Bank Reconciliation Statement: NBSE Class 10 Book Keeping

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Get summaries, questions, answers, solutions, notes, extras, theories, practicles, PDF, and guide of Chapter 3 Bank Reconciliation Statement, NBSE Class 10 Book Keeping (BK) textbook, which is part of the syllabus of students studying under Nagaland Board. These solutions, however, should only be treated as references and can be modified/changed.

Summary

The chapter explains bank reconciliation statements. It begins by introducing bank accounts. People deposit cash and cheques in banks. They also make payments through banks. There are different types of bank accounts. Business firms often use current accounts. They record their banking transactions in a cash book. Banks keep records in ledger accounts. These records should match. But they often do not. A bank reconciliation statement helps find the reasons for differences.

The chapter then lists why bank reconciliation is needed. It helps spot mistakes in cash books and passbooks. It shows delays in cheque clearance. It checks if someone is stealing money. It confirms the accuracy of cash books. It acts as a control technique to prevent fraud.

Next, it explains reasons for differences between cash books and passbooks. Cheques issued but not yet paid cause differences. Deposited cheques not yet cleared by the bank create gaps. Sometimes, debtors directly deposit money into the firm’s account. Interest earned or charged by the bank also causes mismatches. Payments made by the bank on behalf of the customer lead to differences. Dishonored cheques and bills create discrepancies. Bank charges and errors in recording transactions also play a role.

The chapter describes steps to prepare a bank reconciliation statement. First, identify the starting balance. This can be from the cash book or passbook. Then, classify balances as plus or minus. Plus means more deposits than withdrawals. Minus means more withdrawals than deposits. Next, determine the effect of each transaction. Add items that increase the balance. Deduct those that decrease it. Consider the date of preparation. Only include transactions up to that date. Finally, balance the statement.

Examples show how to prepare a bank reconciliation statement. Each example highlights different scenarios. Some involve cheques not yet cleared or presented. Others deal with interest earned or bank charges. Mistakes like under-crediting deposits or omitting entries are also shown. The examples explain calculations step-by-step.

Lastly, the chapter discusses important notes and explanations. It clarifies terms like debit, credit, plus balance, and minus balance. It explains how transactions affect cash books and passbooks. It also mentions that banks now send statements instead of passbooks. These statements serve the same purpose.

The chapter ends with questions and assignments. These help test understanding of the topic.

Textbook solutions

Multiple Choice Questions (MCQs)

1. A bank reconciliation statement is

a. A part of the cash book
b. A part of the passbook
c. A part of the ledger
d. None of these

Answer : d. None of these

2. The debit balance of passbook is

a. Plus balance
b. Minus balance
c. Both plus or minus
d. Neither plus or minus

Answer : b. Minus balance

3. A bank reconciliation statement reconciles the

a. Ledger with the journal
b. Petty cash book with the bank account
c. Day books with the bank statement
d. Bank statement with the cash book

Answer : d. Bank statement with the cash book

4. A passbook is

a. A copy of the banking transactions entered into the cash book
b. A copy of the customer’s ledger account maintained by the bank
c. A record of all the cash transactions
d. A copy of the firm’s receipts and payments

Answer : b. A copy of the customer’s ledger account maintained by the bank

Very Short Answer Type Questions

1. What is bank reconciliation statement?

Answer: A bank reconciliation statement is prepared for finding out the causes for the difference between the balances of a cash book and passbook, and to reconcile their balance.

2. What is overdraft?

Answer: Overdraft means the amount overdrawn from the bank. ln such cases, the bank makes more payments on our account than the deposits received from us.

3. What is minus balance?

Answer: Minus balance indicates a financially unsound position of the firm, where the bank has paid more on our account than what we have deposited into the bank.

4. Will the preparation of Bank Reconciliation Statement rectify the errors that have crept into the Passbook or Cash Book?

Answer: Yes, the preparation of Bank Reconciliation Statement rectify the errors that have crept into the Passbook or Cash Book.

5. What will be the effect of the interest charged by the bank if there is an overdraft balance?

Answer: The bank will debit the amount of interest to our account, and thus our bank balance will decrease as per the passbook or the amount of loan or overdraft will increase.

6. How does a bank reconciliation statement differ from a bank statement?

Answer: A passbook or a bank statement is the copy of the customer’s ledger account maintained by the bank. Whereas, a bank reconciliation statement is a process of explaining the difference between the bank balance and the corresponding amount shown in the organization’s own accounting records.

7. Name four items that are written in the minus column while starting with debit balance of cash book.

Answer: Four items that are written in the minus column while starting with debit balance of cash book are:a. Cheques deposited but not credited by the bank.

b. Bank charges debited by the bank.
c. Interest charged by bank.
d. Standing order paid by the bank.

Short Answer Type Questions

1. Why is a Bank Reconciliation Statement necessary?

Answer: Bank Reconciliation Statement is necessary because of the following reasons:

a. Pointing out mistakes in the Cash Book and Passbook.
b. Identifying delay in the clearance of cheques.
c. Checking on embezzlement.
d. Checking accuracy of the Cash Book

2. Mention the causes of disagreement between bank balance as per Cash Book and as per Passbook.

Answer: Some of the causes of disagreement between bank balance as per Cash Book and as per Passbook are: 

a. Cheque issued or drawn but not yet presented for payment or cashed by customers or debited in the passbook.
b. Cheques debited or deposited or paid into the bank but not yet collected or cleared or credited by the bank.
c. Cheques directly deposited by debtors into one’s bank account.
d. Interest paid or allowed or credited or collected by the bank.
e. Interest on overdraft or interest charged or debited by the bank.
f. Payment made by the bank on our behalf.
g. Dishonour of cheques and bills.
h. Bank charges or collection charges.

3. How does a Bank Reconciliation Statement differ from a Bank Statement?

Answer: A bank reconciliation statement is prepared for finding out the causes for the difference between the balances of a cash book and passbook, and to reconcile their balance. Bank reconciliation statements are prepared by the firm regularly after a certain interval. On the other hand, a bank statement is the copy of the customer’s ledger account maintained by the bank and is required to prepare the bank reconciliation statement.

4. Explain the following terms:

i. Passbook
ii. Overdraft
iii. Cheques debited in cash book
iv. Plus balance
v. Minus balance

Answer: i. Passbook : A passbook or a statement of account is the copy of the customer’s ledger account maintained by the bank. It facilitates in comparing entries with the bank column of the cash book as well as to verify banking records and the bank balance.

ii. Overdraft : Overdraft means the amount overdrawn from the bank. In such cases, the bank makes more payments on our account than the deposits received from us. The word ‘overdraft’ indicates a minus balance, whether it is as per the cash book or the passbook.

iii. Cheques debited in cash book : Cheques are debited in cash book when a business firm cheques from outside parties and deposit them in the bank for collection because according to the firm cash at the bank as an asset has increased. It doesn’t necessarily mean that the transaction has impacted the passbook.

iv. Plus balance : A ‘plus’balance with the bank means that the firm enjoys a financially sound position and has deposited more in the bank than what it has withdrawn.

v. Minus balance : This indicates a financially unsound position of the firm, where the bank has paid more on our account than what we have deposited into the bank.

Long Answer Type Questions

1. What is a Bank Reconciliation Statement? What are the advantages of preparing a Bank Reconciliation Statement?

Answer: A bank reconciliation statement is prepared for finding out the causes for the difference between the balances of a cash book and passbook, and to reconcile their balance.

The advantages of preparing Bank Reconciliation Statement are:

i. Pointing out mistakes in the Cash Book and Passbook: A bank reconciliation statement is prepared by comparing the cash book and the passbook. The comparison points out the mistakes made in either or both of the books.
ii. Identifying delay in the clearance of cheques: The comparison reveals the date of depositing the cheque and the date of clearance. In case of delay, causes for same may be investigated and remedial measures can be taken.
iii. Checking on embezzlement: The continuous comparison of the cash book with the passbook keeps a check on employees trying to embezzle or misappropriate a firm’s funds.
iv. Checking accuracy of the Cash Book: If there is any inaccuracy in transaction postings, the mistake can be readily identified and rectified.
v. Technique of Control. The preparation of a bank reconciliation statement is an important technique of control. It prevents misappropriation in cheques, bank drafts and other transactions with the bank.

2. How is a Bank Reconciliation Statement prepared? Prepare a Bank Reconciliation Statement.

Answer: While preparing bank reconciliation statement, the following steps should be adopted:

i. Identification of the balance with which bank reconciliation statement has to be prepared: Bank reconciliation statement can be prepared either from the balance of cash book or passbook.
ii. Identification of the plus and minus balance: While preparing a bank reconciliation statement, the amount column is divided into ‘plus’ and ‘minus’ columns.
iii. Determining the effect of the transaction: The statement can be prepared either from the balance of the cash book or the passbook. If it is prepared from the balance of the cash book, the effect of the transaction will be studied on the passbook as compared to the cash book and vice versa.
iv. Considering the date of preparing the statement: Only those transactions, which are entered in one of the books, i.e., cash book or passbook, but not in either of the two by the date of preparing the statement, then they are identified as transactions for the bank reconciliation statement.
v. Balancing the statement: The final step will be to balance the plus and minus columns. Iwe started preparing the statement with the balance of the cash book, we will find out the balance of the passbook. Similarly, if we started preparing the statement from the balance of the passbook, we will find out the balance of the cash book.

3. What are the possible causes of disagreement of Cash Book and Passbook? Discuss three in details.

Answer: Causes responsible for the difference between the Balances of cash book and passbook are:

i. Bank charges or collection charges: The bank may charge certain amount for services rendered. The notable charge is a collection charge, which is charged for the collection of outstation cheques. These charges are debited by the bank in the customer’s account, so they reduce the bank balance as per the passbook. These bank charges will not be entered into the cash book by the customer, because the account holder would be unaware of the transaction.
ii. Cheques entered into cash book but omitted from being banked: Cheques received from outside parties, once entered into the cash book will increase our bank balance as per our record. However, any increase in the bank balance as per the records of the bank will not take place, because the cheque was yet to be sent to the bank for collection.
iii. Interest paid or allowed or credited or collected by the bank: The bank may allow or pay interest on our deposits. It is possible that we may instruct the bank to collect interest on our investment or loan advanced by us. After collecting the interest, the bank will credit the same into our account. As we do not have any knowledge of the interest credited by the bank into our account, there will be no entry of interest in the cash book.

4. What is plus balance? What is minus balance?

Answer: A ‘plus’ balance with the bank means that the firm enjoys a financially sound position and has deposited more in the bank than what it has withdrawn.

The bank balance will be treated as plus balance in the following cases:

i. If the cash book shows a debit balance.
ii. If the passbook shows a credit balance.
iii. The balance of cash book or passbook, if not specified 

A ‘minus’ balance means an overdraft balance, i.e., the amount drawn from the bank is more than the deposits. The balance will be treated as a minus in the following cases:

i. If the cash book shows credit balance.
ii. If the passbook shows debit balance.
iii. Overdraft balance as per cash book or passbook.

5. What is an Overdraft balance?

Answer: Overdraft means the amount overdrawn from the bank. In such cases, the bank makes more payments on our account than the deposits received from us. The word ‘overdraft’ indicates a minus balance, whether it is as per the cash book or the passbook. The credit balance of the cash book or the debit balance of the passbook shows the same overdraft balance. The amount overdrawn from the bank is always a minus balance.

Practical Questions

Questions

Question 1

Rim Zim Ltd. maintains a current account with the State Bank of India. On March 31, 2010, the bank column of its cash book showed a debit balance of ₹ 1,54,300. However, the bank statement showed a different balance as on that date. The following were the reasons for the difference:

i. Cheques deposited but not credited to bank – ₹ 75,450
ii. Cheques issued but not yet presented for payment – ₹ 80,760
iii. Bank charges not yet recorded in the cash book – ₹ 1,135
iv. Cheques received by the bank directly from trade debtors – ₹ 1,35,200
v. Insurance premium paid by the bank as per standing instructions but not yet recorded in the Cash Book – ₹ 15,400
vi. Dividend collected from the bank but not yet recorded in the cash book – ₹ 1,000

Find out the balance as per the bank statement.

Solution: Check below

Question 2

The balance of cash at the bank as shown by the Cash Book of Tuli Woodworks on March 31, 2010, was ₹ 7,500. On checking the Cash Book and the Passbook it was ascertained that cheques of ₹ 500 and ₹ 700, respectively, paid on December 30 were not paid till January 2, and three cheques of ₹ 600, ₹ 800 and ₹ 1,200, issued on December 28, were not paid till January 3. There was a credit of ₹ 125 in the Passbook in respect of interest under December 31, which was not entered in the Cash Book. There were also Bank Charges debited in the Passbook amounting in all to ₹ 10, which were not entered in the Cash Book.

Prepare a bank reconciliation statement as on December 31, 2010..

Solution: Check below

Question 3

3. On June 30, 2014, the bank balance of Nise Humptsoe’s Cash Book was ₹ 1,500. On comparing it with the Passbook, the following information was received:

i. Cheques amounting to ₹ 7,290 was issued on June 28, of which one cheque of ₹ 1,300 was presented in the bank for payment on July 4.
ii. Cheques were deposited in banks for ₹ 10,000. However, cheques for ₹ 4,000 were cleared and credited in July.
iii. Interest and dividends on investments of ₹ 580 collected by the bank and credited to his account, although he did not have any information for this.
iv. Life insurance premium of ₹ 750 was paid by the bank according to his standing instructions
v. Bank charges of ₹ 25 were not recorded in the Cash Book

Prepare a bank reconciliation statement.

Solution: Check below

Question 4

Zhokhoi had an account in United India Bank. According to his Cash Book, his bank balance as on December 31, 2011 was ₹ 1,750. However, the passbook made on the same date showed that cheques of ₹ 180, ₹ 1,150 and ₹ 125 were not presented for payment. All cheques of the amount ₹ 1,220 paid into his account were not cleared by December 31, 2001.

Prepare a bank reconciliation statement.

Solution: Check below

Question 5

On June 30, 2014, the bank column of Ketholeno Rio’s cash book showed a debit balance of ₹ 12,000. On checking the cash book with the bank statement she found that:

i. Cheques of ₹ 8,000 paid into bank. Of these, only cheques of ₹ 6,500 were cleared and credited by bankers up to June 30
ii. Cheques of ₹ 9,200 were issued, but out of these, only cheques of ₹ 7,000 were presented for payment up to June 30
iii. The receipt column of the Cash Book was undercast by ₹ 200
iv. The Passbook showed a credit of ₹ 330 as interest on investments collected by bankers and debit of ₹ 60 for bank charges
v. On June 29, a customer deposited ₹ 3,000 directly in the bank account but it was only entered in the Passbook.

Prepare a bank reconciliation statement.

Solution: Check below

Question 6

Prepare a bank reconciliation statement from the following information:

i. Bank overdraft as per cash book on August 30, 2014 was ₹ 2,000 
ii. Cheques issued but not presented for payment ₹ 1,250
iii. The bank charged ₹ 25 on account of bank charges not yet entered in the Cash Book 
iv. Interest charged by the bank but not entered into the Cash Book – ₹ 25 
v. Interest on investment collected by the bank and credited in the passbook – ₹ 1,000

Solution: Check below

Question 7

Pele and Sons found that the bank balance shown in their Cash Book on December 31, 2016 was ₹ 40,500 (credit) but the Passbook showed a difference due to the following reasons: 

i. A cheque of ₹ 5,000 drawn in favour of Zizira has not yet been presented for payment 
ii. A post-dated cheque of ₹ 900 had been debited in the bank column of the Cash Book but it could not be presented in the Cash Book 
iii. Cheques totalling ₹ 10,200 deposited with the bank had not yet been collected and another cheque of ₹ 4,000 deposited in the account had been dishonoured 
iv. A bill payable of ₹ 10,000 was retired by the bank under a rebate of ₹ 150, but the full amount of the bill was credited in the bank column of the Cash Book

Prepare a bank reconciliation statement and find out the balance as per passbook.

Solution: Check below

Question 8

Using the details given below, prepare a bank reconciliation statement for December 31, 2014: 

i. Balance as per passbook – ₹ 1,14,400 
ii. Cheques of ₹ 11,250, ₹ 1,870 and ₹ 1,350 were issued in the month and were presented for payment in January 
iii. Cheques of ₹ 11,500 and ₹ 1,850 were sent for collection. However, no cheques were collected in the year. 
iv. Bank charge of ₹ 180 for commission. An amount of ₹ 1,170 was allowed by the bank as interest.

Solution: Check below

Question 9

On December 31, 2014, the Cash Book of Nungshi showed an overdraft of ₹ 18,000 with the Bank of India. The balance did not agree with the balance shown in the bank passbook and it was found that Nungshi had paid four cheques of ₹ 10,000, ₹ 12,000, ₹ 8,000 and ₹ 6,000 into the bank on December 26. Of these, the cheque of ₹ 6,000 was credited by the bank in January 2015. On December 24, Nungshi had issued three cheques of ₹ 15,000, ₹ 1,200 and ₹ 7,000. The first two cheques were presented to the bank for payment in December and the third cheque in January 2015. It was also found that on December 31, 2014, the bank had debited Nungshi’s account for ₹ 500 for interest and ₹ 20 for charges. However, Nungshi had not recorded these amounts in his books. Prepare a bank reconciliation statement as on

December 31, 2014, and find out the balance as per the passbook.

Solution: Check below

Question 10

Soso’s passbook shows a credit balance of ₹ 33,570 as on December 31, 2010. The cheques and drafts that were sent to the bank but not collected and credited amounted to ₹ 1,790. In addition, cheques from Gloria, Abu and Hilio – drawn for ₹ 1,300, ₹ 1,150 and ₹ 1,200 – were not presented for payment till January 31, 2011. Upon checking further, Soso found that the bank had paid bills payable of ₹ 4,000. However, the amount was not entered into the cash book. Bills receivable of ₹ 1,500, which was discounted by the bank, was dishonoured by the drawee on the due date. As the commission for collecting the outstation cheques, the bank charged ₹ 113. It allowed ₹ 110 as interest on Soso’s balance.

Prepare a bank reconciliation statement and show the balance as shown on the cash book.

Solution: Check below

Question 11

Prepare the bank reconciliation statement as on December 31, 2010, from the following information:

i. Bank balance as per cash book – ₹ 8,960 
ii. Cheques issued up to December 31, 2010 but not presented to bank – ₹ 2,630 
iii. Cheques deposited with the bank for collection on December 31, 2010, amounted to ₹ 12,870, out of which cheques of ₹ 7,890 had been realised and credited by the bank. 
iv. Cheques for collection deposited on December 31, 2010, but cleared subsequently in January 2011 – ₹ 8,660 
v. Incidental charges debited by bank on December 31, 2010 not advised – ₹ 15

Solution: Check below

Question 12

Use the information below to prepare the bank reconciliation statement as on December 31, 2012:

i. Balance as per cash book – ₹ 71,730 
ii. Cheques issued up to December 31, 2012, but not presented to bank – ₹ 1,520 
iii. Cheques deposited with the bank for collection on December 31, 2012, amounted to ₹ 24,560, out of which cheques of ₹ 5,490 were realised and credited by the bank 
iv. Cheques for collection deposited on December 31, 2012, but cleared subsequently in January 2013 – ₹ 9,540 
v. Incidental charges debited by bank on December 31, 2012 not advised – ₹ 10

Solution: Check below

Solutions

Extras

Additional questions and answers

1. What is a bank reconciliation statement?

Answer : A bank reconciliation statement is prepared for finding out the causes for the difference between the balances of a cash book and passbook, and to reconcile their balance. It is a basic document of accounting needed by every business enterprise for exercising control on its dealings with the bank.

Q. Define a passbook.

Answer : A passbook or a statement of account is the copy of the customer’s ledger account maintained by the bank. It facilitates in comparing entries with the bank column of the cash book as well as to verify banking records and the bank balance.

Q. What do you mean by overdraft?

Answer : Overdraft means the amount overdrawn from the bank. In such cases, the bank makes more payments on our account than the deposits received from us. The word ‘overdraft’ indicates a minus balance, whether it is as per the cash book or the passbook.

Q. What does a debit balance in a passbook signify?

Answer : A debit balance in a passbook signifies that the bank has debited our account with more than what it has credited. This shows that we are the debtors of the bank, or in other words, the bank is our creditor, and we have to pay the bank the amount overdrawn.

Q. What is a deposit slip?

Answer : A deposit slip, also known as a ‘pay in slip’, is used for the deposits of cash, cheques, and drafts into the bank.

Q. How frequently can a bank reconciliation statement be prepared?

Answer : A bank reconciliation statement may be prepared every month, every week, or even daily, depending upon the number of transactions and the size of the firm.

Q. Define plus balance.

Answer : A plus balance with the bank means that the firm enjoys a financially sound position and has deposited more in the bank than what it has withdrawn. This occurs in the following cases: (i) If the cash book shows a debit balance, meaning an excess of the debit side over the credit side of the cash book, which indicates more deposits than withdrawals. (ii) If the passbook shows a credit balance, indicating an excess of deposits in the bank over the amount debited by the bank in the account. (iii) When the balance of the cash book or passbook is not specified, it is assumed to be a plus balance since most business firms generally maintain a plus balance.

Q. Define minus balance.

Answer : A minus balance indicates a financially unsound position of the firm where the bank has paid more on the account than what has been deposited into the bank. This occurs in the following cases:

(i) If the cash book shows a credit balance, meaning the credit side, which represents payments made by the bank on behalf of the customer, exceeds the debit side, which shows deposits into the bank.
(ii) If the passbook shows a debit balance, meaning the bank has debited the account with more than it has credited, making the firm a debtor to the bank.
(iii) Overdraft balance as per the cash book or passbook, where the amount overdrawn from the bank always reflects a minus balance.

Q. What is meant by cheque clearance?

Answer : Cheque clearance refers to the process where the bank collects the payment of the cheques deposited with it and credits the customer’s account, thereby increasing the bank balance as per the passbook.

Q. What are bank charges?

Answer : Bank charges refer to certain amounts that the bank debits from the customer’s account for services rendered, such as collection charges for outstation cheques. These charges reduce the bank balance as per the passbook but are not entered into the cash book if the customer is unaware of them.

Q. What does dishonour of a cheque mean?

Answer : Dishonour of a cheque means that the cheque received from an outside party and deposited with the bank could not be cleared because the payment was not collected by the bank. As a result, the amount of the cheque is not credited to the customer’s account, leading to a difference between the balances shown in the cash book and the passbook.

Q. Explain the meaning of a bank reconciliation statement.

Answer : A bank reconciliation statement is prepared for finding out the causes for the difference between the balances of a cash book and passbook, and to reconcile their balance. The cash book is maintained and possessed by the business firm, but the passbook or statement of customer’s account are prepared by the bank and sent to the customer for information. In this way, both the books are with customers and they can compare them and verify records at their own convenience. Bank reconciliation statements are prepared by the firm regularly after a certain interval.

Q. What is the importance of comparing the cash book with the passbook?

Answer : The importance of comparing the cash book with the passbook includes:

• Pointing out mistakes in the Cash Book and Passbook: A bank reconciliation statement is prepared by comparing the information of the cash book with the information of the passbook. The comparison discloses and identifies the entries, which have been made in the cash book, but were omitted or wrongly entered in the passbook and vice versa.
• Identifying delay in the clearance of cheques: The comparison of cash book with the passbook or bank statement issued by the bank reveals the date of depositing the cheque into the bank and the date of clearance. In case there is substantial delay, causes for the delay may be investigated and remedial measures can be taken.
• Checking on embezzlement: The continuous comparison of the cash book with the passbook keeps a check on employees trying to embezzle or misappropriate a firm’s funds. When the balances of the cash book and passbook are checked, compared, and tallied for preparing a bank reconciliation statement on a monthly, weekly, or even daily basis, misappropriation and embezzlement of funds becomes very difficult.
• Checking accuracy of the Cash Book: The comparison of the cash book with the passbook satisfies the management that the cash book is being maintained properly. If there is any inaccuracy in transaction postings, the mistake can be readily identified and rectified.
• Technique of Control: The preparation of a bank reconciliation statement is an important technique of control. It prevents misappropriation in cheques, bank drafts, and other transactions with the bank. The malpractices of dishonest employees dealing with cash and with the bank are controlled, and effective measures are employed to plug loopholes, if any.

Q. How does bank reconciliation help in identifying delays in cheque clearance?

Answer : Bank reconciliation helps in identifying delays in cheque clearance by comparing the cash book with the passbook or bank statement issued by the bank, which reveals the date of depositing the cheque into the bank and the date of clearance. In case there is substantial delay, causes for the delay may be investigated, and remedial measures can be taken.

Q. State two purposes of preparing a bank reconciliation statement?

Answer : Two purposes of preparing a bank reconciliation statement are:

(i) To point out mistakes in the Cash Book and Passbook by disclosing and identifying entries that have been omitted or wrongly entered in either book.
(ii) To identify delays in the clearance of cheques by comparing the dates of depositing the cheque into the bank and the date of clearance.

Q. Describe two consequences of dishonour of cheques?

Answer : Two consequences of dishonour of cheques are:

(i) The balances recorded in the cash book and the passbook will differ because the payment of the cheque is not credited by the bank into the customer’s account.
(ii) Dishonoured cheques will not be recorded in the cash book due to ignorance or lack of information, leading to differences between the balances of the cash book and the passbook.

Q. How do direct deposits by debtors affect the bank reconciliation process?

Answer : Direct deposits by debtors increase the bank balance as per the records maintained by the bank because the payment has already been received by the bank. However, since the firm does not have knowledge of this direct deposit, the bank balance as per the cash book will not increase, resulting in a difference between the balances of the cash book and the passbook.

Q. Explain briefly why bank charges lead to differences in balances shown by cash book and passbook.

Answer : Bank charges lead to differences in balances shown by the cash book and passbook because these charges are debited by the bank in the customer’s account but are not entered into the cash book by the customer, as the account holder is unaware of the transaction. These charges reduce the bank balance as per the passbook but leave the bank balance as per the cash book unchanged.

Q. Describe the impact of interest on overdraft on bank reconciliation.

Answer : The impact of interest on overdraft is that it is charged by the bank on the overdraft or loan advanced, and the bank debits the amount of interest to the customer’s account. This reduces the bank balance as per the passbook or increases the amount of the loan or overdraft. However, the cash balance at the bank remains unchanged as per the cash book because of the ignorance of the interest debited by the bank. This creates a difference between the bank balance as per the cash book and the passbook.

Q. Explain the significance of a bank reconciliation statement.

Answer : A bank reconciliation statement is a basic document of accounting needed by every business enterprise for exercising control on its dealings with the bank. Its importance includes pointing out mistakes in the Cash Book and Passbook, identifying delays in the clearance of cheques, checking on embezzlement, verifying the accuracy of the Cash Book, and serving as a technique of control to prevent misappropriation in cheques, bank drafts, and other transactions with the bank.

Q. Mention and explain any three reasons for the difference between the balances of cash book and passbook.

Answer : The three reasons for the difference between the balances of the cash book and passbook are: (i) Cheques issued or drawn but not yet presented for payment or cashed by customers or debited in the passbook. These cheques reduce the bank balance as shown by the cash book, but the bank balance as per the passbook remains unchanged until the cheque is presented. (ii) Cheques deposited or paid into the bank but not yet collected or cleared or credited by the bank. These increase the bank balance as per the cash book at the time of depositing the cheque, but the bank balance as per the passbook will only increase after the bank actually collects the payment. (iii) Interest paid or allowed or credited or collected by the bank. As the customer is unaware of the interest credited by the bank, there will be no entry of interest in the cash book, leading to a difference between the balances of the cash book and the passbook.

Q. How does preparing a bank reconciliation statement help prevent embezzlement?

Answer : Preparing a bank reconciliation statement helps prevent embezzlement because the continuous comparison of the cash book with the passbook keeps a check on employees trying to embezzle or misappropriate a firm’s funds. When the balances of the cash book and passbook are checked, compared, and tallied for preparing a bank reconciliation statement on a monthly, weekly, or even daily basis, misappropriation and embezzlement of funds become very difficult.

Q. What effect does direct deposit by debtors into the bank account have on bank reconciliation?

Answer : Direct deposit by debtors into the bank account increases the bank balance as per the records maintained by the bank because the payment has already been received by the bank. However, since the firm does not have any knowledge of this direct deposit, the bank balance as per the cash book will not increase. This results in a difference between the balances of the cash book and the passbook, with the balance in the passbook being more than that of the cash book.

Q. Describe how interest charged by banks affects the balances in cash book and passbook.

Answer : Interest charged by the bank on overdraft or loan advanced by it is debited to the customer’s account, which reduces the bank balance as per the passbook or increases the amount of loan or overdraft. However, the cash balance at the bank remains unchanged as per the cash book because the account holder is unaware of the interest debited by the bank. This creates a difference between the bank balance as per the cash book and the passbook since the interest charged by the bank was not entered into the cash book.

Q. Explain why cheques issued but not presented cause discrepancies between cash book and passbook balances.

Answer : Cheques issued or drawn but not yet presented for payment or cashed by customers or debited in the passbook cause discrepancies between the cash book and passbook balances. The firm records the issue of cheques in the cash book on the date of the issue of cheques with the help of the counterfoils of the cheque book. As the payment of the cheque may be collected within three months from the date of its issue, the party receiving the cheque may not collect its payment on the same day from the bank. This means that the issue of the cheque has been recorded in the cash book, but it does not find a place in the ledger accounts of the bank or the passbook maintained by the bank. The transaction will reduce the bank balance as shown by the cash book, but the bank balance as shown by the passbook will not be reduced since the cheque is yet to be presented to the bank.

Q. Discuss briefly the effects of bank charges on the balance as per passbook and cash book.

Answer : Bank charges or collection charges are debited by the bank in the customer’s account, so they reduce the bank balance as per the passbook. These bank charges will not be entered into the cash book by the customer because the account holder would be unaware of the transaction. The bank balance as per the cash book will remain unchanged, and thus, there will be a difference between the balance of the cash book and the passbook.

Q. What is a bank reconciliation statement? Explain the need and importance of preparing such a statement.

Answer : A bank reconciliation statement is prepared for finding out the causes for the difference between the balances of a cash book and passbook, and to reconcile their balance. It is a statement that helps in comparing entries with the bank column of the cash book as well as verifying banking records and the bank balance.

The need and importance of preparing a bank reconciliation statement are:

• Pointing out mistakes in the Cash Book and Passbook by disclosing and identifying entries which have been made in one but omitted or wrongly entered in the other.
• Identifying delay in the clearance of cheques by comparing the date of depositing the cheque into the bank and the date of clearance.
• Checking on embezzlement by continuously comparing the cash book with the passbook, making misappropriation and embezzlement of funds difficult.
• Checking accuracy of the Cash Book by ensuring it is being maintained properly, allowing mistakes to be identified and rectified.
• Technique of Control by preventing misappropriation in cheques, bank drafts, and other transactions with the bank, thereby controlling malpractices and employing effective measures to plug loopholes.

Q. List and explain various causes responsible for differences between the balances of cash book and passbook.

Answer : The causes responsible for differences between the balances of cash book and passbook are:

• Cheque issued or drawn but not yet presented for payment or cashed by customers or debited in the passbook.
• Cheques debited or deposited or paid into the bank but not yet collected or cleared or credited by the bank.
• Cheques directly deposited by debtors into one’s bank account.
• Interest paid or allowed or credited or collected by the bank.
• Interest on overdraft or interest charged or debited by the bank.
• Payment made by the bank on our behalf.
• Dishonour of cheques and bills.
• Bank charges or collection charges.
• Cheques entered into cash book but omitted from being banked.
• Cheques paid into the bank but omitted from being entered into the cash book.
• Cheques deposited into the bank but under-credited by the bank.
• Retiring a bill under rebate by the bank.
• Dividends and interest collected and credited by the bank.

Q. Discuss the procedure for preparing a bank reconciliation statement?

Answer : The procedure for preparing a bank reconciliation statement involves the following steps:

• Identification of the balance with which the bank reconciliation statement has to be prepared. The statement can be prepared either from the balance of the cash book or the passbook. If the balance of the cash book is given, the statement is prepared with the balance of the cash book. If the balance of the passbook is given, the statement is prepared with the balance of the passbook. If both balances are given, the statement can be prepared with either of the balances.
• Identification of the plus and minus balance. A ‘plus’ balance indicates that the firm enjoys a financially sound position, while a ‘minus’ balance indicates an overdraft. Plus balance occurs if the cash book shows a debit balance, the passbook shows a credit balance, or the balance is unspecified but assumed positive. Minus balance occurs if the cash book shows a credit balance, the passbook shows a debit balance, or there is an overdraft as per either the cash book or passbook.
• Determining the effect of the transaction. If the statement is prepared from the cash book balance, the effect of transactions is studied on the passbook. Items increasing the bank balance as per the passbook are added, while items decreasing it are deducted. Conversely, if the statement is prepared from the passbook balance, the effect is studied on the cash book, with items increasing the cash book balance added and those decreasing it deducted.
• Considering the date of preparing the statement. Only transactions entered in one book (cash book or passbook) but not the other by the date of preparation are identified for the bank reconciliation statement. Transactions recorded in both books correctly are ignored.
• Balancing the statement. The final step is to balance the plus and minus columns. If starting with the cash book balance, the balance of the passbook is determined, and vice versa. If the total of the plus items exceeds the minus items, the bank balance is a plus balance; otherwise, it is a minus balance.

Q. Explain the steps to determine the effects of transactions while preparing a bank reconciliation statement?

Answer : The steps to determine the effects of transactions while preparing a bank reconciliation statement are:

• If the statement is prepared from the balance of the cash book, the effect of the transaction is studied on the passbook. Items that increase the bank balance as per the passbook are added, and items that decrease the bank balance as per the passbook are deducted.
• If the statement is prepared from the balance of the passbook, the effect of the transaction is studied on the cash book. Items that increase the bank balance as per the cash book are added, and items that decrease the bank balance as per the cash book are deducted.
  For example, cheques issued but not yet presented for payment decrease the balance of the cash book but do not affect the passbook. If the statement is prepared from the cash book, this item would be added to bring the balance of the cash book at par with the passbook. Conversely, if the statement is prepared from the passbook, the item would be deducted to reflect its effect on the cash book.

31. Explain the different types of payments made by banks on behalf of their customers, which may cause differences in the cash book and passbook balances?

Answer : The different types of payments made by banks on behalf of their customers, which may cause differences in the cash book and passbook balances, include:

(a) Payment of insurance premium.
(b) Payment of loan instalment.
(c) Payment of office or godown rent.
(d) Issue of bank drafts in favor of certain outside parties.
(e) Making any transfer of money.

These payments are debited by the bank in the customer’s account, reducing the bank balance as per the passbook. However, since the customer may be unaware of these payments, they are not recorded in the cash book, leading to differences between the balances of the cash book and passbook.

Additional MCQs

1. What is a bank reconciliation statement?

A. Cash-Passbook comparison
B. Bank ledger summary
C. Profit report
D. Cash flow record

Answer: A. Cash-Passbook comparison

Q. Which document is maintained by the business firm?

A. Cash book
B. Passbook
C. Ledger account
D. Bank statement

Answer: A. Cash book

Q. Which document is maintained by the bank for recording customer transactions?

A. Passbook
B. Cash book
C. Invoice register
D. Receipt log

Answer: A. Passbook

Q. What is the primary purpose of a bank reconciliation statement?

A. Identify discrepancies
B. Record deposits
C. Calculate profits
D. Approve loans

Answer: A. Identify discrepancies

Q. What is a common cause for the difference between the cash book and the passbook?

A. Timing differences
B. Sales errors
C. Tax adjustments
D. Inventory changes

Answer: A. Timing differences

Q. A cheque issued but not presented for payment is recorded in which way?

A. Affects cash book only
B. Affects passbook only
C. Recorded in both
D. Not recorded at all

Answer: B. Affects passbook only

Q. Cheques deposited into the bank but not yet cleared are first recorded in which document?

A. Cash book
B. Passbook
C. Both equally
D. Neither document

Answer: A. Cash book

Q. A direct deposit made by a customer is recorded in which document?

A. Passbook
B. Cash book
C. Both documents
D. None of these

Answer: A. Passbook

Q. What does a debit balance in the cash book indicate?

A. Plus balance
B. Minus balance
C. Overdraft
D. Zero balance

Answer: A. Plus balance

Q. What does a credit balance in the cash book indicate?

A. Minus balance
B. Plus balance
C. Profit surplus
D. No balance

Answer: A. Minus balance

Q. In the passbook, which balance is considered a plus balance?

A. Credit balance
B. Debit balance
C. Zero balance
D. Negative balance

Answer: A. Credit balance

Q. In the passbook, what does a debit balance represent?

A. Minus balance
B. Plus balance
C. Cash surplus
D. Profit amount

Answer: A. Minus balance

Q. Which transaction causes the cash book balance to be higher than the passbook balance?

A. Cheques entered but not banked
B. Cheques issued but not presented
C. Bank charges deducted
D. Interest credited by bank

Answer: A. Cheques entered but not banked

Q. Which transaction causes the cash book balance to be lower than the passbook balance?

A. Cheques issued but not presented
B. Direct deposit by customer
C. Interest credited by bank
D. Cheques entered but not banked

Answer: A. Cheques issued but not presented

Q. Which transaction is not initially recorded in the cash book?

A. Interest credited by bank
B. Cheque issuance
C. Cash deposit
D. Cheque payment

Answer: A. Interest credited by bank

Q. How are bank charges treated in the bank reconciliation statement?

A. As a minus item
B. As a plus item
C. Ignored
D. Doubled

Answer: A. As a minus item

Q. When preparing the statement from the cash book, items that cause the passbook balance to decrease are:

A. Deducted
B. Added
C. Ignored
D. Multiplied

Answer: A. Deducted

Q. What is an overdraft in banking terms?

A. Negative balance
B. Positive balance
C. Cash surplus
D. Loan advance

Answer: A. Negative balance

Q. Which transaction is treated as a plus item in a bank reconciliation statement?

A. Interest credited by bank
B. Cheque issued but not presented
C. Bank charges
D. Cheque deposited but not banked

Answer: A. Interest credited by bank

Q. In bank reconciliation, what does the term “rebate” refer to?

A. Discount on bill payment
B. Bank fee
C. Loan interest
D. Cash bonus

Answer: A. Discount on bill payment

Q. Which of the following best describes a passbook?

A. Bank’s copy of customer ledger
B. Company’s cash register
C. Personal diary
D. Investment report

Answer: A. Bank’s copy of customer ledger

Q. Why is the date of preparing the bank reconciliation statement important?

A. It limits included transactions
B. It affects interest rates
C. It determines tax dues
D. It alters profit margins

Answer: A. It limits included transactions

Q. What is the first step in preparing a bank reconciliation statement?

A. Identify starting balance
B. Calculate interest
C. Verify deposits
D. Audit expenses

Answer: A. Identify starting balance

Q. What is the effect of a dishonoured cheque on the bank reconciliation statement?

A. Reduces passbook balance
B. Increases cash book balance
C. Has no effect
D. Doubles the discrepancy

Answer: A. Reduces passbook balance

Q. In the reconciliation statement, cheques not yet credited by the bank are placed in which column?

A. Minus column
B. Plus column
C. Neutral column
D. Overdraft column

Answer: A. Minus column

Q. When preparing a bank reconciliation statement from the passbook balance, items not recorded in the cash book are:

A. Added
B. Deducted
C. Ignored
D. Multiplied

Answer: A. Added

Q. Which of the following is used as a control measure against misappropriation of funds?

A. Bank reconciliation statement
B. Profit report
C. Cash flow statement
D. Sales ledger

Answer: A. Bank reconciliation statement

Q. What do plus items in a bank reconciliation statement represent?

A. Increases in bank balance
B. Decreases in bank balance
C. No change
D. Errors only

Answer: A. Increases in bank balance

Q. What do minus items in a bank reconciliation statement represent?

A. Decreases in bank balance
B. Increases in bank balance
C. Neutral entries
D. Profit adjustments

Answer: A. Decreases in bank balance

Q. Which transaction causes the cash book balance to be higher than the passbook balance?

A. Cheques entered but not banked
B. Cheques issued but not presented
C. Interest credited by bank
D. Bank charges deducted

Answer: A. Cheques entered but not banked

Q. Which transaction causes the passbook balance to be higher than the cash book balance?

A. Cheques directly deposited by customers
B. Cheques entered but not banked
C. Cheques issued but not presented
D. Bank charges deducted

Answer: A. Cheques directly deposited by customers

Q. How does a bank reconciliation statement help prevent embezzlement?

A. Through regular comparison
B. By increasing deposits
C. Via tax incentives
D. Through profit analysis

Answer: A. Through regular comparison

Q. Which of the following does not affect the bank reconciliation statement?

A. Cleared transactions
B. Outstanding cheques
C. Direct deposits
D. Bank errors

Answer: A. Cleared transactions

Q. What type of balance indicates a financially sound position in the bank?

A. Plus balance
B. Minus balance
C. Overdraft
D. Zero balance

Answer: A. Plus balance

Q. Which item is added when preparing a bank reconciliation statement from a cash book balance?

A. Interest credited by bank
B. Bank charges
C. Cheques issued
D. Overdraft interest

Answer: A. Interest credited by bank

Q. Which item is deducted when preparing a bank reconciliation statement from a cash book balance?

A. Cheques issued but not presented
B. Direct deposits
C. Interest credited by bank
D. Cheques entered but not banked

Answer: A. Cheques issued but not presented

Q. What is the key benefit of preparing a bank reconciliation statement?

A. Error detection
B. Profit calculation
C. Inventory management
D. Marketing analysis

Answer: A. Error detection

37. Which factor is considered while preparing a bank reconciliation statement?

A. Timing differences
B. Employee bonuses
C. Sales figures
D. Inventory counts

Answer: A. Timing differences