BINAYAK ACADEMY,

Gandhi Nagar 1st Line, Near NCC Office,

Berhampur
Bank Reconciliation Statement
The balance of the bank column in the double or triple column cash book represents the
customers cash balance at bank. It should be the same as shown by his bank pass book
on any particular day. For every entry made in the cash book if there is a corresponding
entry in the pass book(maintained by the banker) or vice versa, the bank balance will be
the same in both the books.
However, it must be noted that the cash book and the pass book are maintained by two
different parties and hence it is not certain that entry in one book will always have a
corresponding entry in the other.
Normally entries in the cash book should tally (agree) with those in the pass book and the
balances shown by both the books should be the same. But in practice, the balances
generally differ. In case of disagreement in the balance of the cash book and the pass
book, the need for preparing Bank Reconciliation Statement arises.
Definition
Bank reconciliation statement is a list in which the various items that cause a
difference between bank balance as per cash book and pass book on any given date are
indicated.
Need and Importance
After tracing the various items of difference, a bank reconciliation statement is prepared.
The following are its advantages in which lies its importance.
i. The errors that might have taken place in the cash book in connection with bank
transactions can be easily found.
ii. Regular preparation of bank reconciliation statement prevents frauds.
iii. It indirectly imposes moral check on the accounting staff.
iv. By the preparation of bank reconciliation statement, uncredited cheque can be
detected and steps can be taken for their collection.
Causes of disagreement between the balance shown by the cash book and the
balance shown by the pass book
1. Cheques paid into bank but not yet collected
The cheques paid into bank for collection but not credited into the account of the
customer, because the cheque is
i. Not collected and credited till that date.
ii. Collected but the bank staff has forgotten to make entry.
iii. Collected but credited to wrong account.
iv. Dishonoured.
v. Collected for No.I account but credited to No.II account of the same customer.
As soon as the cheques are sent to the bank, entries are made in the debit side of the
cash book (bank column). But, usually bank credit the customers account only when they
have received payment from the bank concerned, in other words, when the cheques have
been collected.
Hence, there will be a time gap between the depositing of the cheques and the collection
by the bank.
For example, Bharat Company Limited deposited a cheque on March 28, 2003 for a sum of
Rs.3,000. The cheque was collected on April 4, 2003. In case the bank sends a statement
of account upto March 31, 2003, there will be a difference of Rs 3,000 between the
balance shown by the cash book and the pass book.
2. Cheques issued but not yet presented for payment
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BINAYAK ACADEMY,
Gandhi Nagar 1st Line, Near NCC Office,
Berhampur
The cheques issued but not debited customers account may be because the cheque is
i. not cashed till date.
ii. not presented till date.
iii. presented but dishonoured for some reasons or other.
iv. lost by the party to whom the cheque was issued.
v. cashed out of No.I account but wrongly debited to No.II account of the same
customer.
In all of the above cases, the entry in the cash book is made immediately on the issue of
cheque but naturally the entry will be made by bank only when the cheque is presented
for payment. Thus there will be a gap of some days between the entry for issue of cheque
in the cash book and the entry for payment made in the pass book.
For example, Bharat Company Limited issued a cheque in favour of Mr.Krishna on March
28, 2003 for a sum of Rs.5,000. The cheque is presented for payment at the bank on April
4, 2003. In case, bank sends a statement of account upto March 31, 2003, there will be a
difference of Rs.5,000 between the balance as shown by the cash book and the balance as
shown by the pass book.
3. Amount credited by the banker in the pass book without the immediate
knowledge of the customer
The following are some of the examples for the above statement
i. The bank might have collected rent, dividend, bills of exchange, interest etc., due for the
customer as per standing instructions.
ii. Some debtors might have directly paid into bank.
iii. Bank credits interest on the credit balance of the customers account.
iv. The banker has wrongly credited this account instead of some other account.
In all the above cases, the entry will be first entered in the pass book. The customer will
know this only after he verifies the entries in the pass book. So there may be a time gap of
some days before the customer includes entries made in the pass book.
For example, the bank has credited Bharat Company Limiteds account for interest
amounting to Rs.500 on March 31, 2003. The bank prepares and sends a statement of
account on March 31, 2003.
If the customer receives the statement of account on April 4, 2003, there will be a
difference of Rs 500 bewteen the balance shown by the cash book and the balance shown
by the pass book.
4. Amounts debited by the banker in the pass book without the immediate
knowledge of the customer
The following are some of the examples for this.
i. The banker has recorded bank charges, interest on overdraft etc.
ii. The banker has paid insurance premium, subscription for periodicals, etc. on behalf of
the customer as per the standing instructions.
iii. The banker has wrongly debited this account instead of some other account.
iv. The banker has paid the bills payable of the customer as per standing instructions.
v. Dishonour of a cheque deposited and discounted bills receivable
In all the above cases, the entry will be first entered in the pass book of the customer. And
the customer will know only after he verifies the entries in the pass book or statement of
account. So there may be a time gap of some days before the customer includes the
entries made in the pass book.
For example, the bank has debited Bharat Company Limiteds account for its charges
amounting to Rs. 250 on March 31, 2003. In case, the bank sends a statement of account
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BINAYAK ACADEMY,
Gandhi Nagar 1st Line, Near NCC Office,
Berhampur
upto March 31, 2003, there will be a difference of Rs.250 between the balance as per the
cash book and the balance as per the pass book.
For example, A cheque for Rs.5,000 dishonoured on March 28, 2003. In case, the bank
sends a statement of account upto March 31, 2003 there will be a difference of Rs.5,000
between the balance as shown by the cash book and the balance as shown by the pass
book.
After tracing the various items of differences, a Bank reconciliation statement is prepared
by starting with the balance shown by any of the two books. But in actual practice, a Bank
reconciliation statement is prepared by the customer starting with the balance as per cash
book and will ensure that the balance as per pass book is arrived at.
Bank overdraft is an amount drawn over and above the actual balance kept in the bank
account. This facility is available only to the current account holders. Interest will be
charged for the amount overdrawn i.e., overdraft. The Cash book will show a credit
balance i.e., unfavourable balance. The pass book will show a debit balance.

Reasons of difference between cash book & pass book balance:

Cheque issued but not presented for payment: When cheque are issued then
immediately make entry in the cash book. The cheque issued can be presented for
payment to the bank within six month from the date of cheque as per banking law. The
cheques are presented for payment after the expensesiry of the above period then
payment is refused by the bank. This cheque is also known as stale cheque. It is
possible at the time when the balances of the two books are being compared, thus more
chances of causing a disagreement b/w the two balances.

Cheque paid into the bank but not yet cleared: As soon as the cheques are
deposited into the bank, the immediately entry is passed in the cash book. This will make
entry in pass book only when cheques are cleared. It is possible at the time when the
balances of the two books are being compared, thus more chances of causing a
disagreement b/w the two balances.

Interest allowed by the bank: Bank might have credited the account of the
customer with the interest and may have made the entry in the pass book. It is possible
that the entry of such interest may not have been made by the customer in the cash book,
thus causing a disagreement b/w the two balances.

Interest and Bank charges debited by bank: Sometime bank charges interest
from the customer then immediately entry in the pass book but not in cash book. So, in
this case when check the balance b/w cash and bank book then disagreement b/w the two
balances. So, it is the main reason to create difference b/w two books.

Interest, dividend collected by the bank: sometime interest on government

security or dividend on share is collected by the bank and is credited to customer account.
If the entry does not appear in the cash book then balance will differ.

Direct payment by bank: Sometimes, understanding instruction from the clients

certain payment like insurance premium, club fees instalment etc. are made by the
bank. Then this entry is recorded only in the pass book. This entry is made in the cash
book only when the necessary intimation to that effect is received from the bank by the
client. The entries in the cash and pass book may be on different dates.
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BINAYAK ACADEMY,
Gandhi Nagar 1st Line, Near NCC Office,
Berhampur

Direct payment into the bank by a customer: Sometimes, our customer

deposit money direct into the account in the bank. It is only recorded in the pass book not
in the cash book. It is possible at the time when the balances of the two books are being
compared, thus more chances of causing a disagreement b/w the two balances.

Dishonour of bill discounted with the bank: Sometimes, customer gets their
bills discounted with the bank. If the bank is not able to get payment of these bills on the
due date. It will debit the customer account with the amount of the bills together with the
nothing charges if any. The customer will pass the entry in the cash book only. When
balances of the two books are being compared, thus more chances of causing a
disagreement b/w the two balances.

Dishonour of cheque: When the received cheques are deposited into bank, these
are immediately recorded in the cash book. As a result cash book balance is increased. But
the deposited cheque is dishonoured due to lack of funds or due to other reasons. Bank
does not credit the amount of the depositor; as a result disagreement b/w the two
balances.

Error and omissions: If any error is committed either by the bank or by a

customer in the cash book while recording a transaction in their respective books, it
causing a disagreement b/w the two balances. the error may be:
1.

Undercast/overcast of receipt side or payment side.

2.
3.

Bank charges omitted from the banks or recorded twice in the books.
Wrong carry forward of cash book balance.
Format
The format of Bank Reconciliation Statement when bank balance as per cash book is taken
as the starting point.
Bank Reconciliation Statement as on ..
Particulars

Amoun
t

Amount
`

`
A

Balance as per Cash Book

Add: Cheques issued but not presented for payment

***

Interest credited by bank but not recorded in cash book

***

Debtors directly paid into bank but not recorded in cash

book

***

Wrong credit by banker

***

Collections by banker as per customer standing

***

***
***

BINAYAK ACADEMY,
Gandhi Nagar 1st Line, Near NCC Office,
Berhampur
D instructions

***
Total (B)

***

(Total A + B)
Less: Cheques deposited but not credited by the bank

***

Dishonoured cheques appeared in the pass book but not

entered in the cash book

***

Bank charges as per pass book

***

Wrong debit by banker

E

***
***
***

Payments as per standing instructions

Total (D)
Balance as per pass book ( C- D )

Accounting Concepts and Conventions

ACCOUNTING CONCEPT
Accounting Concept defines the assumptions on the basis of which Financial
Statements of a business entity are prepared. Certain concepts are received assumed and
accepted in accounting to provide a unifying structure and internal logic to accounting
process. The word concept means idea or nation, which has universal application.
Financial transactions are interpreted in the light of the concepts, which govern accounting
methods. Concepts are those basis assumption and conditions, which form the basis upon
which the accountancy has been laid. Unlike physical science, Accounting concepts are
only results of broad consensus. These accounting concepts lay the foundation on the
basis of which the accounting principles are formulated.
Now we shall study in detail the various concepts on which accounting is based.
The following are the widely accepted accounting concepts.
1)
Entity Concept:- Entity Concept says that business enterprises is a separate
identity apart from its owner. Business transactions are recorded in the business books of
accounts and owners transactions in this personal back of accounts. The concept of
accounting entity for every business or what is to be excluded from the business books.
Therefore, whenever business received cash from the proprietor, cash a/c is debited as
business received cash and capital/c is credited. So the concept of separate entity is
applicable to all forms of business organization.
2)
Money Measurement Concept:- As per this concept, only those transactions,
which can be measured in terms of money are recorded. Since money in the medium of
exchange and the standard of economic value, this concept requires that these
transactions alone that are capable of being measured in terms of money be only to be
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BINAYAK ACADEMY,
Gandhi Nagar 1st Line, Near NCC Office,
Berhampur
recorded in the books of accounts. For example, health condition of the chairman of the
company, working conditions of the workers, sale policy ect. do not find place in
accounting because it is not measured in terms of money.
3)
Cost Concept:- By this concept, the value of assets is to be determined on the
basic of historical cost. Transactions are entered in the books of accounts at the amount
actually involved. For example a machine purchased for Rs. 80000 and may consider it
worth Rs. 100000, But the entry in the books of account will be made with Rs. 80000 or
the amount actually paid. The cost concept does not mean that the assets will always be
shown at cost. The assets may be recorded at the time of purchase but it may be reduced
its value be charging depreciation.
Many assets de not have acquisition cost. Human assets of an enterprise are an
example. The cost concept fails to recognize such assets although it is a very important
asset of any organization.
4)
Going Concern Concept:- According to this concept the financial statements are
normally prepared on the assumption that an enterprises is a going concern and will
continue in operation for the foreseeable future. Transaction are therefore recorded in
such a manner that the benefits likely to accrue in future from money spent. It is because
of this concept that fixed assets are recorded at their original cost and depreciation in a
systematic manner without reference to their current realizable value.
5)
Dual aspect Concept:- This concept is the care of double entry book-keeping.
Every transaction or event has two aspect. If any event occurs, it is bound to have two
effect. For Rs.50000, on the other hand stock will increase by Rs.50000 and other liability
will increase by Rs.50000. similarly is X starts a business with a capital of Rs. 50000, while
on the other hand the business has to pay Rs. 50000 to the proprietor which is taken as
proprietors Capital.
6)
Realization Concept: - It closely follows the cost concept any change in value of
assets is to be recorded only when the business realize it. i.e. either cash has been
received or a legal obligation to pay has been assumed by the customer. No Sale can be
said to have taken place and no profit can be said to have arisen. It prevents business firm
from inflating their profit by recording sale and income that are likely to accrue, i.e.
expensesected income or gain are not recorded.
7)
Accrual Concept:- Under accrual concept the effect of transaction and other
events are recognized on mercantile basic. When they accrue and not as cash or a cash
equivalent is received or paid and they are recorded in the accounting record and reported
in the financial statements of the periods to which they relate financial statement
prepared on the accrual basic inform users not only of past events involving the payment
and receipt of cash but also of obligation to pay cash in the future and of resources that
represent cash to be received in the future. For Example:- Mr. Raj buy clothing of Rs.
50000,a paying cash Rs. 20000 and sells at Rs. 60000 of which customer paid only Rs.
40000. So his revenue is Rs. 60000, not Rs. 40000 cash received. Expenses. Or Cash is Rs.
50000, not Rs. 20000 cash paid. So the accrual concept based profit is Rs. 10000
(Revenue- Expenses.)
8)
Accounting Period Concept:- This is also called the concept of definite periodicity
concept as per going concept on indefinite life of the entity is assumed for a business
entity it causes inconvenience to measure performance achieved by the entity in the
ordinary causes of business. Therefore, a small but workable fraction of time is chosen out
of infinite life cycle of the business entity for measure the performance and loading at the
financial position 12 months period is normally adopted for this purpose accounting to this
concept accounts should be prepared after every period & not t the end of the life of the
entity. Usually this period is one calendar year. In India we follow from 1 st April of a year to
31st March of the immediately following years. Now a day because of the need of
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BINAYAK ACADEMY,
Gandhi Nagar 1st Line, Near NCC Office,
Berhampur
management, final accounts are prepared at shorter intervals of quarter year or in some
cases a month such accounts are know an interim account.
9)
Matching Concept:- In this concept, all expenses. Matched with the revenue of
that period should only be taken into consideration. In the financial statements of the
organization. If any revenue is recognized that expenses. Related to earn that revenue
should also be recognized. This concept as it considers the occurrence of expenses. And
income and do not concentrate on actual inflow or outflow of cash. This leads to
adjustment of certain items like prepaid and outstanding expenses, unearned or accrued
income.
It is not necessary that every expenses. Identity every income. Some expenses are
directly related to the revenue and some are directly related to sale but rent, salaries etc.
are recorded on accrual basis for a particular accounting period. In other words periodicity
concept has also been followed while applying matching concept.
10)
Objective Concept:- As per this concept, all accounting must be based on
objective evidence. In other words, the transactions recorded should be supported by
verifiable documents. Only than auditors can verify information record as true or
otherwise. The evidence should not be biased. It is for this reasons that assets are
recorded at historical cost and shown thereafter at historical lass depreciation. If the
assets are shown on replacement cost basis, the objectivity is lost and it become difficult
for auditors to verify such value, however, in resent year replacement cost are used for
specific purpose as only they represent relevant costs. For example, to find out intrinsic
value of share, we need replacement cost of assets and not the historical cost of the
assets.
ACCOUNTING CONVENTIONS
The term Accounting Conventions refers to the customs or traditions which are
used as a guide in the preparation of accounting reports and statements. The conventions
are derived by usage and practice. The accountancy bodies of the world may charge any
of the convention to improve the quality of accounting information accounting conventions
need not have universal application. Following are important accounting conventions in
use:
1)
Convention of consistency:- According to this convention the accounting
practices should remain unchanged from one period to another. It requires that working
rules once chosen should not be changed arbitrarily and without notice of the effect of
change to those who use the accounts. For example, stock should be valued in the same
manner every year. Similarly depreciation is charged on fixed assets on the same method
year after year. If this assumption is not followed, the fact should be disclosed together
with reasons.
The principle of consistency plays its role particularly when alternative accounting
methods is equally acceptable. Any change from one method to another method would
result in inconsistency; they may seem to be inconsistent apparently. In case of valuation
of stocks if the company applies the principle at cost or market price whichever is less
and if this principle accordingly result in the valuation of stock in one year at cost and the
market price in the other year, there is no inconsistency here. It is only an application of
the principle.
An Enterprise should change its accounting policy in any of the following circumstances
only.
(i) To bring the books of accounts in accordance with the issued accounting
standard.
(ii) To compliance with the provision of law.
(iii) When under changed circumstances it is felt that new method will reflect more
true and fair picture in the financial statement.
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BINAYAK ACADEMY,
Gandhi Nagar 1st Line, Near NCC Office,
Berhampur
2)
Convention of Conservatism:- This is the policy of playing sale game. It takes
into consideration all prospective losses but leaves all prospective profits financial
statements are usually drawn up on a conservative basis anticipated profit are ignored but
anticipated losses are taken into account while drawing the statements following are the
examples of the application of the convention of conservatism.
(i)
Making the provision for doubtful debts and discount on debtors.
(ii) Valuation of the stock at cost price or market price whichever is less.
(iii) Charging of small capital items, like crockery to revenue.
(iv) Showing joint life policy at surrender value as against the actual amount paid.
(v) Not providing for discount on creditors.
3)
Convention of Disclosure:- Apart from statutory requirement, good accounting
practice also demands that significant information should be disclosed in financial
statements. Such disclosures can also be made through footnotes. The purpose of this
convention is to communicate all material and relevant facts concerning financial position
and results of operations to the users. The contents of balance sheet and profit and loss
account are prescribed by law. These are designed to make disclosures of all materials
facts compulsory. The practice of appending notes relative to various facts and items
which do not find place in accounting statements is in pursuance to the convention of full
disclosure of material facts. For example;
(a) Contingent liability appearing as a note.
(b) Market value of investments appearing as a note.
The convention of disclosure also applies to events occurring after the balance
sheet date and the date on which the financial statement are authorized for issue. Such
events include bad debts, destruction of plant and equipment due to natural calamities,
major acquisition of another enterprises, etc. such events are likely to have a substantial
influence on the earnings and financial position of the enterprises. Their not-disclosure
would affect the ability of the users for evaluations and decisions.
4)
Convention of Materiality:- According to this conventions, the accountant should
attach importance to material detail and ignore insignificant details in the financial
statement. In materiality principle, all the items having significant economics effect on the
business of the enterprises should be disclosed in the financial statement.
The term materiality is the subjective term. It is on the judgment, common sense
and discretion of the accountant that which item is material and which is not. For example
stationery purchased by the organization though not used fully in the concept. Similarly
depreciation small items like books, calculator is taken as 100% in the year if purchase
through used by company for more than one year. This is because the amount of books or
calculator is very small to be shown in the balance sheet. It is the assets of the company.