Class 11 Accountancy Chapter 5 Bank Reconciliation Statement
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Class 11 Accountancy Chapter 5 Bank Reconciliation Statement
Bank Reconciliation Statement
It is a statement prepared by the depositor (customer) for the purpose of reconciling or making agree the cash book balance with the pass book balance on a certain date by making suitable adjustments. It is a statement prepared to show the causes of difference between the
items shown in the pass book and the bank column of the cash book
Need for Reconciliation
If the bank balance shown in the firm’s cash book and the pass book balance does not
tally, we have to first ascertain the causes of difference and then prepare the bank reconciliation statement to reconcile the two balances.
Causes of differences between cash book balance and pass book balance The differences between the cash book and the bank passbook are caused by:
- Timing differences on recording of the transactions.
- Errors made by the business or by the bank.
The disagreement between the balances of cash book and pass book due to timing difference is caused by the time gap in recording the transactions relating either to payments or receipts.
The factors affecting time gap includes
1.Cheque issued but not presented for payment
When a trader issues cheque to a third person, he immediately enters in the cash book whereas; it will be entered by the bank only when the cheques are presented to the bank for payment.
2. Cheque paid in but not credited /collected by bank
Cheque received from customers might have been paid into bank and entered on the debit side of the cash book by the trader. But the bank will credit the same only after realization of the cheque.
3. Interest , dividend etc. collected and credited by bank
Interest allowed on bank balance and interest, dividends etc. collected by the bank will be credited in the pass book. But the trader may not enter the same in his cash book on the same day.
4. Directs debits made by the bank on behalf of the customer
Bank charges, interest on overdraft, commission for collection of cheques, bills, etc. will be debited by the bank in pass book as and when they occure. But it will be entered by the trader only on a later date in his cash book as he may not be aware about them on the same day.
5. Cheques credited but dishonoured
When cheque is discounted, bank will credit it in pass book and customer debits it in cash book, hence both the balances will be increased. Later on if this cheque is dishonoured, the bank will debit the customers account (pass book) but it may not be entered by the trader in his cash book at that time.
6. Amount directly deposited in the bank account
The customers of a trader might have deposited money into the trader’s bank account directly. But it may not be intimated to the trader soon, hence it will not be recorded in the cash book.
7. Direct payments made by the bank on behalf of the customer.
The bank might have made some payments on behalf of the customer under ‘standing instructions’ and debited the customer’s account. But the customer may not have entered the same in his cash book.
8. Dishonour of a bill discounted with the bank
Sometimes the customer discounts bills of exchange before maturity for urgent cash. If on the date of maturity, such a bill is dishonoured, the bank will debit the customer’s account. The customer will make this entry in his book only after getting information from the bank.
Differences caused by errors
Sometimes the difference between the two balances may be because of an error on the part of the bank or an error in the cash book of the business.
1.Errors committed in recording transaction by the firm
Omission or wrong recording of transaction relating to cheque issued, cheques issued and wrong totalling, etc. Committed by the firm while recording entries in cash book cause difference between cash book and passbook balance,
2. Errors committed in recording transaction by the bank
Omission or wrong recording of transaction relating to cheque deposited and wrong totalling, etc. committed by the bank while recording entries in pass book cause difference between cash book and passbook balance,
Preparation of BRS
A bank reconciliation statement can be prepared in two ways:
- Preparation of bank reconciliation statement without adjusting cash book balance
- Preparation of bank reconciliation statement after adjusting cash book balance
Preparation of bank reconciliation statement without adjusting cash book balance
Favourable balance and unfavourable balance
The debit balance as per cash book and credit balance as per passbook are called favourable balance. The debit balance as per cash book means the balance of deposits held at the bank. The credit balance as per pass book means deposits made by the firm are more than its withdrawals.
The credit balance as per cash book and debit balance as per pass book are called unfavourable balance. It means the excess amount withdrawn over the amount deposited in the bank. It is called bank overdraft.
There are four different situations for preparing the bank reconciliation statement.
- When debit balance (favourable balance) as per cash book is given and the balance as per passbook is to be ascertained.
- When credit balance (favourable balance) as per passbook is given and the balance as per cash book is to be ascertained.
- When credit balance as per cash book (unfavourable balance/overdraft balance) is given and the balance as per passbook is to ascertained.
- When debit balance as per passbook (unfavourable balance/overdraft balance) is given and the cash book balance as per is to ascertained.
Preparation of bank reconciliation statement if debit balance as per cash book (favourable balance) as starting item
Items to be added with cash book balance
- Cheques issued but not yet presented.
- Interest allowed by the bank.
- Interest, dividend, commission etc. collected by the bank but not recorded in the cash book.
- Direct deposit made by the customer in firm’s bank account. Items to be deducted from the cash book balance
- Cheques deposited into bank but not yet collected.
- Bank charges debited by the bank in the pass book.
- Interest on overdraft charged by the bank.
- Payment made by bank on customer’s behalf.
- Cheques dishonoured, but not recorded in cash book.
Note: If we are starting with credit balance as per pass book balance, all the items added with
cash book balance must be deducted and all the items deducted from the cash book balance must be added with the pass book balance.
In case the cash book and pass book shows an overdraft balance, the adjustment should be made in opposite direction of starting with deposit balance.
Preparation of bank reconciliation statement after adjusting cash book balance
- Under this method, first we record the items which appear only in the pass book in adjusted or amended cash book and then prepare the bank reconciliation statement.
- This shall reduce the number of items responsible for the difference and have the correct figure of balance at bank.
- In this method only those items which cause the difference on account of the time gap in recording appearing in bank reconciliation statement.