Preparation of Bank Reconciliation Statement :: Problem Solving
Working notes to ascertain whether to Add or Deduct
Identify the transactions which are the reason for the difference
The reasons for the difference in the bank account balance as revealed by the Cash Book and the Pass Book may be given pointwise in the problem. In such a case there is nothing more to do other than making use of these.If the problem is presented in the form of a short paragraph, we would be required to identify the transactions to enable us to prepare the BRS.
For each Transaction
-
Identify the transaction along with the value involved.
Cheque from Rao deposited but not yet collected 15,000
-
Prepare two ledger accounts in a simple T format, with an opening balance
greater than the transaction value.
Assumed opening balance - 18,000 (> 15,000)
Cash Book To bal b/d
18,000 Pass Book By bal b/d 18,000
- Cash book which represents the bank account in the organisation books has a debit balance.
- Passbook which represents the organisation account in the bank books has a credit balance.
Making it simpler (eliminate using To and By)
Cash Book op bal
18,000 Pass Book op bal 18,000
-
Analyse the affect of the transaction on the bank balance
We can use the journal entry as recorded in the organisation's books for this
Journal (CB) Bank a/c To Rao a/cDr 15,000
15,000To get the effect of posting this transaction,
- cash book has to be debited
-
pass book has to be credited
Though the journal entry shown above is not related to the bank books, we can draw such a conclusion as what happens in the bank books can be interpreted as the reverse of what happens in the organisation's books.
Minimise working
We do not need the journal entry as well as the amounts. We just need to identify if the bank account is being debited or credited on account of this transaction.Journal (CB) Bank a/c To _ _ _ a/cDr Bank a/c - Debit
This will increase the bank balance in the book, provided the transaction has been recorded.
-
Ascertain the amount of difference
15,000 here.
Finding the difference is a crucial skill needed
In many transactions, the amount of difference is itself given with the explanation. However, it would not be so always. We may have to analyse the transaction and find out the amount of difference.This is the most important skill required for solving problems involving preparation of the bank reconciliation statement.
-
Find out which book has a greater balance and which one has a lesser balance
- Post to the bank account in the relevant book based on what has actually happened.
- Balance the accounts in both the books.
- Mark the balance as 'Greater' and 'Lesser'.
Cash Book To bal b/d
To _ _ _18,000
15,000By bal c/d 33,000 33,000 33,000 To bal b/d 33,000 GreaterPass Book To bal c/d 18,000 By bal b/d
18,000 18,000 18,000 By bal b/d 18,000 LesserMaking it simpler avoiding To and By
Cash Book op bal
_ _ _18,000
15,000cl bal 33,000 33,000 33,000 cl bal 33,000 GreaterPass Book cl bal 18,000 op bal
18,000 18,000 18,000 cl bal 18,000 Lesser -
Based on which balance we are starting the BRS with, we conclude
Moving
- to Greater, add
- from Greater, deduct
In the above example
- CB > PB
- PB to CB, add [to greater]
- CB to PB, deduct [from greater]
Working notes to ascertain whether to Add or Deduct (Alternative)
Identify the transactions which are the reason for the difference
The reasons for the difference in the bank account balance as revealed by the Cash Book and the Pass Book may be given pointwise in the problem. In such a case there is nothing more to do other than making use of these.If the problem is presented in the form of a short paragraph, we would be required to identify the transactions to enable us to prepare the BRS.
For each Transaction
-
Identify the transaction along with the value involved.
Cheque from Rao deposited but not yet collected 15,000
-
Prepare a statement in the following format
Transactions Bank a/c Effect Final Cash Book Pass Book Cash Book Pass Book (b) Cheques deposited ... Ensure that of the CB and PB columns, the one whose balance we start with is written first, both under effect and final columns.
Use symbols to reduce effort
- Bank (Bank a/c)
- CB (Cash Book)
- PB (Pass Book)
Transactions Bank Effect Final CB PB CB PB (b) Cheques deposited ... -
Analyse the affect of the transaction on the bank balance
We can use the journal entry as recorded in the organisation's books for this
Journal (CB) Bank a/c To Rao a/cDr 15,000
15,000To get the effect of posting this transaction,
- cash book has to be debited
-
pass book has to be credited
Though the journal entry shown above is not related to the bank books, we can draw such a conclusion as what happens in the bank books can be interpreted as the reverse of what happens in the organisation's books.
Minimise working
We do not need the journal entry as well as the amounts. We just need to identify if the bank account is being debited or credited on account of this transaction.Journal (CB) Bank a/c To _ _ _ a/cDr Bank a/c - Debit
This will increase the bank balance in the book, provided the transaction has been recorded.
-
Ascertain the amount of difference
15,000 here.
Finding the difference is a crucial skill needed
In many transactions, the amount of difference is itself given with the explanation. However, it would not be so always. We may have to analyse the transaction and find out the amount of difference.This is the most important skill required for solving problems involving preparation of the bank reconciliation statement.
-
Find out which book has a greater balance and which one has a lesser balance
- Note, debit or credit in the bank column based on what is being done with the bank account.
- Note the amount of increase or decrease in the cash book or pass book based on what actually happened.
- Assuming the initial balance in both the books to be the same, mark the final balance as 'Greater' and 'Lesser' based on the effect on the balance.
Transactions Bank Effect Final CB PB CB PB (a) cheques deposited not yet collected Debit +15,000 Greater Lesser Use symbols to reduce effort
- > (Greater)
- < (Lesser)
- Dr (Debit)
- Cr (Credit)
Transactions Bank Effect Final CB PB CB PB (a) cheques deposited not yet collected Dr +15,000 > < -
The nature of final balance in the outermost (rightmost) column indicates what is to be done.
The final balance
- > (Greater) indicates add
- < (Lesser) indicates deduct
Assuming we start the BRS with cash book balance,
Transactions Bank Effect Final CB PB CB PB (1) cheques deposited not yet collected Dr +15,000 > < (2) cheques issued not yet presented Cr −12,000 < > (1) < deduct
(2) > addNote
Drawing conclusions regarding whether Bank a/c has to be debited or credited may not be straight forward and easy always. In such cases use the interpretation in the above method.
BRS - Bank Reconciliation Statement
Particulars | Amount | Amount | |
---|---|---|---|
Balance as per Cash Book | 8,000 | ||
Add : | Cheques issued but not yet presented for payment | 12,000 | |
Dividends collected by the bank not recorded in the cash book | 1,800 | ||
Deposit made by a debtor directly into bank not recorded in cash book | 4,500 | 18,300 | |
26,300 | |||
Less : | Cheques deposited but not yet collected | 6,000 | |
Bank charges recorded in bank books only | 750 | ||
Bill discounted dishonoured not recorded in cash book yet | 5,800 | ||
Payment made by bank recorded in bank books only | 2,400 | 14,950 | |
Balance as per Pass Book | 11,350 |
Notes :
If the final balance we obtain or arrive at is- positive - it is an normal balance.
- negative - it is a overdraft balance.
In problem solving,
- whether we start with the cash book balance or the pass book balance is not a choice in many cases as we will be given only one of the balances and the other balance has to be obtained.
- Availability of both the balances would help us in cross checking the amount that we arrive at by starting with one of them.
Overdraft Balance
Represent Overdraft balance with a negative number
In preparing the BRS, if we indicate the overdraft nature of the balance (with which we are starting) with a negative sign, then we can view and workout the problem as a normal problem.The final balance we arrive at should also be interpreted as if it is a normal balance.
It would be
- positive, if it is normal.
- negative, if it is an overdraft.
Represent Overdraft balance with a positive number
In preparing the BRS, if we do not indicate the overdraft nature of the balance (with which we are starting) with a negative sign, thenAlternative 1
- analyse the effect of a transaction normally, ignoring the overdraft nature of the balance we started with
-
alter the conclusion based on the closing balance
Moving
-
to Greater,
adddeduct -
from Greater,
deductadd
-
to Greater,
Alternative 2
We can conduct the whole analysis starting from altering the balances we consider in the T accounts. In such a case, the Cash book would have a credit balance and the pass book would have a debit balance.
op bal |
18,000 |
op bal |
18,000 |
The analysis and adjustments are done as in the case of a normal balance.
Moving
- to Greater, add
- from Greater, deduct
The final balance we arrive at would be
- overdraft, if it is positive.
- normal, if it is negative.
Simplest Method
Use a negative sign to indicate the overdraft nature.BRS - adjustments to be made
Transaction | Starting Balance | ||||
---|---|---|---|---|---|
Normal | Overdraft | Normal | Overdraft | ||
CB to PB | PB to CB | ||||
1. | Cheques deposited but not yet collected | − | + | + | − |
2. | Cheques issued but not yet presented for payment | + | − | − | + |
3. | Bank charges, interest etc., charged (debited) in bank books only | − | + | + | − |
4. | Bank interest and other collections credited in bank books only | + | − | − | + |
5. | Cheque discounted dishonoured, intimation not yet received by the organisation | − | + | + | − |
6. | Cheque/Cash directly deposited in bank, information not yet received by the organisation | − | + | + | − |
7. | Collections made by bank on standing instructions, information not yet received by the organisation | − | + | + | − |
8. | Payments made by bank on standing instructions, information not yet received by the organisation | + | − | − | + |
9. | Errors in Cash book which have resulted in a higher cash book bank balance | − | + | + | − |
10. | Errors in Cash book which have resulted in a lower cash book bank balance | + | − | − | + |
It is advised of the student to understand the procedure for arriving at the adjustment and base their decisions on logic rather than memorising the adjustment from the statement. Once we understand the logic we can handle any transaction.