Reconciling a Cash Book That Already Disagrees with the Bank Statement
On 31 March 2024 the bank column of M/s Agarwal Traders' cash book showed a debit balance of ₹18,600, while the bank statement showed a credit balance of ₹27,650. The proprietor has listed eight differences but is unsure which belong in the cash book and which belong only in the reconciliation. Cheques deposited ₹7,900 have not yet been credited by the bank, and cheques issued ₹3,200 have not been presented. The bank charged ₹450, a customer deposited ₹4,500 directly, and a customer's cheque of ₹1,800 was dishonoured without any entry in the cash book. A standing order for insurance ₹2,000 was paid by the bank. The bank wrongly credited the firm's account with ₹1,500, and a cheque for ₹2,600 issued to a creditor was entered twice in the cash book. The proprietor wants to leave the cash book untouched and simply adjust the pass book balance in the BRS.
1. Prepare a bank reconciliation statement after making the necessary cash book adjustments. Show clearly which items correct the cash book and which are timing differences.
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Items known only from the bank statement must first be recorded in the cash book: bank charges ₹450, direct deposit ₹4,500, dishonoured cheque ₹1,800, standing order ₹2,000, wrong credit by the bank ₹1,500, and the cheque entered twice ₹2,600. The last item means the cash book has an extra credit of ₹2,600, so its debit balance is understated and ₹2,600 must be added back.
Adjusted cash book balance: ₹18,600 + ₹4,500 + ₹1,500 + ₹2,600 − ₹450 − ₹1,800 − ₹2,000 = ₹22,950 debit.
BRS starting from the adjusted cash book: Balance as per adjusted cash book: ₹22,950 Dr Add: cheques deposited but not credited: ₹7,900 Less: cheques issued but not presented: ₹3,200 Balance as per pass book: ₹27,650 Cr
This agrees with the bank statement. The two timing differences, ₹7,900 and ₹3,200, do not require any entry in the cash book; they reverse on their own when the bank clears the cheques.
2. The proprietor says that because the pass book already shows ₹27,650, the cash book need not be corrected. Explain why this reasoning is wrong and state the bank balance that should appear in the balance sheet.
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The BRS explains the difference between two records; it does not replace either record. The cash book is the firm's ledger and contains errors and omissions that must be corrected before the accounts are finalised. If the cash book is left at ₹18,600, the bank balance in the balance sheet will be understated by the net effect of the unrecorded items.
Net cash book adjustment = +₹4,500 + ₹1,500 + ₹2,600 − ₹450 − ₹1,800 − ₹2,000 = +₹4,350. Correct cash book balance = ₹18,600 + ₹4,350 = ₹22,950.
The balance sheet should show bank ₹22,950, assuming there is no overdraft. The figure ₹27,650 is the bank's records, not the firm's corrected ledger balance. Ignoring the corrections would also hide the dishonoured cheque and the bank charges from the profit calculation.
3. Suppose the dishonoured cheque of ₹1,800 had already been recorded in the cash book before 31 March. How would the reconciliation change?
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The dishonoured cheque would no longer be a reconciling item, because both the cash book and the bank statement would already reflect it. The opening cash book balance would be ₹1,800 lower, at ₹16,800, and the adjustment list would not include the ₹1,800 deduction.
Revised adjusted cash book = ₹16,800 + ₹4,500 + ₹1,500 + ₹2,600 − ₹450 − ₹2,000 = ₹22,950.
BRS = ₹22,950 + ₹7,900 − ₹3,200 = ₹27,650 Cr.
The final reconciled pass book balance is unchanged. What changes is only the point at which the item was recorded. This shows that a BRS is a statement of timing and errors, not a set of extra entries to be forced into the cash book.