Brief Idea on Business Reconciliation Statement
Before we dive into the topic, let us quickly see what a bank reconciliation statement is and how a cash book is related to back reconciliation. Cashbook is a bank is a book that keeps an account of all my cash transactions which is to be maintained by you. Bank statements are any statements finalized by the bank.
For example, if we deposit 1000 rupees in a bank and withdraw 600 rupees from the deposit, then the bank will show a balance of 400 rupees. This is a bank statement. Now if the bank states that there are 300 rupees in my account, then what will you do? You have to find where there has been a mistake. You may have made a mistake, either in transactions, or to calculate the total. The bank may also make a mistake. On checking all the facts in your cash book, you may find that you may have made a mistake for which the mismatch has occurred. Finding this out is the process of bank reconciliation statements.
Cash Book and Pass Book
This bank reconciliation statement may be done without updating the cash book, like or with updating/ revising/ adjusting/ amending the cash book. This chapter is all about bank reconciliation statements with amendments. But before you dig further into the amending part, let us quickly go through two very common concepts that we usually come across while speaking of any bank statements:
Cash Book - Cash Book is a cash account maintained by me keeping a record of all transactions made by me in a bank.
Passbook - Passbook is a bankbook given by the bank and maintained by the bank which is issued to me.
So what are the differences we find in the cash book and passbook? The first one is that the cash book is maintained by you while the bank maintains the passbook. A closer look at the definitions will point out another difference that is since all the transactions, as well as the calculations in a cash book, are maintained by you in your cash book, hence it should not contain any errors which are made by the bank.
In other words, the bank is considered error-free in maintaining all the records. On the other hand, since a passbook is maintained by the bank, any error in that is caused by an error made by the bank only. We are going to study the former in detail.
Making Amendments (Debit and Credit)
Suppose you are depositing 1000 rupees in a bank, then that 1000 rupees is your asset, and the bank is supposed to return you the money when you close the account, so that is the liabilities of the bank. So, when you are adding some amount of money to the bank, then this is your debit. So, debit in cash book is positive.
This same money becomes a credit to the bank as it can utilize the amount, so the credit of the passbook is positive. When you are withdrawing some amount of money, it becomes a debt to your bank as its liabilities have decreased and which becomes your credit as that amount comes to your hand and is not your asset in the bank anymore. So, to sum things up now:
In Cash Book:
Debit means positive.
Credit means negative.
In Passbook:
Debit is negative.
Credit is positive.
Amendments in Cash Book
With adjustment of Bank Reconciliation Statement, amendments are made in the cash book only under the assumption that no changes are made due to any errors in the passbook because it is assumed that the bank cannot make a mistake as stated earlier.
So, you will not correct the passbook but rather will correct only the cash book. Now, let us look at the procedure to prepare a bank reconciliation statement with the revised cash book.
Steps to Make Amendments in Pass Book:
Draw up a cash book.
Make the necessary entries in the cash book:
For amounts recorded in the passbook while not entered in the cash book.
For amounts wrongly debited or credited in the passbook.
After all required adjustments, calculate the balance amount of cash.
Now, prepare Bank Reconciliation Statement (BRS), leaving those items which have been considered in the cash books.
Important Points for Solving Problems
A few of the most important points while solving out real-life problems are:
You have to note the deposits, withdrawn, any transaction not entered, wrongly credited, problems with dates, interest period, and rates, there may be other human errors also.
No error of the passbook is not to be considered for adjusting the cash book.
Items correctly entered in the cash book are not to be considered for adjusting the cash book.
FAQs on Cash Book Amendments Explained
1. What is an Amended or Adjusted Cash Book in accounting?
An Amended or Adjusted Cash Book is a cash book that has been updated with entries that were previously omitted or incorrectly recorded by the business. It is prepared before creating the Bank Reconciliation Statement (BRS). The main purpose is to correct the cash book's balance for items like bank charges, interest credited by the bank, or dishonoured cheques, which are known only after reviewing the bank statement.
2. Why is preparing an Amended Cash Book important before making a Bank Reconciliation Statement?
Preparing an Amended Cash Book is crucial because it helps determine the true and corrected cash balance of the business. The Bank Reconciliation Statement is meant to explain the difference between this corrected cash balance and the bank statement balance. By first amending the cash book, you eliminate all errors and omissions from your own records, making the final reconciliation process much simpler. The BRS then only needs to account for timing differences (like unpresented cheques) and any errors made by the bank.
3. What types of transactions are recorded in an Amended Cash Book?
An Amended Cash Book exclusively records transactions that have appeared in the bank passbook but have been missed or omitted from the original cash book. These typically include:
- Bank Charges: Fees deducted by the bank for its services.
- Interest Credited/Debited: Interest earned or paid, as reflected in the bank statement.
- Direct Deposits: Payments made directly into the company's account by its customers.
- Direct Payments by Bank: Payments for standing instructions or direct debits made by the bank.
- Dishonoured Cheques: Cheques that were previously deposited but have bounced.
4. How does an Amended Cash Book differ from a standard Bank Reconciliation Statement (BRS)?
The key difference lies in their purpose and role in accounting:
- The Amended Cash Book is a part of the primary books of account. Its purpose is to correct the business's own records for any internal errors and omissions to arrive at the correct cash balance.
- The Bank Reconciliation Statement (BRS) is a separate memorandum statement, not part of the double-entry system. Its purpose is to explain the discrepancy between the now-corrected cash book balance and the bank statement balance.
5. What is a common misconception when preparing an Amended Cash Book?
A very common misconception is to include timing differences, such as 'cheques issued but not yet presented for payment,' in the Amended Cash Book. This is incorrect. The Amended Cash Book should only be used to correct for errors and omissions in the business's own records (e.g., bank charges you forgot to enter). Timing differences are not errors; they are valid transactions that are simply in transit. These items belong exclusively in the Bank Reconciliation Statement itself.
6. Can you explain the process for preparing an Amended Cash Book with an example?
Certainly. The process involves updating the existing cash book balance. Imagine your cash book shows a bank balance of ₹20,000. Your bank statement reveals a bank charge of ₹200 and a direct deposit from a customer of ₹5,000 that you had not recorded.
The steps are:
1. Start with the unadjusted balance as per your cash book (₹20,000).
2. Debit the cash book for receipts missed: Add the ₹5,000 direct deposit.
3. Credit the cash book for payments missed: Subtract the ₹200 bank charge.
4. Calculate the new, adjusted balance: ₹20,000 + ₹5,000 - ₹200 = ₹24,800. This is your corrected cash book balance to be used for the BRS.
7. What are the main types of Cash Books that students learn about in Commerce?
In accounting, students typically learn about four main types of cash books, each serving a different purpose:
- Single Column Cash Book: The simplest form, it records only cash receipts and payments.
- Double Column Cash Book: Features two amount columns on each side to record cash and discount transactions simultaneously.
- Triple Column Cash Book: The most comprehensive type, with three columns for cash, bank, and discount transactions.
- Petty Cash Book: A special journal used to record minor, day-to-day expenditures like postage, stationery, and small travel expenses.
