Financial Accounting

UNIT – II
Trial Balance – Errors – Types of Errors – Rectification of Errors – Problems
– Bank Reconciliation Statement - Problems.

TRIAL BALANCE
Trial balance is a statement, prepared with the debit and credit balances of ledger
accounts to test the arithmetical accuracy of the books. If the totals of the debit and
credit amount columns of the trial balance are equal, it is presumed that the posting to
the ledger in terms of debit and credit amounts is accurate.

Features of Trial Balance

1. The Trial balance is prepared on a specific date. This is why, one use the word „as
on ...…‟ with its heading.
2. Trial balance contains the list of all ledger accounts including cash account.
3. Trial balance may be prepared with the balances or totals or balances and totals of
ledger accounts.
4. The total of the debit and credit column of the amount must be equal.
5. In case the debit and credit side of the trial balance are equal, it is presumed that
the posting to the ledger is accurate.
6. The difference between the debit and credit side of the trial balance points out that
certain mistakes have been committed somewhere.
7. If both the debit and credit sides have the same total, it does not mean that there is
no mistake in accounting.

Objectives and Functions of Trial Balance

 Test of Arithmetical Accuracy: Trial balance tests the accuracy of arithmetical
calculation. If the correct posting is made from subsidiary books to ledger accounts
(i.e. correct amount and figures have been recorded), the debit and credit total of
the trial balance must tally.
 Summarized Information of Ledger Accounts: Trial balance contains a list of all
ledger accounts. It presents the name of ledger accounts and the amount of their
debit and credit balance.
 Basis of Preparing Final Accounts: The main purpose of maintaining books of
accounts is to ascertain the result of the business in terms of profit or loss and the
value of different assets and liabilities.
 Useful for Making Adjustments: While preparing final accounts certain adjustments
regarding closing stock, outstanding and prepaid expenses, accrued an unearned
income are to be made.

Limitations of Trial Balance

It should be noted that the agreement of trial balance is not a conclusive proof of
accuracy. In other words, in spite of the agreement of the trial balance some errors
may remain. These may be of the following types:
a) Transaction has not been entered in the journal.
b) A wrong amount has been written in both columns of the journal.

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c) A wrong account has been mentioned in the journal.

d) An entry has not been posted in the ledger.
e) An entry has posted twice in the ledger.

Specimen of Trial Balance

Trial Balance of M/s …..……………….

As on ………………
Amount Amount
₹ ₹
S.No. Name of the Account L.F. (Total or (Total or
Balance) Balance)
Dr. Cr.

The under mentioned points may be noted while preparing trial balance:
1) A trial balance is prepared as on a particular date which should be mentioned at
the top.
2) In the first column, serial number is written.
3) In the second column, the name of the ledger account is written.
4) In the third column, ledger folio is written.
5) In the fourth column, the total of the debit side of the account concerned or the
debit balance is entered.
6) In the fifth column, the total of the credit side of the account concerned or the
credit balance is entered.

ERRORS – TYPES OF ERRORS

In common, the agreement of trial balance shows the accuracy of the books of
accounts. Though trial balance is tallied, but there may be certain errors which are not
disclosed by the trial balance. That is why it is also said that trial balance is not a
conclusive proof of the accuracy of the books of accounts.

Sometimes, the disagreement of the trial balance will disclose certain errors which are
to be rectified accordingly. If trial balance is not prepared correctly then the final
accounts prepared will not reflect the true and fair view of the state of affairs of the
business.

Types of Errors
There are few errors which can be disclosed and some of the errors cannot be
disclosed. Both the types of errors should be rectified to have a perfect accuracy of
accounts. All these errors can be brought under the two types as follows:
1. Errors which are disclosed by a Trial Balance.
2. Errors which are not disclosed by a Trial Balance

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(1) Errors which are Disclosed by a Trial Balance: If any error, whether clerical or
otherwise, exists in the books of account, the same will cause disagreement of a
trial balance. The disagreement of the trial balance will disclose the following
classes of errors:
(a) Wrong Posting: Posting on the wrong side of an account and posting of a wrong
amount in a ledger account will cause disagreement of trial balance.
(b) Omission of Posting: Omission of posting of an entry from the subsidiary book
will cause disagreement.
(c) Errors in Casting or Totaling: Errors in casting or totaling of subsidiary books or
accounts will cause disagreement.
(d) Errors in Balancing: If any error arises as a result of balancing of an account,
the same will cause disagreement.
(e) Double Posting: if any item is posted twice in a ledger account from a
subsidiary book, the same will create disagreement.
(f) Incomplete Double Entry: If the double entry principle is not completed i.e.
either in debit or credit side of an account, the same will invite disagreement.
(g) Balance Carried Forward Wrongly: If the debit balance of an account is shown
or posted by credit balance in the trial balance it would fail to agree. E.g. rent
account shows a debit balance as per ledger but posted on the credit side of the
trial balance.
(h) Variation in Amount: If different amounts are entered in the two different
accounts they will cause disagreement. E.g. rent account is debited by ₹500
whereas Cash account is credit by ₹50.
(i) Wrong Total in Trial Balance: If the total of both the columns of the trial
balance are not correctly added up, they will cause disagreement.

(2) Errors which are Not Disclosed by a Trial Balance: The agreement of a trial balance
is not a conclusive proof as to the absolute accuracy of the books. In spite of
agreement of trial balance, yet there may be some errors which are not disclosed
by a trial balance.
(a) Errors of Omission: When a transaction is completely omitted from being
recorded in the books of accounts then the resultant error is called error of
complete omission. For example, not recording a transaction in a subsidiary
book. This will not neither affect the debit nor credit balance.
(b) Errors of Commission: These errors are the result of some commission. They
take place during the course of recording of transactions in the books of
accounts because of the carelessness, ignorance, lack of knowledge, etc. For
example, instead of ₹800 either ₹80 or ₹8000 is recorded, in both sides of
ledger accounts.
(c) Errors of Principle: When an accounting transaction is recorded in the books of
accounts violating an accounting principle, such an error is called error of
principle. For example, ₹6550 spent on extension of building wrongly debit to
Repairs Account instead of Building Account will not affect the agreement of
the trial balance.
(d) Errors of Wrong Posting: When wrong posting is made to a wrong account
instead of current one, although amount is correctly recorded. For example,

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sold goods to B but wrongly debited to D‟s account, wherein trial balance
agrees and will not disclose this error.
(e) Compensating Errors: When an error offsets the wrong effect of an already
committed error, it is called a compensating error. The amount involved in such
errors in the same. For example, over-casting or under-casting with the similar
amount.

Location and Correction of Errors for Tallying the Trial Balance

If the trial balance does not tally, following methods should be adopted to tally it:
1. Make totals of debit and credit balances of trial balance once again.
2. If the totals of debit and credit are correct, then write the differences of these
totals separately.
3. Try to see that some balance of ledger may be equal to this difference and it
might not have been posting.
4. Divide the difference of the trial balance by two and see this amount is not
recorded in the wrong side of trial balance.
5. Make 1/9 of the total as it may be possible that zero is added or zero is left out
in some balance by mistake. If zero is added the amount will become ten times
and if zero is left out the amount will become 1/10. In such cases difference
will definitely be divisible by 9.
6. Count all the accounts ledger and see that balances of all of them have been
recorded in trial balance.
7. Check the totals and balances of all the accounts of the ledger.
8. See the balances of all accounts have included in the trial balance.
9. Check the totals of subsidiary books and have been recorded in ledger.
10. See that correct posting has been made from journal to ledger.

Problem
The following trial balance has been prepared incorrectly. You are asked to prepare
the trial balance correctly.
Heads of Accounts Dr. Cr.
Balance (₹) Balance (₹)
Bank overdraft 280 --
Cash in hand -- 40
Purchase returns 80 --
Sundry expenses 240 --
Sales returns -- 160
Salaries 160 --
Purchases 560 --
Sales -- 880
Creditors -- 240
Debtors 160 --
Stock (1.1.2008) -- 200
Plant -- 400
Capital account 440 --
1,920 1,920

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Solution Corrected Trial Balance

Heads of Accounts Dr. Cr.
Balance (₹) Balance (₹)
Bank overdraft -- 280
Cash in hand 40 --
Purchase returns -- 80
Sundry expenses 240 --
Sales returns 160 --
Salaries 160 --
Purchases 560 --
Sales -- 880
Creditors -- 240
Debtors 160 --
Stock (1.1.2008) 200 --
Plant 400 --
Capital account -- 440
1,920 1,920

Problem
A book-keeper drew-up the following Trial Balance for the year ended 31st December
2015:
Heads of Accounts L.F Dr. Cr.
Balance (₹) Balance (₹)
Capital A/c -- 30,000
Drawings A/c 5,000 --
Purchases A/c 16,000 --
Sales A/c -- 45,000
Returns Inwards A/c -- 3,000
Returns Outwards A/c 2,000 --
Carriage Inwards A/c 1,000 --
Carriage Outwards A/c -- 2,000
Bank Overdraft A/c 6,000 --
Provision for Bad Debts A/c 3,000 --
Discount Allowed A/c -- 1,000
Discount Received A/c 2,000 --
General Expenses A/c 5,000 --
Plant and Machinery A/c 10,000 --
Sundry Debtors A/c 8,000 --
Sundry Creditors A/c -- 5,000
Opening Stock A/c 4,000 --
Cash in hand A/c 8,000 --
Dividend Received A/c -- 4,000
Goodwill A/c 17,000 --
87,000 90,000
You are required to draw-up a corrected Trial Balance after transferring the errors to
Suspense Account.

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Solution Corrected Trial Balance

Heads of Accounts L.F Dr. Cr.
Balance (₹) Balance (₹)
Capital A/c -- 30,000
Drawings A/c 5,000 --
Purchases A/c 16,000 --
Sales A/c -- 45,000
Returns Inwards A/c 3,000 --
Returns Outwards A/c -- 2,000
Carriage Inwards A/c 1,000 --
Carriage Outwards A/c 2,000 --
Bank Overdraft A/c -- 6,000
Provision for Bad Debts A/c -- 3,000
Discount Allowed A/c 1,000 --
Discount Received A/c -- 2,000
General Expenses A/c 5,000 --
Plant and Machinery A/c 10,000 --
Sundry Debtors A/c 8,000 --
Sundry Creditors A/c -- 5,000
Opening Stock A/c 4,000 --
Cash in hand A/c 8,000 --
Dividend Received A/c -- 4,000
Goodwill A/c 17,000 --
Suspense A/c 17,000 --
97,000 97,000

RECTIFICATION OF ERRORS – PROBLEMS

Correction of errors in the books of accounts is not done by erasing, re-writing or
striking the figures which are incorrect. Correcting the errors that has occurred is
called „Rectification‟. Appropriate entry is passed or suitable explanatory note is
written in the respective account to neutralize the effect of errors. From the point of
rectification, errors may be classified as follows:
1. Single-sided errors are errors which affect one side of an account.
2. Double-sided errors are errors which affect both the accounts in a transaction.

Basic Principles for Rectification of Errors

All errors, whatever may be their kind or nature, result in one of the following four
positions in one or more accounts:
i. Excess Debit in One or More Accounts: This must be rectified by „crediting‟ the
excess amount to the respective account or accounts.
ii. Short Debit in One or More Accounts: This must be rectified by a „further debit‟
to the respective account or accounts involved.
iii. Excess Credit in One or More Accounts: This must be rectified by „debiting‟ the
respective account with the excess amount involved.

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iv. Short Credit in One or More Accounts: This must be rectified by a „further
credit‟ to the respective account or accounts involved.

Stages of Rectification
The stage in which rectification is done depends on identification or locating the error.
Rectification of errors may be explained in two stages:
 Rectification Before the Preparation of Trial Balance: In this stage errors are located
before transferring the difference in the trial balance to Suspense Account.
 Rectification After the Preparation of Trial Balance: In this stage, the difference in
the trial balance would have been transferred to Suspense Account. So wherever
applicable suspense account is used while passing rectification entries.

Stage at which the Errors are Manner at which the Errors are
Rectified Rectified
1) When the errors are rectified By debiting or crediting the respective
before transferring the difference account with the required amount by
in the trial balance to the suspense giving explanatory note in the particular
account. column.
2) When the errors are rectified after By writing a journal entry with
transferring the difference in the respective account or accounts affected
trial balance to the suspense A/c. by the errors and suspense account.

Rectification through Suspense Account

When the trial balance disagrees, efforts are made to locate the errors and to rectify
them. When the errors cannot be located and the preparation of final accounts is
urgent, the difference in the trial balance is made by writing it temporarily in the
smaller side of the trial balance, under the name of „Suspense Account‟.

The suspense account is only a temporary device which should not be allowed to
remain in the books for long time. In the next accounting period, attempts must be
made to discover the errors which caused the difference in the trial balance. Again, if
the credit side of the trial balance is shorter, the suspense account is credited and if the
debit side of the trial balance is shorter, the suspense account is debited.

Problem
Pass rectification entries for the following transactions:
1. A builder‟s bill for ₹4,600 for erection of small shed was debited to repairs
account.
2. A cheque for ₹750 received from Padma was credited to the account of
Parvathi.
3. Goods to the value of ₹700 returned by Williams were included in closing
stock, but not entry was in the book.
4. The Sales Day Book was overcast by ₹3000.

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Solution
Journal Entries
Particulars L.F Dr. Cr.
(₹) (₹)
Building A/c Dr. 4,600
To Repairs Account 4,600

(Being the erection of small shed wrongly

debited to Repair A/c, now rectified)
Parvathi A/c Dr. 750
To Padma A/c 750

(Being the cheque received from Padma

wrongly credited to Parvathi A/c, now
rectified)
Sales Return A/c Dr. 700
To Williams A/c 700
(Being the omitted entry for goods returned by
Williams, now recorded)
Sales A/c Dr. 3,000
To Suspense A/c 3,000
(Being the error in totaling of sales book (i.e.
overcast by ₹3000, now rectified)

Problem
The following errors were located in the books of a concern after its books were
closed and a Suspense Account was created in order to get the Trial Balance agreed.
Rectify the errors.
1. Sales Day Book was overcast by ₹200.
2. A sale of ₹500 to Xavier was wrongly debited to the Account of John.
3. Repair Expenses of ₹180 was posted as ₹810.
4. A Bill Receivable received from Poppy for ₹300 was passed through Bills
Payable Books.
5. Legal expenses of ₹900 paid to advocate Mohan was debited to his personal
account.
6. Cash received from Dhass was debited to Dasan Account for ₹150.
7. While carrying forward the total of one page of the Purchase Book to the next,
the amount of ₹2,345 was written as ₹3245.

Solution
Journal Entries
Particulars L.F Dr. Cr.
(₹) (₹)
Sales A/c Dr. 200
To Suspense Account 200
(Being overcast in Sales Day Book, now
rectified)

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Xavier Account Dr. 500

To John Account 500
(Being sales made to Xavier wrongly debited
to John, now rectified)
Suspense Account Dr. 630
To Repairs Account 630
(Being Repairs Account debit of ₹810 in place
of ₹180, now rectified)
Bill Payable A/c Dr. 300
Bills Receivable A/c Dr. 300
To Poppy A/c 600
(Being Bills Receivable passed through Bills
Payable Book, now rectified)
Legal Expenses A/c Dr. 900
To Mohan A/c 900
(Being legal expenses paid, wrongly debited to
Mohan account, now rectified)
Suspense Account Dr. 300
To Dasan Account 150
To Dhass Account 150
(Being the sales wrongly credited to Debtors
Account, now rectified)
Suspense Account Dr. 900
To Purchase Account 900
(Being excess amount of ₹900 (₹3245 –
₹2345) debited in Purchase Account, now
rectified)

Dr. Suspense Account Cr.

Particulars ₹ Particulars ₹
To Repairs A/c 630 By Difference in Trial 1,630
To Dasan A/c 150 Balance (balance figure)
To Dhass A/c 150 By Sales Account 200
To Purchase A/c 900
1,830 1,830

Problem
The Trial Balance of M/s. Sethi Brothers extracted on March 31, 2015, was ₹935 short
on the Debit side. The Book-keeper opened Suspense A/c and squared-up the Trial
Balance. An examination of the books however revealed the following errors:
1. The Dr. Discount Column in the Cash Book posted to the Rent A/c ₹15.
2. ₹150 paid to Dinesh posted to Ramesh
3. A cash purchase of ₹105 not posted in the leger.
4. A credit purchase of ₹300 from Ranjit posted as ₹30 in the ledger.

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5. A credit sale of ₹500 to Wahid entered in the Returns Outward Book.

6. Payment of Rent ₹140 debited to Landlord‟s Personal A/c.
7. Payment of ₹1,000 to Jagdish posted to his credit as ₹100.

You are required to pass the necessary rectifying journal entries. Prepare the Suspense
Account.

Solution
Rectifying Journal Entries
Particulars L.F Dr. Cr.
(₹) (₹)
Discount A/c Dr. 15
To Rent Account 15

(Rectification of posting the Discount column

to Rent Acount)
Dinesh Account Dr. 150
To Ramesh Account 150

(Rectification of payment to Dinesh posted to

Ramesh)
Purchase Account Dr. 105
To Suspense Account 105

(Rectification of Cash purchase not posted)

Suspense A/c Dr. 270
To Ranjeet A/c 270

(Rectification of wrong posting)

Returns Outward A/c Dr. 500
To Sales A/c 500

(Rectification of sale recorded in Returns

Outward Book)
Rent Account Dr. 140
To Landlord‟s Personal Account 140

(Rectification of payment of rent posted to

Landlord‟s Personal Account)
Jagdish Account Dr. 1,100
To Suspense Account 1,100

(Rectification of wrong posting of amount as

well as side)

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Dr. Suspense Account Cr.

Particulars ₹ Particulars ₹
To Difference in Books 935 By Purchases A/c 105
To Ranjeet 270 By Jagdish 1,100
1,205 1,205

BANK RECONCILIATION STATEMENT - PROBLEMS

Business concern maintains the cash book for recording cash and bank transactions.
The cash book serves the purpose of both the cash account and the bank account. It
shows the balance of both at the end of a period. Bank also maintains an account for
each customer in its book.

All deposits by the customer are recorded on the credit side of his/her account and all
withdrawals are recorded on the debit side of his/her account. A copy of this account
is regularly sent to the customer by the bank. This is called Pass Book or Bank
Statement.

To reconcile the balance of cash book and pass book a statement is prepared. This
statement is called the „Bank Reconciliation Statement‟. It can be said that, “bank
reconciliation statement is a statement prepared to reconcile the difference between
the balances as per the bank column of the cash book and pass book on any given
date”.

Features of Bank Reconciliation Statement

a. It is merely a statement not an account.
b. This is a periodical statement.
c. It is prepared on a particular day or this statement is valid for the day it is
prepared.
d. The preparation of bank reconciliation statement is not a part of the double
entry book-keeping.
e. The causes which are responsible for the disagreement of the two balances can
easily be found-out.

Importance of Bank Reconciliation Statement

Bank reconciliation statement is the basic document of the accounting needed by
every business enterprise for having check and control on its dealing with the bank. It
has got the following importance:
 Pin-Pointing Mistakes in Cash Book and Pass Book
 Identifying Delay in the Clearance of Cheques
 Check on Embezzlement
 Checking the Accuracy of Cash Book
 Techniques of Control

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In the View of Bank Pass Book: The following transactions in Bank’s Pass Book of
Mr.Sethu
1. Mr.Sethu deposited ₹8,000 with the bank to open his current account.
2. A cheque of ₹2,500 received from Shailesh was paid into bank and was duly
credited by the bank.
3. Insurance premium of ₹500 was paid by the bank on behalf of Mr.Sethu.
4. Withdrew ₹5,000 from the bank for office use.
5. A cheque of ₹1,000 was issued in favor of Surendar and the same was
presented for payment.
6. Interest on investment amounting to ₹600 was collected by the bank on behalf
of Mr.Sethu.

MR.SETHU‟S CURRENT ACCOUNT WITH BANK

Balance
Account
Dr. Cr. Dr. Amount
Date Particulars ant’s
(₹) (₹) or (₹)
Initials
Cr.
By Cash 8,000 Cr. 8,000
By Cheque (of Shailesh) 2,500 Cr. 10,500
To Insurance premium 500 Cr. 10,000
To Self 5,000 Cr. 5,000
To Cheque (to Surendar) 1,000 Cr. 4,000
By Interest on Investmnt 600 Cr. 4,600

In the above example, Mr.Sethu becomes a creditor of the bank when he deposits
money in the bank and he becomes a debtor of the bank when he withdraws money.
Similarly, he become creditor of the bank for depositing cheque in the bank and
interest on investments collected on his behalf and he becomes a debtor for drawing a
cheque on the bank and insurance premium paid by the bank on his behalf.

In the View of Cash Book: The transactions given above will be recorded in the Bank
Column of the Three Columnar Cash Book (maintained by Mr.Sethu).

IN THE BOOKS OF MR.SETHU – THREE-COLUMN CASH BOOK

Dr. RECEIPTS PAYMENTS Cr.
Date Particulars L Discount Cash Bank Date Particulars L Discount Cash Bank
F Allowed (₹) (₹) F Received (₹) (₹)
To Cash C 8000 By Bank C 8000
To Shailsh 2500 By
(cheque) Insurance 500
To Bank C 5000 By Cash C 5000
To Interest By Surndr
on Invt. 600 (cheque) 1000
By Bal c/d 4600
11100 11100

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From the above Pass book and the Cash book, we see the same balance of ₹4,600 in
the bank with a difference that in Cash book it is a debit balance whereas the same is a
credit balance in the Pass book. It is because,
 From the point of view of the Bank, Mr.Sethu is a creditor, so Pass book shows a
credit balance.
 From the point of view of Mr.Sethu, Bank is a debtor, so Cash book shows a debit
balance.

Therefore, balance as per Cash book is always reverse balance as per Pass book and
amount of the balance will be the same if all entries have been correctly recorded in
both the books.

A statement known as „Bank Reconciliation Statement‟ is, therefore, prepared usually

every month with a view to reconciling the two balances shown by the Cash book and
the Pass book on a particular date. The other important purpose of the preparation of
this statement (BRS) is to know the exact balance with the bank so that cheese might
be drawn-up to that amount if there be a need of withdrawal.

The following may be the reasons for the differences in two balances:
a) Cheques issued but not yet presented for payment.
b) Cheques paid into bank but not yet collected by the bank.
c) The bank usually makes charges for the collection of outstanding cheese and
for the various services rendered by it to the trader or account holder.
d) Interest or dividend on investments and rent on property collected by the bank
on behalf of the client.
e) Insurance premium, subscriptions to periodicals and other payments made by
the bank on behalf of the client.
f) Cheese or cash omitted to be banked.
g) Errors in totaling of the cash book, either under-casting or overcasting.
h) Cheques or Bills of Exchange dishonored
i) Payment by customers directly to the bank into businessman‟s account.
j) Wrong debit or credit given in the Pass book or in the Cash book.
k) Bills collected by the bank on behalf of the customers.

Reasons /Causes for Differences

The relationship between the customer and the banker is that of a creditor and a
debtor. So, if the bank column of the cash book shows a debit balance on a specified
date, the pass book should show an equal amount of credit balances as on that date
and vice versa. However, the balances shown by the two independent records may not
agree due to the following reasons:
1) Cheques Issued but not yet Presented for Payment
2) Cheques Presented into Bank but not yet Collected by the Bank
3) Bank Charge
4) Interest Credited by Bank but not entered in Cash Book
5) Interest or Dividend Collected by the Bank
6) Amount Directly Deposited into the Bank by Customers

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7) Payments made by the Bank on behalf of Clients

8) Bills Collected by the Bank on behalf of Customer
9) Dishonor of Bills or Cheque
10) Rebate on Retiring of Bills

Preparation of Bank Reconciliation Statement

The bank reconciliation statement is prepared usually at the end of period, i.e. a
month, a quarter, a half year or year as may be found convenient and necessary by the
business man taking into account the number of transactions involved.

FORMAT OF BANK RECONCILIATION STATEMENT

Particulars Dr. Balance as per Cr. Balance as
Cash Book per Pass Book
(or) (or)
Overdraft as per Overdraft as per
Pass Book Cash Book
1) Those items which affect the debit
side of cash book:
i) Cheque deposited but not
collected back.
ii) Cheque though entered in
Cash book but omitted to be
sent to the Bank.
2) Those items which affect the credit
side of cash book:
i) Cheque issued but not
presented for payment.
3) Those items which affect the credit
side of pass book:
i) Interest/Dividend credited by
bank.
ii) Amount deposited directly by
a customer into bank account.
iii) Cheques sent to the bank but
omitted to be entered into the
Cash book.
4) Those items which affect the debit
side of pass book:
i) Bank charges charged by bnk
ii) Interest on Overdraft.
iii) Payment made by bank on
standing instruments of
customer.

S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: [email protected] Page 14

 Financial Accounting

Problem (Starting with Debit balance as per Cash book)

On 31st December 2015, the Cash book of a firm showed a bank balance of ₹3,000.
From the following information, prepare Bank Reconciliation Statement, showing the
balance as per Pass book:
1. Cheques have been issued for ₹2,500 out of which cheques worth ₹2,000 only
were presented for payment.
2. Cheques worth ₹700 were paid on 28th December but had not been credited by
the bank. One cheque for ₹250 was entered in the Cash book on 30th December
but was banked on 3rd January 2016.
3. A cheque from Mohan for ₹200 was paid in on 26th December but was
dishonored and the advice was received on 2nd January 2016.
4. Pass book showed bank charges ₹10 debited by the bank. It also showed ₹400
collected by the bank as interest.
5. One of the debtors deposited a sum of ₹250 in the account of the firm on 20th
December. Intimation in this respect was received from the bank on 2nd
January, 2016.

Solution
Bank Reconciliation Statement
As on 31st December 2015
Particulars Plus Minus
(₹) (₹)
Dr. Balance as per Cash book 3,000
1. Cheque issued but not yet presented for payment 500
(₹2,500 – ₹2,000)
2. Cheque paid into bank but not yet credited by bank 700
3. Cheque entered in the cash book but was omitted
to be banked upto 31st December. 250
4. Cheque from Mohan paid into bank dishonored but
not yet recorded in the cash book. 200
5. Bank charges as per pass book. 10
6. Interest collected by bank not recorded in cash
book. 400
7. Amount deposited by the customer directly in the
bank not recorded in cash book. 250
4,150 1,160
Cr. Balance as per Pass book 2,990

Problem (Starting with Credit balance as per Pass book)

On 31st December 2014 the Pass book of Mr.Balaji‟s Current Account showed a credit
balance of ₹10,000. Prepare a Bank Reconciliation Statement with the following
information.
1. Mr.Balaji issued a cheque of ₹300 on 25th December, but this was not
presented for payment whereas this was twice in the Cash book.

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 Financial Accounting

2. A cheque of ₹200 drawn on his Savings deposit account has been shown as
drawn on Current account in Cash book.
3. A cheque of ₹285 issued on his Savings deposit account has been shown as
drawn on Current account in Pass book.
4. In the Pass book, a bank charge of ₹25 was recorded twice while another bank
charge of ₹17 was also not recorded in the Cash book.

Solution
Bank Reconciliation Statement
As on 31st December 2014
Particulars Plus Minus
(₹) (₹)
Credit Balance as per Pass book 10,000
1. Cheques issued but not presented and recorded
twice (₹300+₹300) 600
2. Cheque drawn on Savings bank A/c but recorded
in Current A/c 200
3. Cheque issued but recorded in cash column 285
4. Bank charges not recorded in cash book (₹25+₹25
+₹17) 67
10,352 800
Debit Balance as per Cash book 9,552

Problem
On comparing the Cash book of Mr.X Ltd. with the bank Pass book, the following
discrepancies were noted:
1. Out of ₹20,500 paid in cash and by cheese into the bank on 27th March, cheque
amounting to ₹7,500 was collected on 7th April.
2. Cheque and cash amounting to ₹4,800 were deposited in bank on 26th March
but credit was given for ₹3,800 only.
3. Out of cheques amounting to ₹7,800 drawn on 26th March a cheque for ₹2,500
was encashed on 3rd April.
4. Cheques issued to creditor amounting to ₹20,000 on 25th March of which
cheese worth ₹3,000 were presented to bank up to 31st March.
5. A cheque for ₹1,000 entered in cash book but omitted to be banked on 31 st
March.
6. A cheque for ₹600 deposited into bank but omitted to be recorded in cash book.
7. A bill receivable for ₹520 previously discounted (discount ₹20) with the bank
had been dishonored but advice was received on 1st April.
8. A bill for ₹10,000 was retired by the bank under a rebate of ₹150 but the full
amount of the bill was credited in the bank column on the cash book.
9. A cheque of ₹1,080 credited in the pass book on 28th March being dishonored
is debited again in the pass book on 1st April. There was no entry in the cash
book about dishonor of the cheque until 15th April.

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 Financial Accounting

Prepare a Bank Reconciliation Statement as at 31st March, if the balance as per Cash
book was ₹39,770.

Solution
Bank Reconciliation Statement
As on 31st March 2015
Particulars Plus Minus
(₹) (₹)
Balance as per Cash book 39,770
th
1. Cheque deposited on 27 March but not yet
collected till 31st March. 7,500
2. Cheque deposited on 26th March but not yet
collected till 31st March. 1,000
3. Cheques issued on 26th March but not yet
presented for payment till 31st March. 2,500
4. Cheques issued on 25th March but not yet
presented for payment till 31st March. 17,000
5. A cheque entered in cash book but yet banked. 1,000
6. A cheque deposited into bank but not yet entered
in cash book. 600
7. Discounted B/R dishonored, not yet entered in cash
book. 520
8. Rebate on bill not entered in cash book. 150
60,020 10,020
Balance as per Pass book 50,000
Note:
A cheque of ₹1,080 credited in Pass book on March 28, later debited in Pass book on
1st April has no effect on Bank Reconciliation Statement as at 31.03.2015

Bank Overdraft
Until now we are assuming that Cash book shows a debit balance or Pass book a
credit balance, i.e. bank owes amount to the trader. But sometimes Cash book may
show a credit balance or Pass book a debit balance. What does it mean? By this we
mean that the trader owes this amount to the bank, i.e. he has drawn more amount than
his balance in the bank. Such a balance is technically known as „Bank Overdraft’.

Therefore, two separate columns are prepared; one for recording plus items and the
other for minus items. If the total of minus items exceeds the total of plus items, the
result is minus and is bank Overdraft as per Cash book or Pass book as the case may
be.

On the other hand, if the total of plus items, exceeds that of minus items, the result is
plus and is a balance in favor of the trader.

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 Financial Accounting

Illustration
The cash book of a Trader showed a credit balance of ₹875 on 31st December 2016.
On verification with the Bank pass book it was found that:
1. A cheque for ₹300 dishonored was not entered in the cash book.
2. Bank charges amounting to ₹10 were not recorded through the cash book.
3. There was a wrong credit of ₹750 in the cash book.
4. Cheque for ₹850 paid into a bank on 31st December had not been entered in the
pass book.
5. Interest amounting to ₹970 was recorded by the bank and entered only in the
pass book.
6. A cheque for ₹250 was paid into the bank for collection but the cash book
showed no entry for it.
Prepare a Bank Reconciliation Statement as on 31st December 2016.

Solution Bank Reconciliation Statement

As on 31st December 2016
Particulars Plus (₹) Minus (₹)
Credit Balance as per Cash Book/ Overdraft as per Cash 875
Book
1. Cheque dishonored was not entered in the Cash 300
book 10
2. Bank charges not recorded in Cash book 750
3. Wrong credit in the Cash book
4. Cheque paid into the bank had not been entered in
the Pass book.
5. Interest was recorded by the bank and entered only 970
in the Pass book.
6. Cheque paid into the bank had not been entered in 250
the Cash book. 1,970 1,185
Debit Balance / Overdraft as per Pass book 785

Problem
On checking Ram‟s Cash book with the Bank statement of his Overdraft Current
account for the month of November, 2015, you find the following:
1. Cash book showed an overdraft of ₹4,500.
2. The payment side of the Cash book had been under-cast by ₹150.
3. A cheque for ₹750 drawn on his Savings account has been shown as drawn on
Current account.
4. Cheques amounting to ₹7,000 drawn and entered in the Cash book had not yet
been presented.
5. Cheques amounting to ₹6,000 sent to the bank for collection, though entered in
the Cash book, had not been credited by the bank.
6. Bank charges of ₹75 as per Bank statement had not been taken into the Cash
book.
7. Dividends of the amount of ₹2,500 had been paid direct into the bank and not
entered in the Cash book.

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 Financial Accounting

You are required to prepare a Bank Reconciliation Statement as on 30th Nov, 2014.

Solution Bank Reconciliation Statement

As on 30th November 2014
Particulars Plus Minus
(₹) (₹)
Overdraft as per Cash book 4,500
1. Payment side of cash book is under-casted 150
2. Cheque drawn on Savings account wrongly shown
as drawn on Current account. 750
3. Cheque issued but not yet presented for payment. 7,000
4. Cheese paid into bank but not yet credited 6,000
5. Bank charges not entered in cash book. 75
6. Direct payment of Dividend into bank 2,500
10,250 10,725
Overdraft as per Pass book 475

Problem
From the following information supplied by Gokul, prepare his Bank Reconciliation
Statement as on 31st March 2015. ₹
1. Bank overdraft as per Pass book 16,500
2. Cheques issued but not presented for payment 8,750
3. Cheques deposited with bank but not collected 10,500
4. Cheques recorded in the Cash book but not sent to bank for colln. 2,000
5. Payments received from customers directly by bank 3,500
6. Bank charges debited in Pass book 20
7. Premium on life policy of Gokul paid by the bank on standing advice 180
8. A bill for ₹3,000 (discounted with the bank in November) dishonored
on 31-03-2015, and noting charges paid by the bank 10

Solution Bank Reconciliation Statement

As on 31st March 2015
Particulars Plus Items Minus Items
(₹) (₹)
Bank Overdraft as per Pass Book 16,500
1. Cheques issued but not presented for payment. 8,750
2. Cheques deposited but not yet collected. 10,500
3. Cheques recorded in the Cash book but omitted
to be banked. 2,000
4. Direct payment by the customers into bank. 3,500
5. Bank charges 20
6. Life policy premium paid by bank 180
7. Dishonored bill, including noting charges. 3,010
15,710 28,750
Overdraft as per Cash Book 13,040

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 Financial Accounting

Text Book and References

1. S.P.Jain and K.L.Narang, Financial Accounting, Kalyani Publishers, New
Delhi, 3rd Revised Edition, 2008.
2. Grewal T.S, 2009. Double Entry Book Keeping. Sultan Chand and Sons, New
Delhi, 6th Edition.
3. Shukla and Grewal, 1997. Advanced Accountancy. Sultan Chand and Sons,
New Delhi, 13th Edition.

S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: [email protected] Page 20