Selvam's Madurai Hardware Shop: A Reconciliation That Will Not Tally
Selvam runs a hardware shop in Madurai. On 31 March 2025 the bank column of his cash book shows a debit balance of ₹42,600, but the bank statement for the same date shows a different figure. He finds the following: (i) cheques for ₹18,000 deposited on 29 March had not been credited by the bank; one cheque of ₹6,000 within that lot was returned dishonoured on 2 April 2025; (ii) cheques for ₹23,500 issued to suppliers were still unpresented; (iii) bank charges of ₹450 appear only in the bank statement, Selvam recording them on 3 April; (iv) the bank credited ₹1,200 as interest, not yet entered in the cash book; (v) a customer deposited ₹8,000 directly into the bank, intimation reaching Selvam on 4 April; (vi) the bank paid an insurance premium of ₹2,000 under a standing instruction, unrecorded in the cash book; (vii) a cheque of ₹9,000 issued to a supplier was entered in the cash book as ₹900. Selvam wants one statement that explains the whole gap and shows the balance as per the pass book.
1. Prepare a bank reconciliation statement as on 31 March 2025 starting from the cash book balance, and state the balance as per the pass book.
Read the worked answer
Start from the cash book debit (favourable) balance and adjust for every item the bank has recorded differently.
| Particulars | Add ₹ | Less ₹ |
|---|---|---|
| Balance as per cash book (Dr) | 42,600 (starting point) | |
| (ii) Cheques issued but not yet presented - bank has not yet reduced its balance | 23,500 | |
| (iv) Interest credited by bank, not in cash book | 1,200 | |
| (v) Customer's direct deposit, not in cash book | 8,000 | |
| (i) Cheques deposited but not yet credited | 18,000 | |
| (iii) Bank charges debited by bank only | 450 | |
| (vi) Insurance premium paid by bank under standing instruction | 2,000 | |
| (vii) Cheque for ₹9,000 entered as ₹900 - cash book has under-credited the bank by ₹8,100 | 8,100 | |
| Totals | 32,700 | 28,550 |
Balance as per pass book = 42,600 + 32,700 – 28,550 = ₹46,750 credit (favourable).
Logic check: items that make the bank's record higher than the cash book are added (unpresented cheques, bank credits not yet entered); items that make the bank's record lower are deducted (deposits not yet credited, bank debits not yet entered, and the ₹8,100 understatement). The arithmetic difference of ₹4,150 between the two records is fully explained, so the statement reconciles without a plug figure.
2. Explain how the dishonoured cheque of ₹6,000 and the cheque recorded as ₹900 are to be treated, and why no separate adjustment is needed for the first.
Read the worked answer
The ₹6,000 dishonoured cheque needs no separate line. On 31 March it was already part of the ₹18,000 of deposits that the bank had not credited. When a deposited cheque bounces, the bank simply never credits the amount (or reverses a provisional credit), so on the reconciliation date its effect is identical to a cheque still in clearing. It is already inside the ₹18,000 deduction; deducting ₹6,000 again would double-count the item and the statement would not reconcile. The date of intimation (2 April) is irrelevant for a 31 March statement - reconciliation is a position as on a date, not a record of when the trader learnt of the event. (If the cheque had been credited by the bank before 31 March and then reversed after that date, it would need a separate line - the facts here do not support that.)
The ₹900 error is a genuine cash book mistake. A cheque of ₹9,000 was written and entered as ₹900, so the cash book has reduced the bank balance by only ₹900 instead of ₹9,000. The bank, when the cheque is presented, will reduce it by the full ₹9,000. Until then the pass book stands ₹8,100 higher than the cash book, so ₹8,100 is deducted in the reconciliation. The permanent cure is to correct the cash book itself: Bank A/c Dr ₹8,100; To Supplier's A/c ₹8,100, after which the reconciliation line disappears and only timing differences remain.
3. If the cash book had instead shown an overdraft of ₹42,600 on 31 March 2025 with all other facts unchanged, what would the pass book balance be? Show the direction of each adjustment.
Read the worked answer
With an overdraft the starting figure is negative (a credit balance in the cash book), and every adjustment works in the opposite direction to the favourable case, because the same item that pushed the bank's balance above the cash book now pushes it further below.
| Particulars | ₹ |
|---|---|
| Balance as per cash book (overdraft) | (42,600) |
| Less: cheques issued but not presented | (23,500) |
| Less: interest credited by bank | (1,200) |
| Less: customer's direct deposit | (8,000) |
| Add: cheques deposited but not credited | 18,000 |
| Add: bank charges | 450 |
| Add: insurance premium under standing instruction | 2,000 |
| Add: cheque under-recorded (9,000 – 900) | 8,100 |
| Balance as per pass book | (46,750) = overdraft ₹46,750 |
So the pass book would show an overdraft of ₹46,750.
Why the symmetry works: in the first case the cash book was ₹42,600 in credit at the bank and the net adjustments were +₹4,150; here the cash book is overdrawn by ₹42,600 and the same net adjustments move it a further ₹4,150 into overdraft. A useful check is that the reconciliation performs identically whether the opening figure is favourable or an overdraft - only the sign and the add/less columns swap. Writing 'Cr' or 'overdraft' explicitly prevents the common error of reporting an overdraft as a positive bank balance.