A **Bank Reconciliation Statement** is a statement prepared to explain the difference between the bank balance shown in the firm's **cash book** and the balance shown in the **bank passbook** (or bank statement) as on a particular date.
**Key Definitions:**
In practice, the balance shown in the cash book **rarely matches** the balance shown in the bank passbook. This difference occurs due to:
The Bank Reconciliation Statement is essential because:
#### 1. **Cheques Issued but Not Yet Presented for Payment**
When a business issues a cheque to a creditor or supplier, it is immediately recorded on the **credit side of the cash book** (reducing the cash balance). However, the receiving party may not present the cheque to the bank immediately for payment. The bank will debit the firm's account **only when the cheque is actually presented and paid**.
**Effect**: The cash book balance will be **lower** than the passbook balance.
**Example**: A firm issues a cheque of ₹10,000 to a supplier on March 30, 2017. The firm records it in the cash book immediately. However, the supplier presents it to the bank on April 5, 2017. On March 31, the firm's cash book shows ₹10,000 less, but the bank passbook still shows this amount as available.
**Adjustment**: Cheques issued but not presented are **added** to the cash book balance to arrive at the passbook balance.
#### 2. **Cheques Deposited but Not Yet Collected by the Bank**
When a firm receives cheques from customers (debtors), it is immediately recorded on the **debit side of the cash book** (increasing the cash balance). However, the bank credits the customer's account **only when the cheque is actually collected/realised**. This process may take several days, especially for outstation cheques or when deposited at a different branch.
**Effect**: The cash book balance will be **higher** than the passbook balance.
**Example**: A firm deposits a cheque of ₹15,000 on March 31, 2017. The cash book shows the amount immediately. The bank collects it on April 3, 2017. On March 31, the cash book is ₹15,000 higher than the passbook.
**Adjustment**: Cheques deposited but not collected are **deducted** from the cash book balance to arrive at the passbook balance.
#### 3. **Direct Debits Made by the Bank on Behalf of the Customer**
The bank deducts amounts for various services from the account **without prior intimation**. Examples include:
The firm comes to know about these deductions **only when the bank statement arrives**.
**Effect**: The passbook balance will be **less** than the cash book balance.
**Example**: Bank charges of ₹500 are debited by the bank on March 31. The firm receives the passbook in April and records it then. On March 31, the cash book shows ₹500 more than the passbook.
**Adjustment**: Bank charges and direct debits are **deducted** from the cash book balance.
#### 4. **Amounts Directly Deposited in the Bank Account**
Debtors or customers may deposit money **directly into the firm's bank account** without informing the firm. The bank credits the account immediately, but the firm remains unaware until it receives the bank statement.
**Effect**: The passbook balance will be **more** than the cash book balance.
**Example**: A debtor directly deposits ₹20,000 into the firm's account on March 28. The firm's cash book does not show this. On March 31, the passbook shows ₹20,000 more than the cash book.
**Adjustment**: Direct deposits are **added** to the cash book balance.
#### 5. **Interest and Dividends Collected by the Bank**
When the bank collects interest on deposits or dividends on securities held, it **credits the account immediately**. However, the firm learns about these credits **only when the passbook is received**.
**Effect**: The passbook balance will be **more** than the cash book balance.
**Example**: Interest of ₹1,000 is credited by the bank on March 29. The firm sees this only when it receives the April passbook. On March 31, the passbook shows ₹1,000 more.
**Adjustment**: Interest and dividends collected are **added** to the cash book balance.
#### 6. **Direct Payments Made by the Bank (Standing Instructions)**
Firms often authorize the bank to make regular payments on standing instructions, such as:
The bank **debits the account on the due date**, but the firm may not have recorded it in the cash book.
**Effect**: The passbook balance will be **less** than the cash book balance.
**Adjustment**: Direct payments are **deducted** from the cash book balance.
#### 7. **Cheques Deposited or Bills Discounted but Dishonoured**
If a cheque deposited by the firm is **dishonoured** (returned by the drawee's bank) or a bill of exchange discounted with the bank is **dishonoured on maturity**, the bank debits the firm's account. The firm learns about this only when it receives the bank statement.
**Effect**: The passbook balance will be **less** than the cash book balance.
**Example**: A cheque of ₹5,000 deposited on March 25 is dishonoured on March 31. The bank immediately debits the account. The firm's cash book still shows it as collected.
**Adjustment**: Dishonoured cheques are **deducted** from the cash book balance.
#### 1. **Errors in Recording Transactions by the Firm**
These include:
**Effect**: Depends on the nature of the error. The difference is identified only when the cash book is compared with the passbook.
**Example**: A cheque of ₹10,000 issued is recorded in the cash book as ₹1,000. When compared with the passbook, the difference is ₹9,000.
**Adjustment**: Errors must be rectified as per the principles of **rectification of errors** (covered in Chapter 6).
#### 2. **Errors in Recording Transactions by the Bank**
These include:
**Effect**: Identified only when comparing cash book with passbook.
**Example**: The bank debits ₹8,000 for a cheque of ₹800 (typing error). The firm's cash book shows ₹800, but the passbook shows ₹8,000.
**Adjustment**: Bank errors may require communication with the bank for correction.
Under this method, the bank reconciliation statement is prepared by **taking either the cash book balance or the passbook balance as the starting point** and adjusting for all differences to arrive at the other balance.
**Option A (Single Amount Column - Table Form):**
| Particulars | Amount (₹) |
|---|---|
| Balance as per cash book | XXX |
| Add: Cheques issued but not presented | XXX |
| Add: Interest credited by bank | XXX |
| Add: Direct deposits | XXX |
| Less: Cheques deposited but not collected | (XXX) |
| Less: Bank charges and debits | (XXX) |
| Less: Dishonoured cheques | (XXX) |
| **Balance as per passbook** | **XXX** |
**Option B (Dual Amount Column - Plus/Minus Form):**
| Particulars | (+) ₹ | (–) ₹ |
|---|---|---|
| Balance as per cash book | 50,000 | |
| Cheques issued but not presented | 6,000 | |
| Interest credited by bank | 8,000 | |
| Cheques deposited but not collected | | 6,000 |
| Bank charges | | 400 |
| **Balance as per passbook** | **64,000** | **6,400** |
#### **Situation 1: Debit Balance (Favourable) in Cash Book → Finding Passbook Balance**
Starting point: Cash book balance (debit/credit side)
Objective: Find the passbook balance
**Adjustments:**
**Illustration 1: Solved Example**
From the particulars of Mr. Vinod, prepare bank reconciliation statement as on March 31, 2017:
1. Bank balance as per cash book: ₹50,000
2. Cheques issued but not presented: ₹6,000
3. Dividend collected by bank but not recorded in cash book: ₹8,000
4. Bank charges not recorded in cash book: ₹400
5. Cheque deposited but not collected: ₹6,000
**Solution:**
| Particulars | (+) ₹ | (–) ₹ |
|---|---|---|
| Balance as per cash book | 50,000 | |
| Cheques issued but not presented | 6,000 | |
| Dividends collected by bank | 8,000 | |
| Cheques deposited but not collected | | 6,000 |
| Bank charges | | 400 |
| **Balance as per passbook** | **64,000** | **6,400** |
| **Net balance** | | **57,600** |
**Verification**: ₹64,000 – ₹6,400 = ₹57,600 ✓
#### **Situation 2: Credit Balance (Favourable) in Passbook → Finding Cash Book Balance**
Starting point: Passbook balance
Objective: Find the cash book balance
**Adjustments (Reverse of Situation 1):**
**Illustration 2: Solved Example**
The bank passbook of M/s. Boss & Co. shows a balance of ₹45,000 on May 31, 2017. Additional information:
1. Cheques issued before May 31 but not presented: ₹25,940
2. Cheques deposited on May 31 but credited in June: ₹3,900 and ₹2,350
3. Cheque dishonoured and debited on May 31: ₹2,500
Prepare bank reconciliation statement as on May 31, 2017.
**Solution:**
| Particulars | (+) ₹ | (–) ₹ |
|---|---|---|
| Balance as per passbook | 45,000 | |
| Cheques deposited but not collected | | 6,250 |
| (₹3,900 + ₹2,350) | | |
| Cheque dishonoured | | 2,500 |
| Cheques issued but not presented | 25,940 | |
| **Balance as per cash book** | **70,940** | **8,750** |
| **Net balance** | | **27,810** |
**Verification**: ₹70,940 – ₹8,750 = ₹27,810 ✓
#### **Situation 3: Credit Balance (Unfavourable/Overdraft) in Cash Book → Finding Passbook Balance**
When the cash book shows an **overdraft** (credit balance), it means the firm has withdrawn more than deposited. This is a negative balance.
**Illustration 3: Solved Example**
On March 31, 2017, Rakesh had an overdraft of ₹8,000 in his cash book. Additional information:
1. Cheques deposited but not collected: ₹2,000
2. Cheques issued but not presented: ₹800
3. Interest charged on overdraft: ₹60
4. Bank charges: ₹100
Prepare bank reconciliation statement.
**Solution:**
| Particulars | (+) ₹ | (–) ₹ |
|---|---|---|
| Overdraft as per cash book | (8,000) | |
| Cheques issued but not presented | 800 | |
| Cheques deposited but not collected | | 2,000 |
| Interest on overdraft | | 60 |
| Bank charges | | 100 |
| **Overdraft as per passbook** | | **(9,360)** |
**Note**: Overdraft is shown in parentheses or with "Dr." to indicate a negative/borrowed balance.
Sometimes, instead of preparing a bank reconciliation statement separately, the cash book itself is **adjusted** to match the passbook balance.
**Steps to adjust the cash book:**
1. Identify items that should have been recorded in the cash book but were not.
2. Make necessary journal entries to record these items.
3. Rebalance the cash book.
4. The new balance should match the passbook balance.
**Items Requiring Cash Book Adjustment:**
These are items that the **bank has recorded but the firm has not yet recorded**:
**Journal Entries for Cash Book Adjustment:**
Format: `Date | Particulars | Dr. | Cr.`
**Example**: Interest of ₹1,000 credited by bank on March 31 but not recorded in cash book.
`March 31 | Bank A/c (Dr.) 1,000 | To Interest Received A/c (Cr.) 1,000`
(Recording interest credited by bank)
**Example**: Bank charges of ₹500 debited by bank on March 31 but not recorded in cash book.
`March 31 | Bank Charges A/c (Dr.) 500 | To Bank A/c (Cr.) 500`
(Recording bank charges deducted by bank)
Once the cash book is adjusted and rebalanced, the bank reconciliation statement becomes much simpler:
**Adjusted Cash Book Balance** = **Passbook Balance**
The reconciliation would only address **timing differences** (cheques in transit), not items affecting cash book balance.
**Illustration 4: Cash Book Adjustment Example**
Cash book balance as on March 31, 2017: ₹50,000
Bank passbook balance on March 31, 2017: ₹57,600
Additional information:
1. Dividend collected by bank: ₹8,000 (not recorded in cash book)
2. Bank charges: ₹400 (not recorded in cash book)
3. Cheques issued but not presented: ₹6,000
4. Cheques deposited but not collected: ₹6,000
**Journal Entries to Adjust Cash Book:**
```
March 31 | Bank A/c (Dr.) 8,000 | To Dividend Received A/c (Cr.) 8,000
| (Recording dividend collected by bank)
March 31 | Bank Charges A/c (Dr.) 400 | To Bank A/c (Cr.) 400
| (Recording bank charges deducted)
```
**Adjusted Cash Book Balance**: ₹50,000 + ₹8,000 – ₹400 = ₹57,600
**Bank Reconciliation Statement (After Adjusting Cash Book):**
| Particulars | (+) ₹ | (–) ₹ |
|---|---|---|
| Adjusted balance as per cash book | 57,600 | |
| Cheques issued but not presented | 6,000 | |
| Cheques deposited but not collected | | 6,000 |
| **Balance as per passbook** | **63,600** | **6,000** |
**Verification**: ₹63,600 – ₹6,000 = ₹57,600 ✓
The fundamental accounting equation **Assets = Liabilities + Equity** remains true even during bank reconciliation:
| Item | Starting from Cash Book | Starting from Passbook |
|---|---|---|
| Cheques issued but not presented | **Add** | **Deduct** |
| Cheques deposited but not collected | **Deduct** | **Add** |
| Bank charges | **Deduct** | **Add** |
| Interest/Dividends credited | **Add** | **Deduct** |
| Direct deposits | **Add** | **Deduct** |
| Dishonoured cheques | **Deduct** | **Add** |
| Direct payments by bank | **Deduct** | **Add** |
**Common Exam Questions:**
1. Prepare a bank reconciliation statement given cash book and passbook balances
2. Identify causes of differences (timing vs. error)
3. Adjust the cash book and prepare reconciliation statement
4. Calculate the correct bank balance
5. Multiple choice on treatment of items
**Key Points to Remember:**
---
**Question 1**: A firm's cash book shows a bank balance of ₹100,000 on June 30. The passbook shows a balance of ₹85,000. Give reasons for the difference and prepare a bank reconciliation statement.
**Question 2**: Identify which of the following cause timing differences and which indicate errors:
a) Cheques issued but not presented
b) Cheque recorded as ₹5,000 instead of ₹50,000 in cash book
c) Interest credited by bank but not recorded in cash book
**Question 3**: Adjust the cash book if bank deducted ₹200 as charges and credited ₹500 as interest, and prepare reconciliation with passbook balance of ₹65,000.
---
*This comprehensive chapter coverage ensures complete understanding of Bank Reconciliation Statement for CBSE Class 11 board examinations.*
Q1. Which of the following causes a difference between cash book and passbook balance due to timing?
Answer: A — Option A is a natural timing difference; the firm records the cheque immediately but the bank records it only when presented, causing a temporary difference.
Q2. When cheques are deposited in the bank but not yet credited, they should be:
Answer: B — The firm recorded these cheques in the cash book but the bank has not yet cleared them, so we subtract to reconcile the cash book to the lower passbook balance.
Q3. Bank charges deducted by the bank are discovered only when the statement arrives. These should be:
Answer: B — Bank charges reduce the actual bank balance but were not recorded in the cash book, so we subtract them to reconcile the cash book downward to the passbook balance.
Q4. When interest is credited directly by the bank to the firm's account, the firm comes to know only through the bank statement. This should be treated as:
Answer: B — Interest credited by the bank increases the passbook balance but was not recorded in the cash book, so we add it to the cash book balance in reconciliation to make them equal.
Q5. A firm's cash book shows a balance of ₹50,000 on 30th September. The bank passbook shows ₹48,000 on the same date. Cheques issued but not presented amount to ₹4,000. The difference is caused by:
Answer: B — The ₹2,000 difference (₹50,000 – ₹48,000) is not fully explained by the ₹4,000 cheques issued; other items like bank charges or cheques not yet credited must also exist.
Q6. Which statement is NOT correct regarding bank reconciliation?
Answer: C — Option C is wrong because bank charges are deducted from cash book balance (not passbook) to reconcile toward the lower passbook balance in the reconciliation statement.
Q7. A bank statement is a document that shows:
Answer: B — A bank statement is the bank's copy of the account showing deposits as credits and withdrawals as debits, providing the customer with an independent record of transactions.
Q8. If the passbook shows a credit balance, it means:
Answer: B — A credit balance indicates deposits exceed withdrawals, meaning the firm has a positive balance available in the bank account.
Q9. Cash book balance is ₹30,000. Cheques issued but not presented: ₹5,000. Cheques deposited but not credited: ₹2,000. Bank charges not recorded: ₹500. The passbook balance should be:
Answer: B — Passbook balance = ₹30,000 (cash book) + ₹5,000 (cheques not presented) − ₹2,000 (cheques not credited) − ₹500 (bank charges) = ₹32,500.
Q10. When a customer deposits money directly into the firm's bank account, the firm's cash book shows the balance as less than the passbook balance because:
Answer: B — Direct customer deposits are credited by the bank immediately but the firm remains unaware until the bank statement arrives, causing the passbook to show more than the cash book.
What is a bank reconciliation statement?
A statement that explains and reconciles the difference between the cash book balance and the bank passbook balance on a specific date.
Why does the bank balance in the cash book differ from the passbook?
Due to timing differences in recording transactions and errors made by either the firm or the bank.
When cheques are issued but not yet presented for payment, how do we treat them in reconciliation?
Add them to the cash book balance because the firm recorded them early but the bank has not yet debited them.
When cheques are deposited but not yet credited by the bank, how do we treat them?
Subtract them from the cash book balance because the firm recorded them but the bank has not yet credited them.
What is a timing difference in bank reconciliation?
A difference caused by the time gap between when a transaction is recorded in the cash book and when it is processed by the bank.
How should bank charges be treated in the bank reconciliation statement?
Subtract them from the cash book balance because the bank deducts them from the account without the firm's prior knowledge.
When the bank credits interest directly to the account, what adjustment is needed?
Add it to the cash book balance in the reconciliation statement because the firm has not recorded it in its cash book.
What does a credit balance in the passbook indicate?
The bank account has funds available because deposits exceed withdrawals.
What does a debit balance (overdraft) in the passbook mean?
The firm has withdrawn more money than it has deposited, meaning the account is overdrawn.
Why is it important to obtain a recent bank statement for reconciliation?
To ensure the comparison between the cash book and passbook is current and all transactions are accounted for.
Define bank reconciliation statement and state why it is necessary. [2 marks]
State it as a statement that explains differences between cash book and passbook balances. Mention it is necessary to verify accuracy, identify errors, and ensure control over bank transactions.
A firm's cash book on 31st March 2024 shows a balance of ₹50,000. On the same date, the bank passbook shows ₹47,500. Investigation reveals: (a) Cheques issued but not presented: ₹6,000 (b) Cheques deposited but not credited: ₹4,000 (c) Bank charges deducted: ₹1,500. Prepare the bank reconciliation statement and verify if the balances reconcile. [5 marks]
Start with cash book balance of ₹50,000. Add cheques issued not presented (₹6,000). Subtract cheques not credited (₹4,000) and bank charges (₹1,500). Check if result equals ₹47,500. Show all steps in the standard reconciliation format.
Explain with examples the various timing differences that cause discrepancies between the cash book balance and the bank passbook balance. How does the bank reconciliation statement help in resolving these differences? [6 marks]
Discuss cheques issued not presented, cheques deposited not cleared, direct bank debits (charges), direct customer deposits, and interest collected by bank. For each, explain why it creates a time gap. Then explain how the reconciliation statement adjusts the cash book balance to equal the passbook balance by adding or subtracting these items, thereby proving the accuracy of both records and identifying any true errors.
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