Bank Reconciliation Statement and Rectification of Errors
Two linked skills are tested: proving the bank balance by explaining timing differences, and correcting entries using the Suspense account only where a one-sided error exists.
Bank reconciliation
Cash book (bank column) and passbook differ because of timing and because the bank records items the firm has not yet entered:
- Cheques deposited but not yet credited.
- Cheques issued but not yet presented.
- Bank charges, commission, interest on overdraft, standing instructions and direct debits.
- Interest allowed and amounts credited directly by debtors.
- Dishonour of a cheque previously deposited.
Starting from the cash book debit balance: add cheques deposited not credited and interest allowed; deduct cheques issued not presented, bank charges and direct debits.
Worked example
Cash book shows ₹18,000 debit. A cheque of ₹4,000 deposited is not credited; a cheque of ₹2,500 issued is not presented; bank charges ₹150; interest allowed ₹500. Balance as per passbook = 18,000 + 4,000 − 2,500 − 150 + 500 = ₹19,850 credit.
Rectification
- Errors of omission (complete or partial), commission, principle, and compensating errors.
- One-sided errors are corrected in the account concerned, or through Suspense A/c if a trial balance was already prepared.
- Example: furniture ₹20,000 wrongly debited to Purchases. Both are debits, so the trial balance agrees; rectify with Furniture A/c Dr 20,000 To Purchases A/c 20,000.
Traps
- Adding a cheque issued but not presented instead of deducting it.
- Treating an overdraft as a debit balance in the cash book.
- Routing a two-sided error through Suspense A/c, which is reserved for one-sided errors.