Six Differences and a Balance Sheet Figure: Reconciling Sai Traders
On 31 March 2025 the bank column of M/s Sai Traders' cash book, kept on the three-column system, shows a debit balance of Rs 18,450. The pass book obtained on 4 April shows a credit balance that the proprietor, Mr Venkat, cannot reconcile with his books. His clerk lists six differences: (i) cheques for Rs 6,200 deposited on 28 March were credited by the bank only on 3 April; (ii) cheques for Rs 3,400 issued to suppliers on 27 March were still unpresented on 31 March; (iii) bank charges of Rs 250 debited by the bank on 31 March appear nowhere in the cash book; (iv) a customer paid Rs 5,000 directly into the firm's account on 30 March and the firm came to know of it on 5 April; (v) a standing instruction for an insurance premium of Rs 1,200 was debited by the bank on 31 March; (vi) a cheque for Rs 2,000 deposited on 25 March was returned dishonoured on 30 March, which the bank debited at once but the firm recorded only on 3 April. The year-end accounts are being finalised and Mr Venkat wants the bank figure settled today.
1. Prepare a bank reconciliation statement as on 31 March 2025 starting from the cash book balance, and state the pass book balance. Show clearly why each item is added or deducted.
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Principle to hold on to: both balances describe one asset from opposite sides. The cash book debit balance is what the firm believes it has; the pass book credit balance is what the bank believes it owes. An item makes the pass book higher when the firm has already reduced its own figure but the bank has not yet paid, or when the bank has credited the firm without the firm recording it. It makes the pass book lower when the firm has already added money the bank has not yet collected, or the bank has debited something the firm has not recorded.
| Particulars | Rs |
|---|---|
| Balance as per cash book (Dr) | 18,450 |
| Add: cheques issued but not yet presented (ii) | 3,400 |
| Add: customer's direct deposit not yet recorded (iv) | 5,000 |
| Less: cheques deposited but not yet credited (i) | (6,200) |
| Less: bank charges not recorded (iii) | (250) |
| Less: insurance premium under standing instruction (v) | (1,200) |
| Less: dishonoured cheque debited by bank, not yet recorded (vi) | (2,000) |
| Balance as per pass book (Cr) | 17,200 |
Cross-check by the adjusted cash book route: 18,450 + 5,000 − 250 − 1,200 − 2,000 = 20,000; then 20,000 − 6,200 + 3,400 = 17,200. Both routes agree, so the reconciliation is reliable. Common error to avoid: adding the Rs 6,200 deposit because it is 'our money'. It is our money, but the bank has not yet collected it, so at 31 March the pass book is lower, not higher.
2. Classify the six items into (a) those that require an entry in the firm's own books and (b) pure timing differences needing no entry. State the test you used, and explain why no entry is passed for a cheque deposited but not yet credited.
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The test: ask who has acted. If the bank has recorded an event that the firm has not recorded and will never otherwise record, the firm's books are incomplete and need an entry. If both parties have recorded the same event but at different dates, it is a timing difference and needs no entry at all.
Need an entry in the cash book (bank column): (iii) bank charges Rs 250; (iv) direct deposit Rs 5,000; (v) insurance premium Rs 1,200; (vi) dishonoured cheque Rs 2,000. For (iii) and (v) the firm has no other way of learning of the debit; for (iv) the firm would otherwise never record the receipt; for (vi) the asset no longer exists once the cheque is returned, so keeping it in the books overstates the bank balance.
Timing differences, no entry: (i) cheques deposited Rs 6,200 and (ii) cheques issued Rs 3,400. The firm has already debited and credited its cash book correctly on the dates of deposit and issue. The bank will catch up within days. Passing an entry for a deposit in transit would double-count the receipt when the bank finally credits it, and reversing it later only creates work and a second chance of error.
Nuance on (vi): if the dishonour memo genuinely reached the firm on 3 April, a formalist may say the March cash book is not wrong. But the cheque was returned on 30 March, so the firm's claim on the bank had already failed at the reporting date; prudence requires the entry for March. The reconciliation must include it either way.
3. Mr Venkat wants the balance sheet to show the pass book figure of Rs 17,200 because 'the bank's record is the truth'. His accountant wants Rs 18,450 because 'that is our cash book'. Evaluate both and recommend the figure, with reasons.
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Both figures are wrong, for opposite reasons.
Pass book Rs 17,200 is understated. It omits Rs 6,200 of cheques already deposited and merely awaiting collection. That is a real claim on the bank at 31 March, an asset. The bank's silence is a delay in its records, not evidence that the money has gone. It also nets off nothing improperly on the other side, but the deposit-in-transit point alone disqualifies it as a balance sheet figure.
Cash book Rs 18,450 is overstated. It has not absorbed bank charges of Rs 250, the insurance premium of Rs 1,200 and the dishonoured cheque of Rs 2,000, all of which had already reduced the firm's claim on the bank by 31 March. Ignoring them flatters profit and the asset.
Recommended figure: the adjusted cash book, Rs 20,000 (18,450 + 5,000 − 250 − 1,200 − 2,000). This is the amount the firm is entitled to after recording everything the bank has already done, while still recognising the Rs 6,200 receivable from the bank and the Rs 3,400 of cheques not yet presented (already deducted in the books and therefore properly excluded). The balance sheet is prepared from the firm's books after correct adjustment; the pass book is a corroborating document, not a substitute ledger. If the dishonour memo arrived only after the accounts were approved, treat it as an adjusting event relating to a condition existing at 31 March and still adjust.