Class 11 Accountancy Notes Chapter 5 (Bank Reconciliation Statement) – Financial Accounting-I Book

Detailed Notes with MCQs of a very important chapter for your exam preparation: Chapter 5, Bank Reconciliation Statement (BRS). This is a practical topic that helps businesses ensure their bank records align with their own books. Understanding it well is crucial.

Bank Reconciliation Statement (BRS): Detailed Notes

1. Meaning and Purpose:

• A Bank Reconciliation Statement (BRS) is a statement prepared periodically (usually monthly) by a business entity to compare the bank balance as per its own Cash Book (Bank Column) with the balance as per the Bank Statement (or Pass Book) provided by the bank.
• Purpose: The primary goal is to identify and explain the reasons for any difference between these two balances on a specific date. It helps in:
  • Detecting errors or omissions made either by the business or the bank.
  • Identifying delays in the clearing of cheques.
  • Preventing and detecting fraud related to banking transactions.
  • Ensuring the accuracy of the bank balance recorded in the Cash Book.
  • Providing management with the correct bank balance information.

2. Need for Reconciliation:

• The Cash Book (Bank Column) is maintained by the business to record all transactions with the bank (deposits, withdrawals).
• The Pass Book (or Bank Statement) is maintained by the bank, recording the customer's (business's) transactions from the bank's perspective.
• Ideally, both should show the same balance, but in opposite directions (Debit balance in Cash Book = Credit balance in Pass Book, and vice-versa). However, differences often arise.
• A BRS is needed to reconcile these differences and ascertain the actual bank balance.

3. Causes of Difference between Cash Book and Pass Book Balances:

These can be broadly categorized:

• (a) Timing Differences: These arise because there's a time lag between the transaction being recorded in one book and its appearance in the other.

  • Cheques Issued but not yet Presented for Payment: The business debits its bank account (reduces balance) in the Cash Book immediately upon issuing a cheque. However, the bank only debits the account when the cheque is actually presented for payment by the payee. This leads to the Cash Book balance being lower than the Pass Book balance.
  • Cheques Deposited (Paid into Bank) but not yet Collected/Credited by the Bank: The business credits its bank account (increases balance) in the Cash Book as soon as it deposits a cheque. The bank, however, credits the account only after the cheque is cleared (collected from the drawer's bank). This leads to the Cash Book balance being higher than the Pass Book balance.

• (b) Transactions Recorded only by the Bank: Certain transactions are directly handled by the bank and recorded in the Pass Book first. The business usually records them in the Cash Book only after receiving the Bank Statement.

  • Interest Credited by the Bank: Bank allows interest on the deposit balance. This increases the Pass Book balance. The business records it later.
  • Bank Charges and Interest on Overdraft Debited by the Bank: Bank deducts charges for services (cheque book issuance, collection charges, etc.) or charges interest on overdraft. This decreases the Pass Book balance. The business records it later.
  • Direct Deposits by Customers into the Bank Account: Customers may directly deposit money into the business's bank account. This increases the Pass Book balance. The business might not know immediately.
  • Direct Payments made by the Bank on behalf of the Customer: Based on standing instructions (like insurance premiums, rent), the bank makes payments. This decreases the Pass Book balance. The business records it later.
  • Dishonour of a Cheque Deposited: A cheque previously deposited and credited in the Cash Book might be dishonoured by the drawer's bank. The bank reverses the entry (debits the account), decreasing the Pass Book balance.

• (c) Errors and Omissions: Mistakes can occur in either set of records.

  • Errors committed by the Business (in Cash Book): Wrong amount recorded, transaction omitted, recorded on the wrong side (receipt as payment or vice-versa), totalling errors in the bank column.
  • Errors committed by the Bank (in Pass Book): Wrong amount recorded, transaction of another customer posted to the business's account, transaction omitted.

4. Preparation of Bank Reconciliation Statement:

A BRS starts with the balance of either the Cash Book or the Pass Book and arrives at the balance of the other by making adjustments for the items causing the difference.

• Key Terms:

  • Favourable Balance: Debit balance as per Cash Book OR Credit balance as per Pass Book (means money is available in the account).
  • Unfavourable Balance/Overdraft: Credit balance as per Cash Book OR Debit balance as per Pass Book (means the business owes money to the bank).

• Method 1: Starting with Cash Book Balance:

  • Take the Balance as per Cash Book (Debit/Favourable or Credit/Overdraft).
  • Add items that have increased the Pass Book balance but are not yet recorded (or recorded less) in the Cash Book, OR items that have decreased the Cash Book balance but not yet the Pass Book balance.
    • Examples (for Favourable Balance start): Cheques issued but not presented (+), Interest credited by bank (+), Direct deposits by customers (+), Collections by bank (+), Wrong debit in Cash Book (+), Under-casting of receipt side in Cash Book (+), Over-casting of payment side in Cash Book (+), Wrong credit in Pass Book (+).
  • Less items that have decreased the Pass Book balance but are not yet recorded (or recorded less) in the Cash Book, OR items that have increased the Cash Book balance but not yet the Pass Book balance.
    • Examples (for Favourable Balance start): Cheques deposited but not collected (-), Bank charges (-), Interest on overdraft (-), Direct payments by bank (-), Dishonoured cheques (-), Wrong credit in Cash Book (-), Over-casting of receipt side in Cash Book (-), Under-casting of payment side in Cash Book (-), Wrong debit in Pass Book (-).
  • The final result will be the Balance as per Pass Book.
  • (Note: The treatment reverses if starting with Cash Book Overdraft).

• Method 2: Starting with Pass Book Balance:

  • Take the Balance as per Pass Book (Credit/Favourable or Debit/Overdraft).
  • Add items that have increased the Cash Book balance but are not yet recorded (or recorded less) in the Pass Book, OR items that have decreased the Pass Book balance but not yet the Cash Book balance.
    • Examples (for Favourable Balance start): Cheques deposited but not collected (+), Bank charges (+), Interest on overdraft (+), Direct payments by bank (+), Dishonoured cheques (+).
  • Less items that have decreased the Cash Book balance but are not yet recorded (or recorded less) in the Pass Book, OR items that have increased the Pass Book balance but not yet the Cash Book balance.
    • Examples (for Favourable Balance start): Cheques issued but not presented (-), Interest credited by bank (-), Direct deposits by customers (-), Collections by bank (-).
  • The final result will be the Balance as per Cash Book.
  • (Note: The treatment reverses if starting with Pass Book Overdraft).

• Method 3: Preparation of Adjusted Cash Book:

  • Sometimes, before preparing the BRS, the Cash Book is first adjusted.
  • Errors in the Cash Book and items recorded only by the bank (like bank charges, interest credited, direct deposits/payments) are recorded in the Cash Book to arrive at an 'Adjusted Cash Book Balance'.
  • Then, a BRS is prepared starting with this adjusted balance, considering only timing differences (cheques issued/deposited) and errors made by the bank. This method helps ascertain the correct cash balance to be shown in the Balance Sheet.

5. Importance for Government Exams:

• Questions often test the understanding of why an item causes a difference and its correct treatment (add or less) in the BRS under different starting balances (Cash Book/Pass Book, Favourable/Overdraft).
• Be clear about the perspective: Cash Book (business's record) vs. Pass Book (bank's record).
• Understand the meaning of favourable (asset for business) and overdraft (liability for business) balances in both books.

Multiple Choice Questions (MCQs)

Here are 10 MCQs to test your understanding:

1. A Bank Reconciliation Statement is prepared to reconcile the difference between:
   a) Cash Book balance and Cashier's balance
   b) Pass Book balance and Bank Statement balance
   c) Cash Book (Bank Column) balance and Pass Book balance
   d) Trial Balance and Balance Sheet

2. A favourable balance as per Cash Book means:
   a) Credit balance in Cash Book
   b) Debit balance in Cash Book
   c) Debit balance in Pass Book
   d) Credit balance in Bank Statement

3. When starting with a favourable balance as per Cash Book, 'Cheques issued but not yet presented for payment' should be:
   a) Added
   b) Subtracted
   c) Ignored
   d) Divided

4. Bank charges debited by the bank will cause the Pass Book balance to be _______ than the Cash Book balance (before adjustment).
   a) Higher
   b) Lower
   c) Equal
   d) Cannot be determined

5. When preparing a BRS starting with Pass Book overdraft, interest credited by the bank should be:
   a) Added
   b) Subtracted
   c) Ignored
   d) Multiplied

6. Which of the following is NOT a timing difference?
   a) Cheques issued but not presented
   b) Cheques deposited but not collected
   c) Bank charges debited by the bank
   d) None of the above

7. Direct deposit by a customer into the business's bank account, if not yet recorded in the Cash Book, will lead to:
   a) Cash Book balance being higher than Pass Book balance
   b) Pass Book balance being higher than Cash Book balance
   c) Both balances being equal
   d) An error in the Pass Book

8. An overdraft balance as per Pass Book means:
   a) Credit balance in Pass Book
   b) Debit balance in Cash Book
   c) Credit balance in Cash Book
   d) Debit balance in Pass Book

9. If the BRS starts with Debit Balance as per Cash Book, what will be the effect of a cheque of ₹500 deposited but dishonoured (and no entry made in Cash Book yet)?
   a) Add ₹500
   b) Subtract ₹500
   c) Add ₹1000
   d) Subtract ₹1000

10. The primary purpose of preparing an Adjusted Cash Book before BRS is:
    a) To correct only bank errors
    b) To incorporate all timing differences into the Cash Book
    c) To arrive at the correct Cash Book balance by accounting for omissions/errors in it and items recorded only by the bank
    d) To make the Pass Book balance equal to the Cash Book balance

Answer Key for MCQs:

1. c
2. b
3. a
4. b
5. a (Subtract from favourable balance, so Add to overdraft balance)
6. c
7. b
8. d
9. b (Dishonour reduces Pass Book balance; to reconcile from higher Cash Book balance, subtract)
10. c

Study these notes carefully, focusing on the reasons for differences and their treatment. Practice preparing BRS with different starting points and scenarios. Good luck!