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NCERT Class 11 Accountancy Chapter 5 Bank Reconciliation Statement
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Bank Reconciliation Statement
Chapter: 5
| PART – I |
| Short Answers |
1. State the need for the preparation of bank reconciliation statement?
Ans: The main purpose of a bank reconciliation statement (BRS) is to help companies identify errors that can affect their tax and financial reporting. Bank reconciliations are also an essential way to prevent and detect fraud It is generally experienced that when a comparison is made between the bank balance as shown in the firm’s cash book, the two balances do not tally. Hence, we have to first ascertain the causes of difference thereof and then reflect them in a statement called Bank Reconciliation Statement to reconcile (tally) the two balances. In order to prepare a bank reconciliation statement we need to have a bank balance as per the cash book and a bank statement as on a particular day along with details of both the books. If the two balances differ, the entries in both the books are compared and the items on account of which the difference has arisen are ascertained with the respective amounts involved so that the bank reconciliation statement may be prepared
2. What is a bank overdraft?
Ans: An overdraft occurs when you don’t have enough money in your account to cover a transaction, but the bank pays the transaction anyway. Bank overdraft is a type of financial instrument that is provided to some customers by the bank in the form of an extended credit facility, which comes into effect once the main balance of the account reaches zero.
3. Briefly explain the statement ‘wrongly debited by the bank’ with the help of an example.
Ans: The term wrongly debited by the bank’ refers to the bank debiting a transaction’s money in an incorrect way. If the bank has wrongly debited the account in the bank statement, then cash book will show more bank balance compared to that shown balance compared to that shown by the bank statement. The statement ‘wrong debited by the bank’ refers to the activity of bank debiting the amount of the transaction in the wrong manner. The example of such a case is: A cheque of Rs. 10,000 deposited by the user to the bank is wrongly recorded as Rs. 1000 by the bank.
4. State the causes of difference occurred due to time lag.
Ans: When issued cheques are not presented for payment in the period for which Bank Reconciliation Statement is being prepared, i.e., date of issue and the date of presenting the cheques are not same. Causes of differences due to time lag refer to discrepancies that arise because of delays in the recording or processing of information, transactions, or data between different periods or entities.
5. Briefly explain the term ‘favourable balance as per cash book’.
Ans: The term ‘favourable balance as per cash book’ are listed below:
(i) The date on which the statement is prepared is written at the top, as part of the heading.
(ii) 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.
(iii) The cheques deposited but not yet collected are deducted.
(iv) All the cheques issued but not yet presented for payment, amounts directly deposited in the bank account are added.
(v) 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 dishonoured etc. are deducted.
(vi) All the credits given by the bank such as interest on dividends collected, etc. and direct deposits in the bank are added.
6. Enumerate the steps to ascertain the correct cash book balance.
Ans: The steps to ascertain the correct cash book balance are as follows:
(i) The bank balance as per the cash book is noted.
(ii) All the errors committed in the cash book are to be recorded and rectified.
(iv) Transaction present only on the credit side of the passbook needs to be recorded on the debit side of the cash book
(iv) All the credits given by the bank such as interest on dividends collected etc and direct deposits in the bank are deducted.
| Long Answers |
1. What is a bank reconciliation statement. Why is it prepared?
Ans: Bank reconciliation statements compare transactions from financial records with those on a bank statement. Where there are discrepancies, companies can identify and correct the source of errors. A bank reconciliation statement (BRS) is a statement that a company prepares on a particular date to match the bank balance indicated in its cash book with the balance shown by the bank’s passbook. The statement displays the reasons for the differences between the two.
The purpose of this bank reconciliation process is to detect any errors in recording transactions. It also means the business has an up-to-date and accurate view of its exact bank balance on a specified date.
The causes of difference, the reconciliation may be done in the following two ways:
(a) Preparation of bank reconciliation statement without adjusting cash book balance.
(b) Preparation of bank reconciliation statement after adjusting cash book balance. It may be noted that in practice, the bank reconciliation statement is prepared after adjusting the cash book balance, about which you will study later in the chapter.
2. Explain the reasons where the balance shown by the bank passbook does not agree with the balance as shown by the bank column of the cash book.
Ans: If the bank charges interest on the overdraft, an entry will be made in the debit side of the passbook but no entry will be recorded in the cash book unless the firm receives information about the interest charged by the bank. This causes the difference in the two balances errors from either party, certain bank items not recorded (like bank fees), timing differences (checks not cleared), potentially fraud, and potentially rounding differences. Bank statements and cash book can disagree due to unprocessed checks, deposits in transit, bank service charges or errors, and errors in bookkeeping.
3. Explain the process of preparing bank reconciliation statement with amended cash balance.
Ans: To prepare bank reconciliation statement, under this approach, 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.
(i) Compare Bank Statement with Cash Book: The cash book states the money paid or received by the organisation over a specific period, whereas the bank statement states the money that is cleared by the bank for the organisation over a specific period. All transactions of cheques, postal orders, money orders, cash, etc.
(ii) List Outstanding Checks: Outstanding checks are checks that have been issued but not yet presented for payment or cleared by the bank. They represent pending transactions where the funds have not yet been deducted from the issuer’s account.
(iii) Calculate Adjusted Cash Balance: The adjusted cash balance is calculated by taking the ending cash balance from the bank statement and adding any outstanding deposits while deducting outstanding checks.
(iv) Prepare Bank Reconciliation Statement: A bank reconciliation statement is a document prepared by a company that shows its recorded bank account balance matches the balance the bank lists. This statement includes all transactions, such as deposits and withdrawals, from a given timeframe.
(v) Verify and Confirm: Verification means “proving the truth” or “confirmation”. Verification is an auditing process in which auditor satisfy himself with the actual existence of assets and liabilities appearing in the Statement of Financial position.
