Bank Reconciliation Statement and Rectification of Errors
What the domain tests
This domain tests preparation of a bank reconciliation statement and correction of accounting errors. You must explain why cash book and pass book balances differ and pass rectification entries, including through a suspense account.
Core rules
- The cash book is the firm's record; the pass book is the bank's record. Differences arise from timing and from errors.
- Timing items: cheques issued but not presented, cheques deposited but not credited, standing orders, direct collections, bank charges and interest.
- Starting from a cash book debit balance: add cheques issued but not presented, direct credits by the bank and interest allowed; deduct cheques deposited but not credited, bank charges, interest charged and direct debits.
- Rectify errors of omission, commission, principle, original entry and compensating errors.
- One-sided errors are corrected through the suspense account; two-sided errors affect two accounts.
- A suspense account is opened when the trial balance does not agree and is closed after rectification.
Worked example
Cash book shows a debit balance of Rs. 10,000. Cheques issued Rs. 2,000 are not presented, and bank charges Rs. 100 are not entered in the cash book. Balance as per pass book = 10,000 + 2,000 - 100 = Rs. 11,900. The bank has not yet reduced its balance for the unpresented cheque, so the pass book is higher by Rs. 2,000. The bank has charged Rs. 100, so the pass book is lower by that amount. If cheques deposited but not credited were Rs. 1,500, deduct that as well.
Traps
Do not add unpresented cheques when starting from the pass book; do not omit bank charges; do not treat a timing difference as an error; and do not use suspense for errors that affect two accounts.