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:
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Cash Book – Cash Book is a cash account maintained by me keeping a record of all transactions made by me in a bank.
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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:
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Debit means positive.
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Credit means negative.
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Debit is negative.
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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:
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For amounts recorded in the passbook while not entered in the cash book.
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For amounts wrongly debited or credited in the passbook.
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After all required adjustments, calculate the balance amount of cash.
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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:
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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.
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No error of the passbook is not to be considered for adjusting the cash book.
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Items correctly entered in the cash book are not to be considered for adjusting the cash book.