ncert-textbook-for-class-11-financial-accounting-I-chapter-5
Cash Book and Bank Transactions
In business organizations, a cash book records cash and bank transactions.
It serves as both the cash account and bank account and provides the balance at the end of the period.
Upon balancing, details are checked against the bank's records to confirm accuracy.
A recent bank statement or passbook is necessary for this check.
Bank Statement/Passbook Details
Bank statements or passbooks show accounts as maintained by the bank.
They allow customers to verify their bank funds and update their records.
The balance shown in the passbook should ideally match the cash book balance.
Discrepancies between the two necessitate an investigation of differences.
Bank Transactions Overview
Bank statements have deposits in the credit column and withdrawals in the debit column.
Credit Balance: When deposits exceed withdrawals.
Debit Balance (Overdraft): When withdrawals exceed deposits.
Learning Objectives
Understand the preparation of a bank reconciliation statement.
Identify causes of differences between bank balance per cash book and passbook.
Prepare the bank reconciliation statement.
Determine the correct bank balance as per cash book.
Need for Reconciliation
Discrepancies between the firm’s cash book and the bank balance are common and require reconciliation.
A statement called the Bank Reconciliation Statement is prepared to reconcile differences.
Necessary documents include cash book balance and a bank statement.
Format of Bank Reconciliation Statement
The general format includes:
Balance as per cash book
Additions (e.g., issued cheques not presented)
Deductions (e.g., cheques deposited but not credited).
Importance of Reconciliation
Reconciliation clarifies the reasons for discrepancies.
It involves comparing entries in both the cash book and bank statement to identify missing items.
Causes of Differences
Timing Differences
Timing discrepancies often arise due to:
Cheques not presented: Cheques issued but not yet cashed cause delays in reflecting true balances.
Cheques deposited but not cleared: Funds reflected in cash book but not available until cleared.
Direct bank debits: Bank charges deducted without prior notice.
Direct deposits: Receipts deposited directly by customers without notification to the firm.
Interest/Dividends: Bank routinely collects on behalf of the customer not reflected until the bank statement's arrival.
Direct payments: Standing orders paid by the bank can lead to discrepancies.
Differences Due to Errors
Differences can also arise from errors:
Firm's errors: Omitted or incorrect entries in the cash book.
Bank's errors: Incorrectly recorded transactions in the bank statement.
Steps for Preparation of Bank Reconciliation Statement
Identify causes of differences.
Compile bank statement with appropriate additions and deductions.
Present a clear and systematic statement.
Favourable and Unfavourable Balances
Favourable balances indicate that cash inflows exceed outflows in the cash book.
Unfavourable balances (overdraft) indicate cash outflows exceed inflows.
Example Scenarios for Bank Reconciliation
Example 1: Favourable Balance Scenario
Cash book balance: `50,000
Cheques issued not presented: `6,000
Dividend collected by bank: `8,000
Bank charges not in cash book: `400
Bank balance: Calculate final balance.
Example 2: Unfavourable Balance Scenario
Overdraft in cash book: `8,000.
Cheques not collected: `2,000.
Bank charges and interest debited: total deducted from balance.
Practice Problems and Their Solutions
Examples with final amounts after adjustments guide how to reconcile differences effectively.
Key Terms to Remember
Bank Reconciliation Statement
Cash Book
Passbook
Summary of Causes for Difference
Timing issues predominantly account for discrepancies, along with wrong entries.
Regular reconciliation helps maintain accurate records and smooth business operations.