Reconciling an Overdraft When the Bank Has Recorded Items the Cash Book Has Not
On 31 March 2024 the cash book of M/s Kiran Enterprises showed an overdraft of ₹9,600. The bank pass book showed a different balance. The following were discovered: (i) cheques deposited but not credited by the bank ₹7,400; (ii) cheques issued but not presented for payment ₹10,200; (iii) bank charges ₹480 not entered in the cash book; (iv) a customer directly deposited ₹3,500 into the bank, with no cash book entry; (v) a standing instruction for insurance premium ₹1,200 was paid by the bank; (vi) bank credited interest ₹600, not recorded in the cash book; (vii) a customer's cheque for ₹2,000 was dishonoured, but the cash book has no entry for dishonour. The proprietor cannot understand why the two balances differ when all transactions are believed to be recorded. He asks for a reconciliation and for the treatment of the direct deposit and the dishonoured cheque.
1. Prepare a Bank Reconciliation Statement starting from the cash book overdraft and find the pass book balance.
Read the worked answer
Start with the cash book overdraft of ₹9,600. Because it is an overdraft, items that make the bank balance lower increase the overdraft, and items that make the bank balance higher reduce it.
| Particulars | ₹ |
|---|---|
| Cash book overdraft | 9,600 |
| Add: cheques deposited but not credited | 7,400 |
| Add: bank charges not in cash book | 480 |
| Add: standing instruction paid by bank | 1,200 |
| Add: dishonoured cheque not recorded | 2,000 |
| Less: cheques issued but not presented | (10,200) |
| Less: direct deposit by customer | (3,500) |
| Less: interest credited by bank | (600) |
| Pass book overdraft | 6,380 |
The pass book shows an overdraft of ₹6,380.
2. Explain why the direct deposit and the dishonoured cheque are treated differently, and state the cash book adjustment needed for each.
Read the worked answer
A direct deposit is a receipt the bank has recorded but the cash book has not. The cash book must be updated by debiting Bank and crediting the customer by ₹3,500. In the reconciliation prepared before that adjustment, it reduces the overdraft because the bank balance is higher than the cash book shows.
A dishonoured cheque is the opposite: the bank had earlier credited the cheque but has now reversed it, while the cash book still treats it as received. The cash book must be updated by debiting the customer and crediting Bank by ₹2,000. In the reconciliation before adjustment, it increases the overdraft because the bank balance is lower than the cash book shows. Both are correction items in the cash book, not errors by the bank.