Gauhati wholesaler: the reconciliation that 'tallies' but corrects nothing
M/s Baruah Traders, a wholesale dealer in Guwahati, closes its books on 31 March. On 31 March 2024 the bank column of its cash book showed a debit balance of ₹18,460, while the bank issued a statement showing a debit balance of ₹18,100. The accountant, who joined in February, listed six differences:
- Cheques issued but not presented, ₹6,200.
- Cheques deposited but not yet credited, ₹4,100.
- Bank charges of ₹350 debited by the bank, not yet entered in the cash book.
- A customer's cheque of ₹2,500 was entered twice in the cash book while deposited only once.
- Dividend of ₹1,200 on the firm's investments was collected by the bank; no intimation was received.
- A cheque of ₹900 issued to a supplier was entered in the cash book as ₹90.
The accountant simply listed all six items in the statement and says it 'tallies', so no further work is needed. He has passed no journal entry for any of the six items, arguing that 'the reconciliation statement is itself the rectification'. The proprietor insists the balance sheet should show the cash book figure.
1. Separate the six items into errors in the cash book and timing differences. Compute the corrected cash book balance and prepare a bank reconciliation statement that ends at the balance shown by the bank.
Read the worked answer
Items 1 and 2 are timing differences - the bank has not yet acted, so no entry is needed. Items 3 to 6 are errors or omissions in the firm's own books and must be corrected before reconciling.
| Corrected cash book | ₹ |
|---|---|
| Balance as per cash book (Dr) | 18,460 |
| Less: cheque entered twice (Dr overstated) | (2,500) |
| Less: ₹900 cheque entered as ₹90 (credit short by 810) | (810) |
| Less: bank charges not recorded | (350) |
| Add: dividend collected by bank not recorded | 1,200 |
| Corrected balance | 16,000 |
Bank reconciliation statement as on 31 March 2024
| Particulars | ₹ |
|---|---|
| Balance as per cash book (corrected) | 16,000 Dr |
| Add: cheques issued but not presented | 6,200 |
| Less: cheques deposited but not credited | (4,100) |
| Balance as per bank statement | 18,100 Dr |
This matches the bank statement, which confirms that the corrections have been made in the right direction. Note the direction test for item 6: a cheque issued for ₹900 but credited at ₹90 under-credits the bank column, so the debit balance is too high and must be reduced.
2. Pass the rectification entries for items 3 to 6, and state the net effect of the errors on the profit for the year.
Read the worked answer
| No. | Entry | Why | |---|---|---|---| | 4 | Dr Sundry Debtors 2,500 / Cr Bank 2,500 | the duplicate entry removed cash that never moved and over-credited the customer | | 6 | Dr Sundry Creditors 810 / Cr Bank 810 | the supplier was credited with ₹90 instead of ₹900 | | 3 | Dr Bank Charges 350 / Cr Bank 350 | an expense of the year omitted | | 5 | Dr Bank 1,200 / Cr Dividend Income 1,200 | income collected by the bank, not recorded |
Effect on profit: only items 3 and 5 pass through the profit and loss account: −350 + 1,200 = net increase of ₹850.
Items 4 and 6 are pure balance sheet errors - they mis-state debtors and creditors, not profit - because the underlying sale and purchase were already correctly recorded. A common mistake is to treat every cash book error as a profit item; the test is whether the wrong entry touched an income or expense account.
3. Evaluate the accountant's claim that 'the reconciliation statement is itself the rectification'. What is the practical consequence of leaving the ledgers uncorrected?
Read the worked answer
The statement reconciles arithmetically only because the same amounts were used, but it mixes two different things: timing differences (which resolve themselves) and errors (which never resolve themselves). Reconciliation confirms the bank balance; it does not repair the ledger.
Consequences if no entries are passed:
- Bank balance in the balance sheet is shown at ₹18,460 instead of ₹16,000 - overstated by ₹2,460.
- Sundry debtors are understated by ₹2,500 (item 4) and sundry creditors understated by ₹810 (item 6).
- Profit is understated by ₹850.
- The wrong closing balances are carried forward as next year's opening balances, so the error compounds.
- The parties' capital accounts and every ratio drawn from them are affected.
There is also a control problem: the person who maintains the cash book has prepared the reconciliation himself, so the reconciliation cannot act as an independent check. The proprietor's demand to use the cash book figure should be refused; the balance sheet must show the corrected book balance, with the reconciliation used only to explain the difference from the bank statement.