CBSE Class 11 Accountancy Chapter 5: Bank Reconciliation Statement NCERT Solutions

The preparation of a Bank Reconciliation Statement (BRS) is essential for businesses for several key reasons:

• Ensuring Accuracy: It verifies the accuracy of the bank balances recorded in both the company's cash book and the bank's pass book (or bank statement).
• Error Detection: It helps in identifying and rectifying errors that may have occurred in the cash book concerning bank transactions, such as incorrect amounts, wrong entries, or omissions.
• Fraud Prevention: Regular preparation of BRS acts as a deterrent against potential frauds by ensuring that all transactions are accounted for and discrepancies are investigated promptly.
• Identifying Delays: It highlights any undue delays in recording transactions, such as the time taken for cheques to be presented for payment or for deposited cheques to be collected and credited by the bank.
• Prompt Action: By identifying delays, businesses can take appropriate actions to expedite the process and manage their cash flow effectively.
• Maintaining Control: It keeps a check on the accuracy of entries made in both the cash book and the pass book, ensuring consistency.
• Updating Cash Book: It facilitates the updating of the cash book to reflect the correct bank balance as per the pass book, often by preparing an adjusted cash book.

A bank overdraft occurs when a firm or an account holder withdraws an amount from their bank account that exceeds the available balance. In such a situation, the bank account shows a negative balance. This negative balance is referred to as a bank overdraft. Essentially, it represents the excess of withdrawals over deposits. For the account holder, a bank overdraft is considered a liability because it is an amount that needs to be repaid to the bank.

The statement 'wrongly debited by the bank' signifies a situation where the bank incorrectly reduces a customer's account balance by making a debit entry that should not have been made or was made for the wrong amount. A wrong debit by the bank decreases the customer's available funds. Such errors can occur in a couple of ways:

• Incorrect Account Debited: If a customer maintains multiple accounts with the same bank (e.g., a savings account and a current account), the bank might mistakenly debit the wrong account. For instance, a cheque of Rs. 4,000 issued from the customer's savings account could be wrongly debited from their current account.
• Incorrect Amount Debited: The bank might record the wrong amount when debiting the customer's account. For example, a cheque payment of Rs. 60,000 might be wrongly debited in the pass book as Rs. 6,000, leading to a difference of Rs. 54,000.

Differences between the cash book and the pass book often arise due to a 'time lag', which is the difference in the timing of recording a transaction in the two books. The main causes are:

1. Cheques Issued but Not Presented for Payment: When a company issues cheques to its suppliers or creditors, it immediately records the reduction in the cash book. However, the bank only deducts the amount from the account when the recipient presents the cheque for payment. If the cheque has not been presented by the time the reconciliation is done, the cash book balance will be lower than the pass book balance.
2. Cheques Paid or Deposited but Not Collected and Credited by the Bank: When a company receives cheques from its debtors, it records the receipt and increases the balance in the cash book. However, the bank only credits the customer's account after it has successfully collected the funds from the debtor's bank. If the cheque has been deposited but not yet cleared and credited by the bank, the cash book balance will be higher than the pass book balance.

A 'favourable balance' as per the cash book, also known as a debit balance in the cash book, occurs when the total of the debit side (receipts) in the bank column is greater than the total of the credit side (payments). This indicates that the amount deposited into the bank is more than the amount withdrawn. It represents the actual amount of money the company has available in its bank account according to its own records.

To ascertain the correct cash book balance, often referred to as preparing an 'adjusted cash book', the following steps are taken:

Step 1: Start with the initial balance. Note the bank balance as it appears in the cash book (either favourable or overdraft).

Step 2: Rectify cash book errors. Identify and correct any errors that have been made in the cash book concerning bank transactions. This includes correcting wrong amounts, double entries, or omissions made by the company.

Step 3: Record items credited only in the pass book. Add transactions that appear only on the credit side of the pass book (like interest credited by the bank, direct deposits by customers) to the debit side of the cash book. These increase the cash book balance.

Step 4: Record items debited only in the pass book. Deduct transactions that appear only on the debit side of the pass book (like bank charges, dishonoured cheques debited by the bank) from the credit side of the cash book. These decrease the cash book balance.

Step 5: Balance the adjusted cash book. After making all the necessary adjustments, total both sides of the cash book and determine the balancing figure. This adjusted balance represents the correct cash book balance and is then used as the starting point for preparing the Bank Reconciliation Statement.

A Bank Reconciliation Statement (BRS) is a report prepared by a company to compare its own accounting records of bank transactions (as recorded in the cash book) with the records maintained by the bank (as shown in the pass book or bank statement). The primary goal is to identify and explain any differences between the two balances.

Why it is prepared:

Business organizations maintain a cash book to record all their cash and bank transactions. This book shows the balance of cash and bank accounts at the end of an accounting period. Concurrently, banks maintain accounts for each customer, recording all deposits as credits and all withdrawals as debits. A copy of this account, known as a pass book or bank statement, is provided to the customer.

The BRS is prepared because the balance shown in the company's cash book and the balance shown in the bank's pass book do not always match. This discrepancy occurs because the two books are maintained by different parties (the company and the bank), and transactions are often recorded at different times or may contain errors.

The process involves comparing the entries in both books. By identifying the items causing the difference, the company can reconcile the two balances. This reconciliation ensures the accuracy of financial records, helps in detecting errors or potential fraud, and provides a clear picture of the company's actual cash position with the bank.