The ₹2,750 gap: Kavita's cash book versus her bank statement
Kavita runs a small stationery and photocopy shop and keeps a cash book with a bank column. On 31 March her cash book shows a bank balance of ₹46,300. The same day's bank statement shows ₹49,050. While comparing the two she finds the following: (i) cheques for ₹9,000 issued to suppliers in the last week of March were not presented for payment; (ii) a cheque for ₹7,500 deposited on 30 March was not yet credited; (iii) the bank credited ₹1,200 as interest on the savings balance, but Kavita has not recorded it; (iv) the bank charged ₹450 for cash handling and SMS alerts; (v) a customer paid ₹4,000 directly by NEFT into her account against a bill, and Kavita has not recorded it; (vi) a cheque for ₹1,500 received from a customer was returned dishonoured and Kavita has not recorded it; (vii) an insurance premium of ₹2,000 was paid by standing instruction from her account and she has not recorded it. She is convinced the bank has "eaten" her money.
1. Prepare a bank reconciliation statement as on 31 March starting from the cash book balance, and show that it agrees with the bank statement.
Read the worked answer
Approach: first correct the cash book for items the bank has already recorded and Kavita has not; then adjust for items recorded in the cash book that the bank has not yet processed.
Step 1 - start with the cash book balance (bank column, debit): ₹46,300
Step 2 - add items the bank has credited but the cash book has not:
- Interest credited by bank: ₹1,200
- NEFT received directly from customer: ₹4,000
- Sub-total: ₹46,300 + ₹5,200 = ₹51,500
Step 3 - deduct items the bank has debited but the cash book has not:
- Bank charges ₹450
- Dishonoured customer cheque ₹1,500
- Insurance premium by standing instruction ₹2,000
- Total deductions: ₹3,950
- Adjusted cash book balance: ₹51,500 − ₹3,950 = ₹47,550
Step 4 - adjust for timing differences:
- Add cheques issued but not yet presented: ₹9,000 (the bank has not yet reduced her balance, so it shows more) → ₹56,550
- Less cheques deposited but not yet credited: ₹7,500 (the bank has not yet increased her balance, so it shows less) → ₹49,050
Step 5 - conclusion: the reconciled figure equals the bank statement balance of ₹49,050. The ₹2,750 "gap" she saw is fully explained by these seven items. No money has been eaten; in fact, after recording the omissions, her true bank balance is ₹47,550, and the bank statement is ₹1,500 higher only because two cheques have not yet cleared.
2. Which of the seven items require entries in Kavita's books, and which do not? Why does the distinction matter?
Read the worked answer
Items needing entries in the cash book (the bank has acted; she has not recorded it):
- (iii) Interest ₹1,200 - debit bank, credit interest income.
- (iv) Bank charges ₹450 - debit bank charges, credit bank.
- (v) NEFT from customer ₹4,000 - debit bank, credit the customer's account (her books still show the bill unpaid).
- (vi) Dishonoured cheque ₹1,500 - reverse the earlier receipt: debit the customer, credit bank. The customer owes her again, and the bank will also charge a return fee.
- (vii) Standing instruction ₹2,000 - debit insurance premium, credit bank.
Items needing no entry (pure timing):
- (i) Cheques issued ₹9,000 not yet presented, and (ii) cheque deposited ₹7,500 not yet credited. Nothing has gone wrong; the bank simply has not processed them yet.
Why the distinction matters:
- If she does not pass entries (iii) to (vii), her cash book balance of ₹46,300 is simply wrong - it overstates or understates what she actually has. The adjusted figure, ₹47,550, is her true bank balance.
- If she were to pass entries for (i) and (ii), she would double-count: the cheques are already recorded in her cash book, and the bank will record them when they clear.
- The dishonoured cheque is a real receivable, not a timing item: if she does not record it, she will believe a customer has paid when he has not, and may supply goods on credit again.
- Regular reconciliation also catches genuine fraud or error, which is exactly what she is accusing the bank of; her own books are the first place to look.
3. What documentation and monthly practice should Kavita adopt so that this does not happen again?
Read the worked answer
Monthly routine (on a fixed date):
- Download the bank statement for the month and reconcile it with the cash book, item by item, before closing the month - not three months later.
- Record bank-initiated entries - charges, interest, standing instructions, auto-debits, NEFT/UPI receipts - on the day she sees them, so the cash book stays close to the bank record.
- Keep a cheque register with cheque number, date, party and amount, and mark off each cheque when it is presented. That makes unpresented cheques (like the ₹9,000) easy to identify and to follow up if they go stale.
- Deposit cheques early in the month and record the deposit slip number, so clearing delays do not distort the month-end.
- Follow up dishonoured cheques in writing on the same day - a polite message to the customer with the bank's return memo, and a fresh due date.
Documentation to keep: bank statements, cheque books and counterfoils, deposit slips, return memos, a receipt book or billing app, purchase invoices, and the monthly reconciliation statement signed and dated. Under GST and income-tax rules, records must be preserved for the prescribed period, and a signed BRS is strong evidence if there is ever a dispute.
Conclusion for her complaint: the ₹2,750 difference is explained entirely by her own unrecorded entries and normal clearing time. The lesson is not that the bank is dishonest, but that a shop that does not reconcile monthly is running blind on its own cash position.