Meera Traders: unreconciled cash book and pass book at year end
Meera Traders is a small hardware wholesaler in Cuttack. On 31 March 2025 its cash book showed a debit balance of ₹18,640 in the bank column, while the bank statement showed a credit balance of ₹21,930. The accountant, who joined in January, has never prepared a reconciliation and insists the two figures 'must be wrong' because they do not agree. On enquiry you gather the following. Cheques for ₹5,820 deposited on 29 and 30 March had not yet been credited. Cheques for ₹3,450 issued to suppliers were still unpresented. The bank had debited ₹280 as charges and credited ₹940 as interest, neither entered in the cash book. A customer's cheque for ₹1,500 was dishonoured and returned by the bank, but the cash book was not updated. Another customer deposited ₹2,000 directly into the bank account, also unrecorded. Finally, a cheque of ₹2,700 issued to a supplier on 18 March was entered in the bank column as ₹7,200. The proprietor wants to know which balance is correct and whether the books can be closed on time.
1. Prepare the reconciliation and determine the correct bank balance as per the firm's own books. Show the treatment of the ₹2,700 cheque error.
Read the worked answer
Step 1 – Classify the items. Only the ₹5,820 (deposits not credited) and ₹3,450 (cheques not presented) are timing differences; they belong in the statement. Charges, interest, the direct deposit and the dishonour are entries the bank has already made, so they must first be written into the cash book. The ₹2,700 cheque is different again: the supplier's account was correctly credited with ₹2,700, but the bank column was credited with ₹7,200. This is a one-sided error that makes the trial balance disagree, so it needs a suspense entry - not a place in the reconciliation statement.
Step 2 – Rectify the error. Bank column is understated by ₹4,500 (7,200 − 2,700):
Bank A/c Dr 4,500 To Suspense A/c 4,500
Step 3 – Amended cash book (bank column).
| Particulars | ₹ |
|---|---|
| Balance b/d (Dr) | 18,640 |
| Add: transposition correction | 4,500 |
| Add: interest credited by bank | 940 |
| Add: direct deposit by customer | 2,000 |
| Less: bank charges | (280) |
| Less: dishonoured cheque | (1,500) |
| Balance c/d (Dr) | 24,300 |
Step 4 – Reconciliation.
Balance as per cash book (Dr) 24,300 Add: cheques issued but not presented 3,450 Less: cheques deposited but not credited (5,820) Balance as per pass book (Cr) 21,930 ✔
The two statements now agree exactly, which confirms that every difference has been identified.
2. Which figure should the proprietor treat as 'the money we have' and why? Explain what a favourable pass book balance actually means.
Read the worked answer
Three different numbers are in play and each answers a different question.
- ₹18,640 is simply wrong; it is the residue of an uncorrected book-keeping error and must not be reported.
- ₹24,300 (Dr) is the corrected book balance - the firm's own record of what it has received and paid. It is the figure for the balance sheet: 'Bank' under current assets at ₹24,300, along with the ₹4,500 suspense adjustment closed off.
- ₹21,930 (Cr in the pass book) is the bank's record. A credit balance in the pass book is favourable - it means the bank owes the customer that amount. It is lower than ₹24,300 only because ₹5,820 of deposited cheques have not yet cleared while ₹3,450 of issued cheques have not yet been debited.
For cash planning the proprietor should use ₹24,300 less the ₹3,450 of cheques already handed out but not yet cleared - a spendable figure of about ₹20,850 - because those cheques may be presented at any moment. The pass book cannot be used for planning, since the bank may debit unpresented cheques at any time.
Note also that the ₹1,500 dishonour does not simply vanish: the firm must recover it, so the entry is Bank A/c Cr ₹1,500 and the customer's personal account Dr ₹1,500.
3. The proprietor asks whether the reconciliation is itself a journal entry and whether the books can be closed without resolving all the items. Advise.
Read the worked answer
A bank reconciliation statement is a statement, not a book of entry. It creates no ledger account, is not posted anywhere, and forms no part of the double-entry system. It is a working paper that the auditor uses as evidence for the bank balance.
The items split into two legal categories, and that decides what must be done before the accounts are closed:
- Items already in the books but not in the bank's record (timing differences) - the ₹5,820 and ₹3,450. No entry is possible, because the firm has already recorded them correctly. They are simply disclosed; no adjustment is made. Books can be closed.
- Items the bank has recorded but the books have not - charges ₹280, interest ₹940, direct deposit ₹2,000, dishonour ₹1,500. These must be journalised and posted before the trial balance is drawn up, otherwise the bank balance and profit are wrong (charges and the dishonour reduce profit; interest increases it).
- A book error (₹4,500) - must be rectified, and the suspense account must stand at nil before the accounts are finalised.
So the answer to the proprietor is: yes, the accounts can be closed, provided categories 2 and 3 are passed through the ledger first. Only the timing differences may be left unresolved.
Practical advice: prepare the reconciliation every month, not annually. Two months of unexamined differences produced one transposition error and five unrecorded bank entries - precisely the pattern that fraud and stale cheques hide in. Also fix responsibility: the person who writes cheques should not be the person who prepares the reconciliation.