The firm keeps the bank column of its cash book. The bank keeps the firm’s account in its own books and sends a copy — the pass book or bank statement. Both claim to say how much money the firm has at the bank, and on any given date they almost never agree.
Neither is wrong. They differ because the two record the same event at different moments. The firm records a cheque when it writes it; the bank records it when the supplier presents it, which may be a week later. Until then both books are right and the two figures differ.
A bank reconciliation statement starts at one figure and arrives at the other, naming every difference on the way. It is not an account and has no debit or credit sides — it is an explanation.
Two reasons, and examiners ask for both:
| Difference | Which book has it first | Effect on the pass book balance |
|---|---|---|
| Cheques issued but not yet presented | Cash book | Pass book is higher — the bank has not paid out yet |
| Cheques deposited but not yet cleared | Cash book | Pass book is lower — the bank has not collected yet |
| Bank charges and commission | Pass book | Pass book is lower — the firm has not recorded them |
| Interest credited by the bank | Pass book | Pass book is higher |
| Direct deposits by customers | Pass book | Pass book is higher |
| Standing orders paid by the bank | Pass book | Pass book is lower |
The first two are pure timing and will correct themselves without anybody doing anything — the cheque gets presented, the deposit clears. The last four are not: the bank knows something the firm does not, and the firm’s cash book is genuinely out of date until it is corrected. Section 5 returns to that distinction, and it is the one most often examined.
The firm’s cash book (bank column) shows a debit balance of 79,000 on 30 April. Six differences are found. Starting from the cash book figure, each one is added if it makes the bank’s figure larger and subtracted if it makes it smaller.
| Particulars | ₹ | Running balance (₹) |
|---|---|---|
| Balance as per cash book | 79,000 | |
| Cheques issued but not yet presented for payment | + 18,000 | 97,000 |
| Cheques deposited but not yet credited by the bank | − 12,500 | 84,500 |
| Bank charges debited by the bank, not in the cash book | − 600 | 83,900 |
| Interest credited by the bank, not in the cash book | + 1,450 | 85,350 |
| Direct payment by a customer into the bank | + 7,000 | 92,350 |
| Insurance premium paid by the bank on standing instruction | − 3,200 | 89,150 |
| Balance as per pass book | 89,150 |
Reading the six lines as reasoning rather than arithmetic:
Closing at 89,150, which is what the pass book says. The statement reconciles.
A reconciliation can start at either end, and starting at the pass book is a genuine check on the first attempt rather than a repetition of it: every sign reverses, and if the arithmetic was right you land exactly on the cash book figure.
| Particulars | ₹ |
|---|---|
| Balance as per pass book | 89,150 |
| Cheques issued but not yet presented for payment | − 18,000 |
| Cheques deposited but not yet credited by the bank | + 12,500 |
| Bank charges debited by the bank, not in the cash book | + 600 |
| Interest credited by the bank, not in the cash book | − 1,450 |
| Direct payment by a customer into the bank | − 7,000 |
| Insurance premium paid by the bank on standing instruction | + 3,200 |
| Balance as per cash book | 79,000 |
Sum of the reversed adjustments: \( -18,000 + 12,500 + 600 - 1,450 - 7,000 + 3,200 = -10,150 \), and \( 89,150 - 10,150 = 79,000 \). Back to the cash book figure, so the first statement was right.
Use this as your check in the examination. It costs two minutes and it catches the single commonest error in the topic, which is getting one sign the wrong way round.
After the statement is drawn up, the four non-timing items must be entered in the cash book, because they are real transactions the firm had simply not heard about:
| Item | Entry in the firm's books |
|---|---|
| Bank charges 600 | Debit Bank Charges A/c, credit Bank |
| Interest credited 1,450 | Debit Bank, credit Interest Received A/c |
| Direct payment by customer 7,000 | Debit Bank, credit the customer |
| Insurance paid by standing order 3,200 | Debit Insurance A/c, credit Bank |
Once those four are posted, the cash book balance moves from 79,000 to \( 79,000 - 600 + 1,450 + 7,000 - 3,200 = 83,650 \), and the only remaining differences are the two genuine timing items. A reconciliation drawn up after correcting the cash book is therefore shorter — two lines instead of six — and examiners sometimes ask for it that way, calling it the “adjusted cash book” method.
Check it: \( 83,650 + 18,000 - 12,500 = 89,150 \), the pass book figure again.
An overdraft is money the firm owes the bank. In the cash book it is a credit balance; in the pass book it is a debit balance. Everything in the statement still works, but each adjustment now moves the debt, so every sign is the opposite of what it was above.
The safe method is to carry the overdraft as a negative balance and use the same rules as before. An overdraft of ₹40,000 with cheques issued but not presented of ₹18,000 gives \( -40000 + 18000 = -22{,}000 \) — an overdraft of ₹22,000 per the pass book, smaller than the firm’s own figure, which is right: the bank has not yet paid those cheques, so it thinks the firm owes it less.
Handling the sign arithmetic this way means there is only one rule to remember instead of two, and the answer carries its own interpretation — a negative result is an overdraft.