financial accounting (unit 2)

Financial Accounting

S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: [email protected]

UNIT – II

Trial Balance – Errors – Types of Errors – Rectification of Errors – Problems

– Bank Reconciliation Statement - Problems.

TRIAL BALANCE

Trial balance is a statement, prepared with the debit and credit balances of ledger

accounts to test the arithmetical accuracy of the books. If the totals of the debit and

credit amount columns of the trial balance are equal, it is presumed that the posting to

the ledger in terms of debit and credit amounts is accurate.

Features of Trial Balance

1. The Trial balance is prepared on a specific date. This is why, one use the word „as

on ...…‟ with its heading.

2. Trial balance contains the list of all ledger accounts including cash account.

3. Trial balance may be prepared with the balances or totals or balances and totals of

ledger accounts.

4. The total of the debit and credit column of the amount must be equal.

5. In case the debit and credit side of the trial balance are equal, it is presumed that

the posting to the ledger is accurate.

6. The difference between the debit and credit side of the trial balance points out that

certain mistakes have been committed somewhere.

7. If both the debit and credit sides have the same total, it does not mean that there is

no mistake in accounting.

Objectives and Functions of Trial Balance

Test of Arithmetical Accuracy: Trial balance tests the accuracy of arithmetical

calculation. If the correct posting is made from subsidiary books to ledger accounts

(i.e. correct amount and figures have been recorded), the debit and credit total of

the trial balance must tally.

Summarized Information of Ledger Accounts: Trial balance contains a list of all

ledger accounts. It presents the name of ledger accounts and the amount of their

debit and credit balance.

Basis of Preparing Final Accounts: The main purpose of maintaining books of

accounts is to ascertain the result of the business in terms of profit or loss and the

value of different assets and liabilities.

Useful for Making Adjustments: While preparing final accounts certain adjustments

regarding closing stock, outstanding and prepaid expenses, accrued an unearned

income are to be made.

Limitations of Trial Balance

It should be noted that the agreement of trial balance is not a conclusive proof of

accuracy. In other words, in spite of the agreement of the trial balance some errors

may remain. These may be of the following types:

a) Transaction has not been entered in the journal.

b) A wrong amount has been written in both columns of the journal.

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c) A wrong account has been mentioned in the journal.

d) An entry has not been posted in the ledger.

e) An entry has posted twice in the ledger.

Specimen of Trial Balance

Trial Balance of M/s …..……………….

As on ………………

S.No. Name of the Account L.F.

Amount

₹

(Total or

Balance)

Dr.

Amount

₹

(Total or

Balance)

Cr.

The under mentioned points may be noted while preparing trial balance:

1) A trial balance is prepared as on a particular date which should be mentioned at

the top.

2) In the first column, serial number is written.

3) In the second column, the name of the ledger account is written.

4) In the third column, ledger folio is written.

5) In the fourth column, the total of the debit side of the account concerned or the

debit balance is entered.

6) In the fifth column, the total of the credit side of the account concerned or the

credit balance is entered.

ERRORS – TYPES OF ERRORS

In common, the agreement of trial balance shows the accuracy of the books of

accounts. Though trial balance is tallied, but there may be certain errors which are not

disclosed by the trial balance. That is why it is also said that trial balance is not a

conclusive proof of the accuracy of the books of accounts.

Sometimes, the disagreement of the trial balance will disclose certain errors which are

to be rectified accordingly. If trial balance is not prepared correctly then the final

accounts prepared will not reflect the true and fair view of the state of affairs of the

business.

Types of Errors

There are few errors which can be disclosed and some of the errors cannot be

disclosed. Both the types of errors should be rectified to have a perfect accuracy of

accounts. All these errors can be brought under the two types as follows:

1. Errors which are disclosed by a Trial Balance.

2. Errors which are not disclosed by a Trial Balance




(1) Errors which are Disclosed by a Trial Balance: If any error, whether clerical or

otherwise, exists in the books of account, the same will cause disagreement of a

trial balance. The disagreement of the trial balance will disclose the following

classes of errors:

(a) Wrong Posting: Posting on the wrong side of an account and posting of a wrong

amount in a ledger account will cause disagreement of trial balance.

(b) Omission of Posting: Omission of posting of an entry from the subsidiary book

will cause disagreement.

(c) Errors in Casting or Totaling: Errors in casting or totaling of subsidiary books or

accounts will cause disagreement.

(d) Errors in Balancing: If any error arises as a result of balancing of an account,

the same will cause disagreement.

(e) Double Posting: if any item is posted twice in a ledger account from a

subsidiary book, the same will create disagreement.

(f) Incomplete Double Entry: If the double entry principle is not completed i.e.

either in debit or credit side of an account, the same will invite disagreement.

(g) Balance Carried Forward Wrongly: If the debit balance of an account is shown

or posted by credit balance in the trial balance it would fail to agree. E.g. rent

account shows a debit balance as per ledger but posted on the credit side of the

trial balance.

(h) Variation in Amount: If different amounts are entered in the two different

accounts they will cause disagreement. E.g. rent account is debited by ₹500

whereas Cash account is credit by ₹50.

(i) Wrong Total in Trial Balance: If the total of both the columns of the trial

balance are not correctly added up, they will cause disagreement.

(2) Errors which are Not Disclosed by a Trial Balance: The agreement of a trial balance

is not a conclusive proof as to the absolute accuracy of the books. In spite of

agreement of trial balance, yet there may be some errors which are not disclosed

by a trial balance.

(a) Errors of Omission: When a transaction is completely omitted from being

recorded in the books of accounts then the resultant error is called error of

complete omission. For example, not recording a transaction in a subsidiary

book. This will not neither affect the debit nor credit balance.

(b) Errors of Commission: These errors are the result of some commission. They

take place during the course of recording of transactions in the books of

accounts because of the carelessness, ignorance, lack of knowledge, etc. For

example, instead of ₹800 either ₹80 or ₹8000 is recorded, in both sides of

ledger accounts.

(c) Errors of Principle: When an accounting transaction is recorded in the books of

accounts violating an accounting principle, such an error is called error of

principle. For example, ₹6550 spent on extension of building wrongly debit to

Repairs Account instead of Building Account will not affect the agreement of

the trial balance.

(d) Errors of Wrong Posting: When wrong posting is made to a wrong account

instead of current one, although amount is correctly recorded. For example,




sold goods to B but wrongly debited to D‟s account, wherein trial balance

agrees and will not disclose this error.

(e) Compensating Errors: When an error offsets the wrong effect of an already

committed error, it is called a compensating error. The amount involved in such

errors in the same. For example, over-casting or under-casting with the similar

amount.

Location and Correction of Errors for Tallying the Trial Balance

If the trial balance does not tally, following methods should be adopted to tally it:

1. Make totals of debit and credit balances of trial balance once again.

2. If the totals of debit and credit are correct, then write the differences of these

totals separately.

3. Try to see that some balance of ledger may be equal to this difference and it

might not have been posting.

4. Divide the difference of the trial balance by two and see this amount is not

recorded in the wrong side of trial balance.

5. Make 1/9 of the total as it may be possible that zero is added or zero is left out

in some balance by mistake. If zero is added the amount will become ten times

and if zero is left out the amount will become 1/10. In such cases difference

will definitely be divisible by 9.

6. Count all the accounts ledger and see that balances of all of them have been

recorded in trial balance.

7. Check the totals and balances of all the accounts of the ledger.

8. See the balances of all accounts have included in the trial balance.

9. Check the totals of subsidiary books and have been recorded in ledger.

10. See that correct posting has been made from journal to ledger.

Problem

The following trial balance has been prepared incorrectly. You are asked to prepare

the trial balance correctly.

Heads of Accounts Dr.

Balance (₹)

Cr.

Balance (₹)

Bank overdraft

Cash in hand

Purchase returns

Sundry expenses

Sales returns

Salaries

Purchases

Sales

Creditors

Debtors

Stock (1.1.2008)

Plant

Capital account

280

--

80

240

--

160

560

--

--

160

--

--

440

--

40

--

--

160

--

--

880

240

--

200

400

--

1,920 1,920




Solution Corrected Trial Balance

Heads of Accounts Dr.

Balance (₹)

Cr.

Balance (₹)

Bank overdraft

Cash in hand

Purchase returns

Sundry expenses

Sales returns

Salaries

Purchases

Sales

Creditors

Debtors

Stock (1.1.2008)

Plant

Capital account

--

40

--

240

160

160

560

--

--

160

200

400

--

280

--

80

--

--

--

--

880

240

--

--

--

440

1,920 1,920

Problem

A book-keeper drew-up the following Trial Balance for the year ended 31st December

2015:

Heads of Accounts L.F Dr.

Balance (₹)

Cr.

Balance (₹)

Capital A/c

Drawings A/c

Purchases A/c

Sales A/c

Returns Inwards A/c

Returns Outwards A/c

Carriage Inwards A/c

Carriage Outwards A/c

Bank Overdraft A/c

Provision for Bad Debts A/c

Discount Allowed A/c

Discount Received A/c

General Expenses A/c

Plant and Machinery A/c

Sundry Debtors A/c

Sundry Creditors A/c

Opening Stock A/c

Cash in hand A/c

Dividend Received A/c

Goodwill A/c

--

5,000

16,000

--

--

2,000

1,000

--

6,000

3,000

--

2,000

5,000

10,000

8,000

--

4,000

8,000

--

17,000

30,000

--

--

45,000

3,000

--

--

2,000

--

--

1,000

--

--

--

--

5,000

--

--

4,000

--

87,000 90,000

You are required to draw-up a corrected Trial Balance after transferring the errors to

Suspense Account.




Solution Corrected Trial Balance

Heads of Accounts L.F Dr.

Balance (₹)

Cr.

Balance (₹)

Capital A/c

Drawings A/c

Purchases A/c

Sales A/c

Returns Inwards A/c

Returns Outwards A/c

Carriage Inwards A/c

Carriage Outwards A/c

Bank Overdraft A/c

Provision for Bad Debts A/c

Discount Allowed A/c

Discount Received A/c

General Expenses A/c

Plant and Machinery A/c

Sundry Debtors A/c

Sundry Creditors A/c

Opening Stock A/c

Cash in hand A/c

Dividend Received A/c

Goodwill A/c Suspense A/c

--

5,000

16,000

--

3,000

--

1,000

2,000

--

--

1,000

--

5,000

10,000

8,000

--

4,000

8,000

--

17,000

17,000

30,000

--

--

45,000

--

2,000

--

--

6,000

3,000

--

2,000

--

--

--

5,000

--

--

4,000

--

--

97,000 97,000

RECTIFICATION OF ERRORS – PROBLEMS

Correction of errors in the books of accounts is not done by erasing, re-writing or

striking the figures which are incorrect. Correcting the errors that has occurred is

called „Rectification‟. Appropriate entry is passed or suitable explanatory note is

written in the respective account to neutralize the effect of errors. From the point of

rectification, errors may be classified as follows:

1. Single-sided errors are errors which affect one side of an account.

2. Double-sided errors are errors which affect both the accounts in a transaction.

Basic Principles for Rectification of Errors

All errors, whatever may be their kind or nature, result in one of the following four

positions in one or more accounts:

i. Excess Debit in One or More Accounts: This must be rectified by „crediting‟ the

excess amount to the respective account or accounts.

ii. Short Debit in One or More Accounts: This must be rectified by a „further debit‟

to the respective account or accounts involved.

iii. Excess Credit in One or More Accounts: This must be rectified by „debiting‟ the

respective account with the excess amount involved.




iv. Short Credit in One or More Accounts: This must be rectified by a „further

credit‟ to the respective account or accounts involved.

Stages of Rectification

The stage in which rectification is done depends on identification or locating the error.

Rectification of errors may be explained in two stages:

Rectification Before the Preparation of Trial Balance: In this stage errors are located

before transferring the difference in the trial balance to Suspense Account.

Rectification After the Preparation of Trial Balance: In this stage, the difference in

the trial balance would have been transferred to Suspense Account. So wherever

applicable suspense account is used while passing rectification entries.

Stage at which the Errors are

Rectified

Manner at which the Errors are

Rectified

1) When the errors are rectified

before transferring the difference

in the trial balance to the suspense

account.

By debiting or crediting the respective

account with the required amount by

giving explanatory note in the particular

column.

2) When the errors are rectified after

transferring the difference in the

trial balance to the suspense A/c.

By writing a journal entry with

respective account or accounts affected

by the errors and suspense account.

Rectification through Suspense Account

When the trial balance disagrees, efforts are made to locate the errors and to rectify

them. When the errors cannot be located and the preparation of final accounts is

urgent, the difference in the trial balance is made by writing it temporarily in the

smaller side of the trial balance, under the name of „Suspense Account‟.

The suspense account is only a temporary device which should not be allowed to

remain in the books for long time. In the next accounting period, attempts must be

made to discover the errors which caused the difference in the trial balance. Again, if

the credit side of the trial balance is shorter, the suspense account is credited and if the

debit side of the trial balance is shorter, the suspense account is debited.

Problem

Pass rectification entries for the following transactions:

1. A builder‟s bill for ₹4,600 for erection of small shed was debited to repairs

account.

2. A cheque for ₹750 received from Padma was credited to the account of

Parvathi.

3. Goods to the value of ₹700 returned by Williams were included in closing

stock, but not entry was in the book.

4. The Sales Day Book was overcast by ₹3000.




Solution

Journal Entries

Particulars L.F Dr.

(₹)

Cr.

(₹)

Building A/c Dr.

To Repairs Account

(Being the erection of small shed wrongly

debited to Repair A/c, now rectified)

4,600

4,600

Parvathi A/c Dr.

To Padma A/c

(Being the cheque received from Padma

wrongly credited to Parvathi A/c, now

rectified)

750

750

Sales Return A/c Dr.

To Williams A/c (Being the omitted entry for goods returned by

Williams, now recorded)

700

700

Sales A/c Dr.

To Suspense A/c

(Being the error in totaling of sales book (i.e.

overcast by ₹3000, now rectified)

3,000

3,000

Problem

The following errors were located in the books of a concern after its books were

closed and a Suspense Account was created in order to get the Trial Balance agreed.

Rectify the errors.

1. Sales Day Book was overcast by ₹200.

2. A sale of ₹500 to Xavier was wrongly debited to the Account of John.

3. Repair Expenses of ₹180 was posted as ₹810.

4. A Bill Receivable received from Poppy for ₹300 was passed through Bills

Payable Books.

5. Legal expenses of ₹900 paid to advocate Mohan was debited to his personal

account.

6. Cash received from Dhass was debited to Dasan Account for ₹150.

7. While carrying forward the total of one page of the Purchase Book to the next,

the amount of ₹2,345 was written as ₹3245.

Solution

Journal Entries

Particulars L.F Dr.

(₹)

Cr.

(₹)

Sales A/c Dr.

To Suspense Account

(Being overcast in Sales Day Book, now

rectified)

200

200




Xavier Account Dr.

To John Account

(Being sales made to Xavier wrongly debited

to John, now rectified)

500

500

Suspense Account Dr.

To Repairs Account

(Being Repairs Account debit of ₹810 in place

of ₹180, now rectified)

630

630

Bill Payable A/c Dr.

Bills Receivable A/c Dr.

To Poppy A/c

(Being Bills Receivable passed through Bills

Payable Book, now rectified)

300

300

600

Legal Expenses A/c Dr.

To Mohan A/c

(Being legal expenses paid, wrongly debited to

Mohan account, now rectified)

900

900


To Dasan Account

To Dhass Account

(Being the sales wrongly credited to Debtors

Account, now rectified)

300

150

150


To Purchase Account

(Being excess amount of ₹900 (₹3245 –

₹2345) debited in Purchase Account, now

rectified)

900

900

Dr. Suspense Account Cr.

Particulars ₹ Particulars ₹

To Repairs A/c

To Dasan A/c

To Dhass A/c

To Purchase A/c

630

150

150

900

By Difference in Trial

Balance (balance figure)

By Sales Account

1,630

200

1,830 1,830

Problem

The Trial Balance of M/s. Sethi Brothers extracted on March 31, 2015, was ₹935 short

on the Debit side. The Book-keeper opened Suspense A/c and squared-up the Trial

Balance. An examination of the books however revealed the following errors:

1. The Dr. Discount Column in the Cash Book posted to the Rent A/c ₹15.

2. ₹150 paid to Dinesh posted to Ramesh

3. A cash purchase of ₹105 not posted in the leger.

4. A credit purchase of ₹300 from Ranjit posted as ₹30 in the ledger.




5. A credit sale of ₹500 to Wahid entered in the Returns Outward Book.

6. Payment of Rent ₹140 debited to Landlord‟s Personal A/c.

7. Payment of ₹1,000 to Jagdish posted to his credit as ₹100.

You are required to pass the necessary rectifying journal entries. Prepare the Suspense

Account.

Solution

Rectifying Journal Entries

Particulars L.F Dr.

(₹)

Cr.

(₹)

Discount A/c Dr.

To Rent Account

(Rectification of posting the Discount column

to Rent Acount)

15

15

Dinesh Account Dr.

To Ramesh Account

(Rectification of payment to Dinesh posted to

Ramesh)

150

150

Purchase Account Dr.

To Suspense Account

(Rectification of Cash purchase not posted)

105

105

Suspense A/c Dr.

To Ranjeet A/c

(Rectification of wrong posting)

270

270

Returns Outward A/c Dr.

To Sales A/c

(Rectification of sale recorded in Returns

Outward Book)

500

500

Rent Account Dr.

To Landlord‟s Personal Account

(Rectification of payment of rent posted to

Landlord‟s Personal Account)

140

140

Jagdish Account Dr.

To Suspense Account

(Rectification of wrong posting of amount as

well as side)

1,100

1,100




Dr. Suspense Account Cr.

Particulars ₹ Particulars ₹

To Difference in Books

To Ranjeet

935

270

By Purchases A/c

By Jagdish

105

1,100

1,205 1,205

BANK RECONCILIATION STATEMENT - PROBLEMS

Business concern maintains the cash book for recording cash and bank transactions.

The cash book serves the purpose of both the cash account and the bank account. It

shows the balance of both at the end of a period. Bank also maintains an account for

each customer in its book.

All deposits by the customer are recorded on the credit side of his/her account and all

withdrawals are recorded on the debit side of his/her account. A copy of this account

is regularly sent to the customer by the bank. This is called Pass Book or Bank

Statement.

To reconcile the balance of cash book and pass book a statement is prepared. This

statement is called the „Bank Reconciliation Statement‟. It can be said that, “bank

reconciliation statement is a statement prepared to reconcile the difference between

the balances as per the bank column of the cash book and pass book on any given

date”.

Features of Bank Reconciliation Statement

a. It is merely a statement not an account.

b. This is a periodical statement.

c. It is prepared on a particular day or this statement is valid for the day it is

prepared.

d. The preparation of bank reconciliation statement is not a part of the double

entry book-keeping.

e. The causes which are responsible for the disagreement of the two balances can

easily be found-out.

Importance of Bank Reconciliation Statement

Bank reconciliation statement is the basic document of the accounting needed by

every business enterprise for having check and control on its dealing with the bank. It

has got the following importance:

Pin-Pointing Mistakes in Cash Book and Pass Book

Identifying Delay in the Clearance of Cheques

Check on Embezzlement

Checking the Accuracy of Cash Book

Techniques of Control




In the View of Bank Pass Book: The following transactions in Bank’s Pass Book of

Mr.Sethu 1. Mr.Sethu deposited ₹8,000 with the bank to open his current account.

2. A cheque of ₹2,500 received from Shailesh was paid into bank and was duly

credited by the bank.

3. Insurance premium of ₹500 was paid by the bank on behalf of Mr.Sethu.

4. Withdrew ₹5,000 from the bank for office use.

5. A cheque of ₹1,000 was issued in favor of Surendar and the same was

presented for payment.

6. Interest on investment amounting to ₹600 was collected by the bank on behalf

of Mr.Sethu.

MR.SETHU‟S CURRENT ACCOUNT WITH BANK

Date Particulars Dr.

(₹)

Cr.

(₹)

Balance Account

ant’s

Initials

Dr.

or

Cr.

Amount

(₹)

By Cash

By Cheque (of Shailesh)

To Insurance premium

To Self

To Cheque (to Surendar)

By Interest on Investmnt

500

5,000

1,000

8,000

2,500

600

Cr.

Cr.

Cr.

Cr.

Cr.

Cr.

8,000

10,500

10,000

5,000

4,000

4,600

In the above example, Mr.Sethu becomes a creditor of the bank when he deposits

money in the bank and he becomes a debtor of the bank when he withdraws money.

Similarly, he become creditor of the bank for depositing cheque in the bank and

interest on investments collected on his behalf and he becomes a debtor for drawing a

cheque on the bank and insurance premium paid by the bank on his behalf.

In the View of Cash Book: The transactions given above will be recorded in the Bank

Column of the Three Columnar Cash Book (maintained by Mr.Sethu).

IN THE BOOKS OF MR.SETHU – THREE-COLUMN CASH BOOK

Dr. RECEIPTS PAYMENTS Cr.

Date Particulars L

F

Discount

Allowed

Cash

(₹)

Bank

(₹)

Date

Particulars L

F

Discount

Received

Cash

(₹)

Bank

(₹)

To Cash

To Shailsh

(cheque)

To Bank

To Interest

on Invt.

C

C

5000

8000

2500

600

By Bank

By

Insurance

By Cash

By Surndr

(cheque)

By Bal c/d

C

C

8000

500

5000

1000

4600

11100 11100




From the above Pass book and the Cash book, we see the same balance of ₹4,600 in

the bank with a difference that in Cash book it is a debit balance whereas the same is a

credit balance in the Pass book. It is because,

From the point of view of the Bank, Mr.Sethu is a creditor, so Pass book shows a

credit balance.

From the point of view of Mr.Sethu, Bank is a debtor, so Cash book shows a debit

balance.

Therefore, balance as per Cash book is always reverse balance as per Pass book and

amount of the balance will be the same if all entries have been correctly recorded in

both the books.

A statement known as „Bank Reconciliation Statement‟ is, therefore, prepared usually

every month with a view to reconciling the two balances shown by the Cash book and

the Pass book on a particular date. The other important purpose of the preparation of

this statement (BRS) is to know the exact balance with the bank so that cheese might

be drawn-up to that amount if there be a need of withdrawal.

The following may be the reasons for the differences in two balances:

a) Cheques issued but not yet presented for payment.

b) Cheques paid into bank but not yet collected by the bank.

c) The bank usually makes charges for the collection of outstanding cheese and

for the various services rendered by it to the trader or account holder.

d) Interest or dividend on investments and rent on property collected by the bank

on behalf of the client.

e) Insurance premium, subscriptions to periodicals and other payments made by

the bank on behalf of the client.

f) Cheese or cash omitted to be banked.

g) Errors in totaling of the cash book, either under-casting or overcasting.

h) Cheques or Bills of Exchange dishonored

i) Payment by customers directly to the bank into businessman‟s account.

j) Wrong debit or credit given in the Pass book or in the Cash book.

k) Bills collected by the bank on behalf of the customers.

Reasons /Causes for Differences

The relationship between the customer and the banker is that of a creditor and a

debtor. So, if the bank column of the cash book shows a debit balance on a specified

date, the pass book should show an equal amount of credit balances as on that date

and vice versa. However, the balances shown by the two independent records may not

agree due to the following reasons:

1) Cheques Issued but not yet Presented for Payment 2) Cheques Presented into Bank but not yet Collected by the Bank 3) Bank Charge 4) Interest Credited by Bank but not entered in Cash Book

5) Interest or Dividend Collected by the Bank 6) Amount Directly Deposited into the Bank by Customers




7) Payments made by the Bank on behalf of Clients 8) Bills Collected by the Bank on behalf of Customer 9) Dishonor of Bills or Cheque 10) Rebate on Retiring of Bills

Preparation of Bank Reconciliation Statement

The bank reconciliation statement is prepared usually at the end of period, i.e. a

month, a quarter, a half year or year as may be found convenient and necessary by the

business man taking into account the number of transactions involved.

FORMAT OF BANK RECONCILIATION STATEMENT

Particulars Dr. Balance as per

Cash Book

(or)

Overdraft as per

Pass Book

Cr. Balance as

per Pass Book

(or)

Overdraft as per

Cash Book

1) Those items which affect the debit

side of cash book:

i) Cheque deposited but not

collected back.

ii) Cheque though entered in

Cash book but omitted to be

sent to the Bank.

2) Those items which affect the credit

side of cash book:

i) Cheque issued but not

presented for payment.

3) Those items which affect the credit

side of pass book:

i) Interest/Dividend credited by

bank.

ii) Amount deposited directly by

a customer into bank account.

iii) Cheques sent to the bank but

omitted to be entered into the

Cash book.

4) Those items which affect the debit

side of pass book:

i) Bank charges charged by bnk

ii) Interest on Overdraft.

iii) Payment made by bank on

standing instruments of

customer.




Problem (Starting with Debit balance as per Cash book)

On 31st December 2015, the Cash book of a firm showed a bank balance of ₹3,000.

From the following information, prepare Bank Reconciliation Statement, showing the

balance as per Pass book:

1. Cheques have been issued for ₹2,500 out of which cheques worth ₹2,000 only

were presented for payment.

2. Cheques worth ₹700 were paid on 28th

December but had not been credited by

the bank. One cheque for ₹250 was entered in the Cash book on 30th

December

but was banked on 3rd

January 2016.

3. A cheque from Mohan for ₹200 was paid in on 26th

December but was

dishonored and the advice was received on 2nd

January 2016.

4. Pass book showed bank charges ₹10 debited by the bank. It also showed ₹400

collected by the bank as interest.

5. One of the debtors deposited a sum of ₹250 in the account of the firm on 20th

December. Intimation in this respect was received from the bank on 2nd

January, 2016.

Solution

Bank Reconciliation Statement

As on 31st December 2015

Particulars Plus

(₹)

Minus

(₹)

Dr. Balance as per Cash book

1. Cheque issued but not yet presented for payment

(₹2,500 – ₹2,000)

2. Cheque paid into bank but not yet credited by bank

3. Cheque entered in the cash book but was omitted

to be banked upto 31st December.

4. Cheque from Mohan paid into bank dishonored but

not yet recorded in the cash book.

5. Bank charges as per pass book.

6. Interest collected by bank not recorded in cash

book.

7. Amount deposited by the customer directly in the

bank not recorded in cash book.

Cr. Balance as per Pass book

3,000

500

400

250

4,150

2,990

700

250

200

10

1,160

Problem (Starting with Credit balance as per Pass book)

On 31st December 2014 the Pass book of Mr.Balaji‟s Current Account showed a credit

balance of ₹10,000. Prepare a Bank Reconciliation Statement with the following

information.

1. Mr.Balaji issued a cheque of ₹300 on 25th

December, but this was not

presented for payment whereas this was twice in the Cash book.




2. A cheque of ₹200 drawn on his Savings deposit account has been shown as

drawn on Current account in Cash book.

3. A cheque of ₹285 issued on his Savings deposit account has been shown as

drawn on Current account in Pass book.

4. In the Pass book, a bank charge of ₹25 was recorded twice while another bank

charge of ₹17 was also not recorded in the Cash book.

Solution



Particulars Plus

(₹)

Minus

(₹)

Credit Balance as per Pass book

1. Cheques issued but not presented and recorded

twice (₹300+₹300)

2. Cheque drawn on Savings bank A/c but recorded

in Current A/c

3. Cheque issued but recorded in cash column

4. Bank charges not recorded in cash book (₹25+₹25

+₹17)

Debit Balance as per Cash book

10,000

285

67

10,352

9,552

600

200

800

Problem

On comparing the Cash book of Mr.X Ltd. with the bank Pass book, the following

discrepancies were noted:

1. Out of ₹20,500 paid in cash and by cheese into the bank on 27th

March, cheque

amounting to ₹7,500 was collected on 7th

April.

2. Cheque and cash amounting to ₹4,800 were deposited in bank on 26th

March

but credit was given for ₹3,800 only.

3. Out of cheques amounting to ₹7,800 drawn on 26th

March a cheque for ₹2,500

was encashed on 3rd

April.

4. Cheques issued to creditor amounting to ₹20,000 on 25th

March of which

cheese worth ₹3,000 were presented to bank up to 31st March.

5. A cheque for ₹1,000 entered in cash book but omitted to be banked on 31st

March.

6. A cheque for ₹600 deposited into bank but omitted to be recorded in cash book.

7. A bill receivable for ₹520 previously discounted (discount ₹20) with the bank

had been dishonored but advice was received on 1st April.

8. A bill for ₹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 on the cash book.

9. A cheque of ₹1,080 credited in the pass book on 28th

March being dishonored

is debited again in the pass book on 1st April. There was no entry in the cash

book about dishonor of the cheque until 15th

April.




Prepare a Bank Reconciliation Statement as at 31st March, if the balance as per Cash

book was ₹39,770.

Solution


As on 31st March 2015

Particulars Plus

(₹)

Minus

(₹)

Balance as per Cash book

1. Cheque deposited on 27th

March but not yet

collected till 31st March.

2. Cheque deposited on 26th

March but not yet

collected till 31st March.

3. Cheques issued on 26th

March but not yet

presented for payment till 31st March.

4. Cheques issued on 25th

March but not yet

presented for payment till 31st March.

5. A cheque entered in cash book but yet banked.

6. A cheque deposited into bank but not yet entered

in cash book.

7. Discounted B/R dishonored, not yet entered in cash

book.

8. Rebate on bill not entered in cash book.

Balance as per Pass book

39,770

2,500

17,000

600

150

60,020

50,000

7,500

1,000

1,000

520

10,020

Note: A cheque of ₹1,080 credited in Pass book on March 28, later debited in Pass book on

1st April has no effect on Bank Reconciliation Statement as at 31.03.2015

Bank Overdraft

Until now we are assuming that Cash book shows a debit balance or Pass book a

credit balance, i.e. bank owes amount to the trader. But sometimes Cash book may

show a credit balance or Pass book a debit balance. What does it mean? By this we

mean that the trader owes this amount to the bank, i.e. he has drawn more amount than

his balance in the bank. Such a balance is technically known as „Bank Overdraft’.

Therefore, two separate columns are prepared; one for recording plus items and the

other for minus items. If the total of minus items exceeds the total of plus items, the

result is minus and is bank Overdraft as per Cash book or Pass book as the case may

be.

On the other hand, if the total of plus items, exceeds that of minus items, the result is

plus and is a balance in favor of the trader.




Illustration

The cash book of a Trader showed a credit balance of ₹875 on 31st December 2016.

On verification with the Bank pass book it was found that:

1. A cheque for ₹300 dishonored was not entered in the cash book.

2. Bank charges amounting to ₹10 were not recorded through the cash book.

3. There was a wrong credit of ₹750 in the cash book.

4. Cheque for ₹850 paid into a bank on 31st December had not been entered in the

pass book.

5. Interest amounting to ₹970 was recorded by the bank and entered only in the

pass book.

6. A cheque for ₹250 was paid into the bank for collection but the cash book

showed no entry for it.

Prepare a Bank Reconciliation Statement as on 31st December 2016.

Solution Bank Reconciliation Statement


Particulars Plus (₹) Minus (₹)

Credit Balance as per Cash Book/ Overdraft as per Cash

Book

1. Cheque dishonored was not entered in the Cash

book

2. Bank charges not recorded in Cash book

3. Wrong credit in the Cash book

4. Cheque paid into the bank had not been entered in

the Pass book.

5. Interest was recorded by the bank and entered only

in the Pass book.

6. Cheque paid into the bank had not been entered in

the Cash book. Debit Balance / Overdraft as per Pass book

750

970

250

1,970

875

300

10

1,185

785

Problem

On checking Ram‟s Cash book with the Bank statement of his Overdraft Current

account for the month of November, 2015, you find the following:

1. Cash book showed an overdraft of ₹4,500.

2. The payment side of the Cash book had been under-cast by ₹150.

3. A cheque for ₹750 drawn on his Savings account has been shown as drawn on

Current account.

4. Cheques amounting to ₹7,000 drawn and entered in the Cash book had not yet

been presented.

5. Cheques amounting to ₹6,000 sent to the bank for collection, though entered in

the Cash book, had not been credited by the bank.

6. Bank charges of ₹75 as per Bank statement had not been taken into the Cash

book.

7. Dividends of the amount of ₹2,500 had been paid direct into the bank and not

entered in the Cash book.




You are required to prepare a Bank Reconciliation Statement as on 30th

Nov, 2014.


As on 30th

November 2014

Particulars Plus

(₹)

Minus

(₹)

Overdraft as per Cash book

1. Payment side of cash book is under-casted

2. Cheque drawn on Savings account wrongly shown

as drawn on Current account.

3. Cheque issued but not yet presented for payment.

4. Cheese paid into bank but not yet credited

5. Bank charges not entered in cash book.

6. Direct payment of Dividend into bank

750

7,000

2,500

4,500

150

6,000

75

10,250 10,725

Overdraft as per Pass book 475

Problem

From the following information supplied by Gokul, prepare his Bank Reconciliation

Statement as on 31st March 2015. ₹

1. Bank overdraft as per Pass book 16,500

2. Cheques issued but not presented for payment 8,750

3. Cheques deposited with bank but not collected 10,500

4. Cheques recorded in the Cash book but not sent to bank for colln. 2,000

5. Payments received from customers directly by bank 3,500

6. Bank charges debited in Pass book 20

7. Premium on life policy of Gokul paid by the bank on standing advice 180

8. A bill for ₹3,000 (discounted with the bank in November) dishonored

on 31-03-2015, and noting charges paid by the bank 10


As on 31st March 2015

Particulars Plus Items

(₹)

Minus Items

(₹)

Bank Overdraft as per Pass Book

1. Cheques issued but not presented for payment.

2. Cheques deposited but not yet collected.

3. Cheques recorded in the Cash book but omitted

to be banked.

4. Direct payment by the customers into bank.

5. Bank charges

6. Life policy premium paid by bank

7. Dishonored bill, including noting charges.

10,500

2,000

20

180

3,010

16,500

8,750

3,500

15,710 28,750

Overdraft as per Cash Book 13,040




Text Book and References

1. S.P.Jain and K.L.Narang, Financial Accounting, Kalyani Publishers, New

Delhi, 3rd

Revised Edition, 2008.

2. Grewal T.S, 2009. Double Entry Book Keeping. Sultan Chand and Sons, New

Delhi, 6th

Edition.

3. Shukla and Grewal, 1997. Advanced Accountancy. Sultan Chand and Sons,

New Delhi, 13th

Edition.


financial accounting (unit 2)

Education