Class 11 Accountancy (Financial Accounting) Chapter 5 Bank Reconciliation Statement

Key Concept: Cause of Difference

b) Interest credited by the bank not recorded in the cash book

[Solution Description] One of the causes of differences between cash book and passbook balances can be due to bank charges debited by the bank that have not been recorded in the firm’s cash book. This leads to a lower balance in the passbook compared to the cash book.

Key Concept: Format Identification

a) Cheques issued but not presented

[Solution Description] When preparing a bank reconciliation statement, cheques issued but not yet presented are added back to the balance as per the cash book. This is because these cheques have already been deducted from the cash book balance but are not yet reflected in the bank balance until they are presented for payment.

Key Concept: Cheque Collection

c) The passbook balance is lower than the cash book balance.

[Solution Description] When a cheque is deposited into the bank but not yet collected, it implies that the transaction has been recorded in the cash book as an increase in balance, but since the bank hasn’t cleared it yet, there’s no corresponding entry in the passbook. Therefore, the passbook balance will be lower than the cash book balance until the cheque is collected.

Key Concept: Dishonoured Cheques

a) It reduces the bank passbook balance

[Solution Description] When a cheque deposited by the firm is dishonoured, the amount of the cheque is not actually credited to the firm’s account. This means that any prior entry assuming the credit will need to be reversed, leading to a decrease in the bank passbook balance.

Key Concept: Simple Calculation

b) Rs.23,000

[Solution Description] The balance as per the passbook can be calculated by adding the amount of unpresented cheques to the cash book balance. Thus, balance as per passbook = Rs.20,000 + Rs.3,000 = Rs.23,000.

Key Concept: Basic Calculation

c) \$6,500

[Solution Description] The balance as per passbook can be calculated by adding the uncredited deposits to the cash book balance:

Cash book balance = \$5,000

Uncredited deposits = \$1,500

Balance as per passbook = \$5,000 + \$1,500 = \$6,500

Key Concept: Simple Cause and Effect

c) No change in passbook balance

[Solution Description] When cheques are paid into the bank but not yet collected, there is no immediate effect on the passbook balance. The cash book shows an increase, while the passbook remains the same until collection occurs.

Key Concept: Favourable and Unfavourable Balances

d) Unfavourable balance

[Solution Description]

An overdraft indicates an unfavourable balance, where withdrawals exceed deposits in a bank account, often resulting in a negative balance.

Key Concept: Basic Concept

b) The account holder owes money to the bank.

[Solution Description] An overdraft balance as per the passbook indicates that withdrawals have exceeded deposits, meaning the account has a negative balance.

Key Concept: Identification

b) Dr

[Solution Description] The term “Dr” (Debit) is used in a bank statement to indicate an overdraft as it signifies a negative balance.

Key Concept: Direct Debits

b) Lower passbook balance

[Solution Description] Direct debits made by the bank reduce the balance in the bank account directly, leading to a lower passbook balance than what might be reflected in the firm’s cash book if the firm is not aware of these debits.

Key Concept: Cause Identification

a) Timing of recording transactions

[Solution Description]

One common cause of differences between the cash book and passbook balances is timing differences due to cheques issued but not yet presented for payment by the recipient. Other causes could be bank charges not recorded in the cash book, direct deposits by third parties, etc.

Key Concept: Terminology

b) A copy of the bank’s ledger

[Solution Description] A ‘passbook’ is a record maintained by the bank that details all transactions related to a customer’s account, essentially representing the bank’s ledger regarding the customer’s account activities.

Key Concept: Cause and Effect

c) Both a and b

[Solution Description] Temporary differences between cash book and passbook balances are often due to timing differences. For example, when cheques are issued but not yet presented for payment, it creates a discrepancy because the amount is deducted in the cash book immediately but not from the bank account until the cheque is cashed.

Key Concept: Basic Concept

c) Dishonored bill

[Solution Description] Direct debits made by the bank, such as service charges or payments under standing instructions, reduce the bank passbook balance.

Key Concept: Simple Cause Identification

c) Cheque recorded incorrectly in cash book

[Solution Description] Errors made by the business, such as recording a transaction twice or omitting a transaction, can cause differences between the balances shown in the cash book and the passbook. One common example is errors in recording payments.

Key Concept: Basic Concept

b) To reconcile cash book and passbook balances

[Solution Description] The primary purpose of a bank reconciliation statement is to reconcile the differences between the cash book and passbook balances, ensuring that records match and any discrepancies are identified.

Key Concept: Reconciliation Process

a) Identifying the balance as per the cash book

[Solution Description] The first step in preparing a Bank Reconciliation Statement is identifying the balance as per either the cash book or the passbook. This starting point helps in making subsequent adjustments for discrepancies like outstanding cheques and bank charges.

Key Concept: Basic Concept

b) It is credited

[Solution Description] When the bank collects interest and dividends for a customer, it increases the customer’s balance with the bank. This is done by crediting the collected amount to the customer’s account, as per standard banking practice.

Key Concept: Interest Collection

c) Passbook balance increases before cash book balance

[Solution Description] When a bank collects interest for a customer, the bank credits this interest directly to the customer’s account shown in the passbook. The cash book will only reflect this increase once the firm is informed and updates their own records.

Key Concept: Error Identification

c) Cheque deposited but not recorded when dishonoured

[Solution Description] A dishonoured cheque that is not recorded in the cash book can cause a mismatch because the passbook will reflect a lower balance after the cheque is debited back, while the cash book still shows the original deposit amount. Hence, the error “Cheque deposited but not recorded when dishonoured” accurately describes the cause of this mismatch.

Key Concept: Basic Concept

a) Bank overdraft

[Solution Description] An unfavourable balance in the cash book usually indicates a negative balance, which means the account is overdrawn. This occurs when withdrawals exceed deposits.

Key Concept: Causes of Difference

d) All of the above

[Solution Description] Differences can arise due to cheques issued but not yet presented for payment, deposits made but not yet credited by the bank, or bank charges and fees not yet recorded in the cash book.

Key Concept: Definition Recall

a) Favourable balance, indicating funds available

[Solution Description] A credit balance as per the passbook indicates a favourable balance, meaning that the bank account has money available and the bank owes this amount to the account holder.

Key Concept: Process Steps

c) Compare opening balances of cash book and passbook

[Solution Description] The first step in preparing a bank reconciliation statement is to compare the opening balances of the cash book and passbook to identify any initial discrepancies that may exist before examining the transactions.

Key Concept: Basic Format

d) Cheques issued but not presented

[Solution Description] In a bank reconciliation statement, cheques that have been issued by the company but not yet presented for payment are added back to the balance as per the cash book. This adjustment is necessary because the cash book reflects these payments immediately, while the bank account does not until they are presented and cleared.

Key Concept: Definition Recall

d) The account holder has a positive balance.

[Solution Description] A credit balance in the passbook means that the bank owes money to the account holder, which indicates a favourable situation for the account holder. It shows that there is an available positive balance in the account.

Key Concept: Steps for Reconciliation

d) Calculating tax liabilities based on transactions

[Solution Description] Preparing a bank reconciliation statement usually involves writing the date, starting with either the cash book or passbook balance, adjusting for cheques issued and charges that have not been recorded by the bank, adding deposits not yet credited, subtracting any errors, and ensuring all items are accounted for.

Key Concept: Strategic Planning, Instruction Optimization

a) Set all payments to the same date and ensure fund availability.

[Solution Description]

To optimize standing instructions effectively:

1. Synchronize payment dates within a short window or on the same day, reducing timing differences.

2. Confirm sufficient funds availability before automated deductions to prevent any discrepancies.

3. Regularly review transaction confirmations against automatic schedules to ensure accuracy.

4. Consolidate smaller regular payments into single transactions where feasible, minimizing multiple reconciliation tasks.

Implementing such strategies helps manage cash flow seamlessly while minimizing potential errors, enhancing the overall reconciliation efficiency.

Key Concept: Starting Point

d) Balance as per cash book

[Solution Description] The starting point for preparing a bank reconciliation statement with a favourable balance is usually the balance as per the cash book. This is because it provides a record of all transactions from the company’s perspective.

Key Concept: Simple Calculation

c) \$12,500

[Solution Description] To find the adjusted bank balance, we add back the unpresented cheques to the cash book balance:

$$10,000 + 2,500 = 12,500$$

Key Concept: Interest Collection

c) The bank balance increases before the cash book

[Solution Description] When the bank collects interest on behalf of a customer, it credits the customer’s bank account with the amount collected. This results in an increase in the bank balance before it is updated in the cash book.

Key Concept: Definition Recall

b) To explain discrepancies between a company’s cash book and the bank statement.

[Solution Description] The primary purpose of a bank reconciliation statement is to ensure that the cash book balance and the passbook balance match, by identifying any discrepancies due to timing differences or errors.

Key Concept: Conceptual Understanding

b) Credit balance

[Solution Description] In the cash book, an overdraft is shown as a credit balance because it signifies an amount owed by the business to the bank, thus appearing as a liability.

Key Concept: Comparison

c) Passbook balance will be less than cash book by \$500

[Solution Description] The direct debit reduces the bank balance but is not reflected in the cash book until it’s recorded. Thus, the bank passbook will show a \$500 lower balance compared to the cash book due to timing differences.

Key Concept: Sequential Steps

b) Compare cash book with passbook

[Solution Description] The initial step in preparing a bank reconciliation statement is to compare the entries in the cash book with those in the passbook and identify any discrepancies or differences between the two.

Key Concept: Error Source

b) The error overstates the cash book balance by \$180.

[Solution Description] The error here is a recording error made by the business. The cheque was supposed to be recorded as \$200 but was recorded as \$20 instead. Therefore, the cash book shows an excess amount of \$180 (i.e., 200 – 20). As a result, the cash book balance is overstated by \$180.