Why the Cash Book and Pass Book Disagree at Ravi Traders
On 31 March 2024 the cash book of Ravi Traders, Madurai, showed a debit balance of ₹18,450, while the bank pass book showed a credit balance of ₹17,200. Ravi could not understand why the two balances differed. On investigation he found: (i) cheques for ₹6,200 deposited on 29 March were not yet credited by the bank; (ii) cheques for ₹4,500 issued to suppliers were not yet presented; (iii) bank charges of ₹350 appeared only in the pass book; (iv) a customer had directly deposited ₹2,000 into the bank, of which Ravi had no information; (v) a cheque for ₹1,800 deposited earlier was dishonoured and returned, but no entry was made in the cash book; (vi) the bank had credited interest of ₹600, not yet entered in the cash book. Ravi wants to prepare a bank reconciliation statement and also wants to know whether he can treat the ₹4,500 cheques as 'paid' in his books.
1. Prepare a bank reconciliation statement starting with the cash book balance and reconcile it with the pass book balance.
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A debit balance in the cash book means money at bank. A credit balance in the pass book also means money at bank, because the bank owes the customer. To move from the cash book to the pass book:
| Bank Reconciliation Statement as on 31 March 2024 | ₹ |
|---|---|
| Balance as per cash book (Dr) | 18,450 |
| Add: Cheques issued but not presented | 4,500 |
| Add: Customer's direct deposit not entered in cash book | 2,000 |
| Add: Interest credited by bank not entered in cash book | 600 |
| Less: Cheques deposited but not yet credited | (6,200) |
| Less: Bank charges not entered in cash book | (350) |
| Less: Cheque dishonoured, no entry in cash book | (1,800) |
| Balance as per pass book (Cr) | 17,200 |
Reasoning for each line: cheques issued reduce the cash book at once but reduce the pass book only when presented, so they are added back. A direct deposit and interest increase the pass book before the cash book, so they are added. Cheques deposited increase the cash book but not yet the pass book, so they are deducted. Bank charges and dishonour reduce the pass book before the cash book, so they are deducted.
2. Explain how the dishonoured cheque and the direct deposit should be treated, and state the journal entries Ravi must pass.
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The dishonoured cheque is not a fresh expense. When Ravi deposited it, he debited Bank and credited the customer. The bank has now reversed the credit, so Ravi must reverse his earlier entry: debit the customer's account and credit Bank with ₹1,800. The customer again becomes a debtor. The direct deposit is the opposite case: the bank has received money from a customer before Ravi recorded it. Ravi must debit Bank and credit the customer's account with ₹2,000, because the customer's balance has been settled. Bank charges of ₹350 require debit Bank Charges and credit Bank. Interest of ₹600 requires debit Bank and credit Interest Received. These entries bring the cash book into line with the bank's records before the BRS is prepared; the BRS itself is a statement, not a journal entry.
3. The ₹4,500 cheque issued in March is presented in April. Should Ravi treat it as payment in March? Explain with reference to the BRS.
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Yes, Ravi should treat it as a payment in March in his own books, because the cheque was issued and the liability settled in March. That is why the cash book balance is already reduced by ₹4,500. The bank has not yet paid it, so the pass book has not been reduced; this is exactly why the item is added in the BRS. The BRS explains a timing difference, not an error. If the cheque is later dishonoured, then the original payment entry must be reversed. Ravi should not delay recording the payment until presentation, because that would mix up two different dates and understate his March payments.