. True
2.
A business firm periodically prepares a bank reconciliation statement to reconcile the bank balance as per the cash book with the passbook as these two show different balances for various reasons. True
3.
Cheques issued but not presented for payment will reduce the balance as per the passbook. False
4.
Cheques deposited but not collected will result in increasing the balance of the cash book when compared to passbook. True
5.
Overdraft as per the passbook is less than the overdraft as per cash book when there are cheques deposited but not collected by the banker. False
6.
The debit balance of the bank account as per the cash book should be equal to the credit balance of the account of the business in the books of the bank. True
7.
Favourable bank balance as per the cash book will be less than the bank passbook balance when there are unpresented cheques for payment. True
8.
Direct collections received by the bank on behalf of the customers would increase the balance as per the bank passbook when compared to the balance as per the cash book. True
9.
When payments made by the bank as per the standing instructions of the customer, the balance in the passbook will be more when compared to the cash book. False
Short Answers
1. State the need for the preparation of bank reconciliation statement?
In general, when a comparison is made between
1.
Bank Balance shown in the firm’s cash book
2.
and passbook or the bank statement
the two balances do not tally and show differences. So Bank Reconciliation Statement is needed to ascertain the causes of difference thereof and then reflect them in a statement to reconcile/tally the two balances.
2. What is a bank overdraft?
A bank overdraft is the debit balance reflected in the bank statement/passbook indicating that the withdrawals exceed deposits. (You’ve withdrawn more amount than what you’ve deposited).
3. Briefly explain the statement ‘wrongly debited by the bank’ with the help of an example.
The statement ‘wrongly debited by the bank’ indicates that the bank has debited/deducted the amount from the account for an invalid reason. It could be due to either
1.
the amount is recorded as deducted while it is actually not deducted. For example, a firm’s account is deducted with ₹ 7,500 for overdraft charges though he has good credit balance. This could be due to the fact that the cashier has wrongly entered the transaction into this account instead of a different account.
2.
the amount deducted is recorded as more that what is actually debited from the bank. For example, the firm has issued a cheque for ₹ 1,000. However, a sum of ₹ 10,000 is wrongly debited/deducted from the firm’s account.
4. State the causes of difference occurred due to time lag.
The following are the causes of difference occurred due to time lag.
a.
Cheque is issued by the firm but not yet presented for payment.
b.
Cheque is deposited into the bank but not yet realized.
c.
Direct debits made by the bank on behalf of the customer.
d.
Amounts directly deposited into the bank account.
e.
Interest and dividends collected by the bank.
f.
Direct payments made by the bank on behalf of the customers
g.
Cheques deposited / bills discounted dishonoured
5. Briefly explain the term ‘favourable balance as per cash book’.
Favourable balance as per cash book represents a debit balance as per the cash book and indicates the balance of deposits held at the bank. This will reflect as credit balance as per the passbook. This balance is due to the deposits made at the bank are more than the withdrawals. It is also known as the favourable balance as per the passbook.
6. Enumerate the steps to ascertain the correct cash book balance.
In general, the Cash book balance differs from the Passbook balance due to some of the transactions present in the passbook are not yet recorded into the cashbook. This can be corrected by first recording these transactions into the cashbook. The balance obtained after these corrections is called as the adjusted balance or amended balance. The process can be summarized into the following steps.
1.
The bank balance according the cash book is noted down.
2.
Rectify any errors committed in the cashbook.
3.
The transactions appearing only on the credit side of the passbook should be recorded on the debit side of the cashbook.
4.
The transactions appearing only on the debit side of the passbook should be recorded on the credit side of the cashbook.
5.
The new cashbook balance is computed and is used for preparing the Bank Reconciliation Statement.
Long Answers
1. What is a bank reconciliation statement. Why is it prepared?
Bank Reconciliation Statement: A Bank Reconciliation Statement is a statement prepared to reconcile/tally the differences that appear between the bank statement or passbook and the firm’s cashbook so that the cause of difference thereof is ascertained.
Businesses need to prepare the bank reconciliation statement for the following reasons:
1.
To ascertain the balance reported by the company’s cashbook is the correct amount.
2.
To rectify any errors present in the cashbook. If these errors are carried forward, it results in an incorrect income statement as well as incorrect balance sheet.
3.
More control over the recordings in the cashbook. When Bank Reconciliation Statement is prepared by another person other than the one who prepared the cashbook, it improves accountability and there by prevents any fraudulent activities or dishonesty.
4.
Any errors made by the bank are discovered and corrective measures are taken.
5.
Discover dishonoured cheques and take corrective measures.
2. Explain the reasons where the balance shown by the bank passbook does not agree with the balance as shown by the bank column of the cash book.
The following are the reasons where in the balance shown by the bank passbook does not agree with the balance as shown by the bank column of the cashbook.
1.
Timing Differences: The differences caused by the time gap in recording the transactions are as follows:
i.
Cheques issued by the firm but not yet presented for payment: Cheques issued by the firm to the suppliers or creditors are immediately recorded on the credit side of the cashbook. However, there will be a time gap hy the receiving party by the time they are presented to the bank. So the bank have not yet debited them. This will cause a difference in the two balances.
ii.
Cheques are deposited into the bank but not yet collected: When the firm receives cheques from its debtors/customers, they are immediately recorded in the debit side of the cashbook. However, when these cheques are deposited into the bank, the bank credits the firm’s account only after the cheques are actually realised. There will be time-gap between the time the cheques are deposited into the bank and the time by which the cheques are cleared especially when the cheques need to be cleared in outstation or in the bank branch different from the one where the firm’s account is maintained. This will cause a difference in the two balances.
iii.
Direct debits made by the bank on behalf of the customer: When the bank deducts various charges like cheque collection charges, incidental charges, interest on overdraft, unpaid cheques deducted by bank i.e. stopped or bounced etc, the firm will not be aware of these changes and hence these changes will not be reflected in the firm’s cash book. Due to this the cashbook will not be in balance with the passbook.
iv.
Amounts directly deposited in the bank account: When debtors/customers directly deposits money into the firm’s bank account, the firm will not be aware of these deposits. Due to this, these entries will not be recorded into the cashbook. This will also create an imbalance between the bank passbook and firm’s cashbook.
v.
Interest and dividends collected by the bank: The banks collects interest and dividend on behalf of the customer these will not be known by the firm and hence will not be recorded into the firm’s cash book. This will also create an imbalance between the bank passbook and firm’s cashbook.
vi.
Direct payments made by the bank on behalf of the customers: When the customers give standing instructions to the bak to make some payment regularly on stated days to the third parities like telephone bill, insurance premium, rent taxes etc, the firm will not be aware of these payments and hence these transactions will not be recorded into the firm’s cashbook. This will also create an imbalance between the the bank passbook and firm’s cashbook.
vii.
Cheques deposited/bills discounted dishonoured: When cheque deposited by the firm is dishonoured or a bill of exchange drawn by the business firm is discounted with the bank is dishonoured on the date of maturity, the same is debited to customer’s account by the bank. As this information is not available to the firm immediately, it will not be recorded in the firm’s cashbook. This will also create an imbalance between the bank passbook and the firm’s cashbook.
2.
Differences casused by Errors: The difference between the two balances could be due to an error on part of the bank or an error in the cash book of the business. This will also create an imbalance between the bank passbook and the firm’s cashbook.
i.
Errors committed in recording transaction by the firm: Omission or wrong recording of transactions relating to cheques issued, cheques deposited, incorrect totaling etc committed by the firm in the cashbook will create an imbalance between the bank passbook and the firm’s cashbook.
ii.
Errors committed in recording transactions by the bank: Omission or wrong recording of transactions related to cheques issued, cheques deposited, wrong totaling etc committed by the bank in the passbook will create an imbalance between the bank passbook and the firm’s cashbook.
3. Explain the process of preparing bank reconciliation statement with amended cash balance.
In general, the Cash book balance differs from the Passbook balance due to some of the transactions present in the passbook are not yet recorded into the cashbook. This can be corrected by first recording these transactions into the cashbook. The balance obtained after these corrections is called as the adjusted balance or amended balance. The process can be summarized into the following steps.
1.
The bank balance according the cash book is noted down.
2.
Rectify any errors committed in the cashbook.
3.
The transactions appearing only on the credit side of the passbook should be recorded on the debit side of the cashbook.
4.
The transactions appearing only on the debit side of the passbook should be recorded on the credit side of the cashbook.
5.
The new cashbook balance is computed and is used for preparing the Bank Reconciliation Statement.
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