Kavitha Traders: Reconciling a Cash Book That Will Not Agree With the Pass Book
Kavitha runs a textile wholesale business in Coimbatore. On 31 March 2024 the bank column of her cash book showed a debit balance of ₹42,600, while the pass book issued by the bank showed a different figure. Investigation on 2 April 2024 revealed the following. (i) Cheques for ₹9,400 deposited on 28 and 29 March had not been credited by the bank. (ii) Cheques for ₹6,850 issued to suppliers were still unpresented. (iii) The bank had debited ₹370 as charges and credited ₹1,150 as interest, neither of which had been entered in the cash book. (iv) A debtor had deposited ₹5,000 directly into the bank on 25 March; Kavitha learnt of it only from the pass book. (v) A customer's cheque for ₹3,200 was dishonoured by the bank on 28 March, but the intimation reached her on 3 April and nothing had been recorded. (vi) A cheque for ₹1,800 issued to a supplier on 20 March had been entered twice in the cash book. Kavitha wants a statement explaining the difference, and wants to know which items must be entered in her own books before the accounts are finalised.
1. Prepare a bank reconciliation statement as on 31 March 2024 starting from the cash book balance, and state the balance as per the pass book.
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Bank Reconciliation Statement as on 31 March 2024
| Particulars | ₹ | ₹ |
|---|---|---|
| Balance as per cash book (Dr) | 42,600 | |
| Add: Interest credited by bank only | 1,150 | |
| Add: Direct deposit by debtor not recorded | 5,000 | |
| Add: Cheque entered twice in cash book (credited ₹3,600 instead of ₹1,800) | 1,800 | |
| Add: Cheques issued but not yet presented | 6,850 | |
| 57,400 | ||
| Less: Bank charges debited by bank only | 370 | |
| Less: Cheque dishonoured on 28 March (bank has already debited) | 3,200 | |
| Less: Cheques deposited but not yet credited | 9,400 | 12,970 |
| Balance as per pass book (Cr) | 44,430 |
Reasoning: a debit balance in the cash book is a positive balance at the bank, so the statement begins there. Items the bank has already acted on but the books have not (interest, direct deposit, charges, dishonour) must be added to or deducted from the book balance to reach the bank's figure; so must the book error. Items the bank has not yet acted on are purely timing: unpresented cheques make the pass book higher, deposits in transit make it lower. The offsetting items total ₹27,770, although the net difference is only ₹1,830.
2. Which of the six items require entries in Kavitha's cash book, and which do not? Give the correcting entry for the cheque recorded twice.
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Entries are needed where the books are wrong or incomplete, not where the bank is merely slow.
Require entries: (iii) Bank charges ₹370: debit bank charges, credit bank column. Interest ₹1,150: debit bank column, credit interest received. (iv) Debit bank column ₹5,000, credit the debtor's account - the debtor has discharged his debt and his account must show nil. (v) On 3 April, when intimation is received, debit the customer ₹3,200 and credit the bank column; the cheque is no longer an asset. (vi) The cheque was credited as ₹3,600 instead of ₹1,800, so the bank column is short by ₹1,800: debit the bank column ₹1,800 and credit the supplier's personal account ₹1,800 (he was also debited twice).
No entries required: (i) and (ii) are timing differences that the bank will clear in April; they appear in the reconciliation only.
Judgement point: if the accounts are finalised after 3 April and the dishonour is entered, item (v) drops out of the reconciliation altogether and the cash book balance becomes ₹39,400. The statement must therefore be dated and prepared from the cash book as it stands, not from a half-corrected one.
3. Kavitha argues that the net difference of ₹1,830 is trivial against turnover of ₹60 lakh and that the reconciliation can be skipped. Evaluate this view and state what a reader of the accounts loses if she is right.
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The argument confuses the size of the net difference with the size of the risk. The net figure of ₹1,830 is the residue of seven items worth ₹27,770 that move the balance in opposite directions; a large error and a large offsetting error can produce a tiny net difference.
What is hidden inside the ₹1,830: (a) ₹6,850 of cheques issued but unpresented, which may be stale and require reissue, with a risk of duplicate payment or a lapsed liability; (b) ₹9,400 of deposits not yet credited, which may be lost in transit or held up for a technical reason; (c) ₹3,200 owed by a customer whose cheque bounced, an amount still shown as a bank balance and therefore overstated; (d) recurring errors of ₹370 and ₹1,150 that will repeat every quarter. The true bank position is ₹44,430, not ₹42,600 - if she writes cheques on the strength of ₹42,600 she may overdraw.
A reconciliation is also the only independent check on the completeness of cash receipts; without it, unrecorded direct deposits or unrecorded charges go undetected and the books lose credibility with the auditor and the bank.