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Book Balance


In this method, the balance as per cash book or as per passbook is the starting item. The debit balance as per the cash book means the balance of deposits held at the bank. Such a balance will be a credit balance as per the passbook. Such a balance exists when the deposits made by the firm are more than its withdrawals. It indicates the favorable balance as per cash book or favorable balance as per the passbook.

On the other hand, the credit balance as per the cash book indicates bank overdraft. In other words, the excess amount withdrawn over the amount deposited in the bank. It is also known as unfavorable balance as per cash book or unfavorable balance as per passbook.

Different situations faced while preparing the bank reconciliation statement:
  1. When debit balance (favorable balance) as per cash book is given and the balance as per passbook is to be ascertained.
  2. When credit balance (favorable balance) as per passbook is given and the balance as per cash book is to be ascertained.
  3. When credit balance (unfavorable balance/overdraft balance) as per cash book is given and the balance as per passbook is to be ascertained.
  4. When debit balance (unfavorable balance/overdraft balance) as per passbook is given and the balance as per
  5. cash book balance is to be ascertained.

5.2.1(a) Dealing with favorable balances


The following steps may be followed to prepare the bank reconciliation statement:
  1. The date on which the statement is prepared is written at the top, as part of the heading.
  2. The first item in the statement is generally the balance as shown by the cash book. Alternatively, the starting point can also be the balance as per passbook.
  3. The cheques deposited but not yet collected are deducted.
  4. All the cheques issued but not yet presented for payment, amounts directly deposited in the bank account are added.
  5. All the items of charges such as interest on overdraft, payment by bank on standing instructions and debited by the bank in the passbook but not entered in cash book, bills and cheques dishonored etc. are deducted.
  6. All the credits given by the bank such as interest or dividends collected etc. and direct deposits in the bank are added.
  7. Adjustment for errors is made according to the principles of rectification of errors. (The rectification of errors has been discussed in detail in chapter 6.)
  8. Now the net balance shown by the statement should be same as shown by the passbook.
Here, it may be noted that treatment of all items shall be the reverse of the above if we adjust passbook balance as the starting point.

The following illustrations may help you to understand dealing with favorable balance as per cash book and pass book:

Illustration 1
From the following particulars of Mr. Vinod, prepare bank reconciliation statement as on March 31, 2005.
  1. Bank balance as per cash book Rs. 50,000.
  2. Cheques issued but not presented for payment Rs. 6,000.
  3. The bank had directly collected dividend of Rs. 8,000 and credited to bank account but was not entered in the cash book.
  4. Bank charges of Rs. 400 were not entered in the cash book.
  5. A cheque for Rs. 6,000 was deposited but not collected by the bank.
Solution
Bank Reconciliation Statement of Mr. Vinod as on March 31, 2005
 

Particulars

Amount

Rs.

Amount

Rs.

1.

2.

3.

4.

5.

6.

Balance as per cash book

Cheques issued but not presented for payment

Dividends collected by the bank

Cheques deposited but not credited by the bank

Bank charges debited by the Bank

Balance as per the passbook.

 

50,000
6,000

8,000

 

 

 
 

________

64,000

________

 

 

 

6,000

400

57,600

 

________

64,000

________


Illustration 2
The bank passbook of M/s. Boss & Co. showed a balance of Rs. 45,000 on May 31, 2005.
  1. Cheques issued before May 31, 2005, amounting to Rs. 25,940 had not been presented for encashment.
  2. Two cheques of Rs. 3,900 and Rs. 2,350 were deposited into the bank on May 31, 2005 but the bank gave credit for the same in June.
  3. There was also a debit in the passbook of Rs. 2,500 in respect of a cheque dishonored on 31.5.2005. Prepare a bank reconciliation statement as on May 31, 2005.
Solution
Bank Reconciliation Statement of Bose & Co as on May 31, 2005
 

Particulars

Amount

Rs.

Amount

Rs.

1.

2.

3.

4.

5.

 

Balance as per pass book

Cheques deposited but not collected by the Bank (Rs. 3,900+ Rs. 2,350)

Cheques dishonoured recorded only in Pass book
Cheques issued but not presented for payment
Balance as per the cash book.

45,000

6,250

2,500

 


________

53,750

________

 

 

 

25,940

27,810
________

53,750

________

5.2.1(b) Dealing with overdrafts


Till now we have dealt with bank reconciliation statement where bank balances has been positive - i.e., there has been money in the bank account. But sometimes, the businesses may have overdrafts at the bank. Overdrafts are where the bank account becomes negative and the businesses in effect have borrowed from the bank. This is shown in the cash book as a credit balance. In the bank statement, where the balance is followed by Dr. (or sometimes OD) means that there is an overdraft and called debit balance as per passbook. An
overdraft is treated as negative figure on a bank reconciliation statement.

The following solved illustration will help you understand the preparation of bank reconciliation statement when there is an overdraft.

Illustration 3:
On March 31, 2005, Rakesh had on overdraft of Rs. 8,000 as shown by his cash book.

Cheques amounting to Rs. 2,000 had been paid in by him but were not collected by the bank. He issued cheques of Rs. 800 which were not presented to the bank for payment.

There was a debit in his passbook of Rs. 60 for interest and Rs. 100 for bank charges.

Prepare bank reconciliation statement.

Solution
Bank Reconciliation Statement of Rakesh as on April 01, 2005
 

Particulars

(+)

Amount

Rs.

(-)

Amount

Rs.

1.

2.

3.

4.

5.

 

Overdraft as per Cash book

Cheques deposited but not yet collected charged by the Bank

Bank charges

Cheques issued but not presented for payment

Balance as per the Bank pass book (overdraft).

 

 

 

 

800

9,360

________

10,160

________

8,000

2,000

60

100

 

________

10,160

________





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