Preparation of BRS (given cash book/pass book balance) MCQs Quiz | Class 10

Understanding the Bank Reconciliation Statement (BRS)

The Bank Reconciliation Statement (BRS) is a crucial tool in accounting, typically prepared by businesses to reconcile the differences between the bank balance shown in their Cash Book and the balance shown in the bank’s Pass Book (or bank statement) on a specific date. These differences arise due to various reasons, primarily timing issues, errors by either the bank or the business, and transactions recorded by one party but not yet by the other.

Why Reconcile?

• Accuracy Check: Ensures both the Cash Book and Pass Book balances are accurate.
• Error Detection: Helps identify errors made by the firm or the bank.
• Fraud Prevention: Can expose fraudulent activities.
• Complete Records: Ensures all bank transactions are properly recorded in the firm’s books.

Common Reasons for Differences:

1. Timing Differences:

• Cheques Issued but Not Presented: The firm records these cheques in the Cash Book immediately, reducing the balance. The bank, however, only records them when they are presented for payment, so the Pass Book balance remains higher until then.
• Cheques Deposited but Not Cleared/Credited: The firm records these deposits in the Cash Book, increasing the balance. The bank credits the account only after the cheques are cleared, which takes time. Thus, the Pass Book balance remains lower.
• Direct Deposits by Customers: Customers sometimes directly deposit money into the firm’s bank account. The Pass Book shows this increase immediately, but the Cash Book only records it once the firm is informed.
• Bank Interest/Dividends Collected: The bank may collect interest or dividends on behalf of the firm and credit the account. The Pass Book shows this increase, but the Cash Book is updated only upon notification.

2. Transactions Recorded by Bank, Not by Firm:

• Bank Charges/Commission: The bank charges for services (e.g., ATM charges, cheque book issuance, ledger folio charges). These are debited in the Pass Book first, reducing the balance. The Cash Book is updated only when the firm receives the bank statement.
• Interest on Overdraft: If the firm has an overdraft, the bank charges interest. This is debited in the Pass Book, reducing the balance. The Cash Book is updated later.
• Direct Payments by Bank: The bank might make payments on behalf of the firm (e.g., insurance premiums, loan installments) based on standing instructions. The Pass Book reflects these debits immediately.

3. Errors:

• Errors in Cash Book: Mistakes made by the firm in recording transactions (e.g., wrong amount, omission, double entry).
• Errors in Pass Book: Mistakes made by the bank (less common but can occur).

Preparing the BRS: Starting from Either Balance

The BRS can be prepared by taking either the Cash Book balance or the Pass Book balance as a starting point. The goal is to arrive at the other balance by systematically adjusting for all differences.

Key Rule of Thumb for Adjustments:

When adjusting the starting balance (Cash Book or Pass Book) to reach the other balance:

• If the starting balance is higher than the target balance due to an item, subtract that item.
• If the starting balance is lower than the target balance due to an item, add that item.

Example: Starting with Favorable Cash Book Balance to arrive at Pass Book Balance

Note: The adjustments reverse if you start with Pass Book balance to arrive at Cash Book balance, or if you are dealing with overdraft balances.

Quick Revision Points:

• BRS explains differences between Cash Book and Pass Book.
• Cheques issued but not presented: Add to Cash Book (if starting with Cash Book favorable balance).
• Cheques deposited but not cleared: Subtract from Cash Book (if starting with Cash Book favorable balance).
• Bank charges/Interest on overdraft: Subtract from Cash Book (if starting with Cash Book favorable balance).
• Interest/Dividends collected by bank or direct deposits: Add to Cash Book (if starting with Cash Book favorable balance).
• Errors require careful analysis to determine the correct adjustment.
• Overdraft balances reverse the normal addition/subtraction rules.

Practice Questions:

1. A cheque for Rs. 2,000 was deposited into the bank but was dishonored. It was recorded in the Cash Book. If you start your BRS with a debit balance as per Cash Book, how will you treat this item to arrive at the Pass Book balance?
2. The bank credited interest on fixed deposit amounting to Rs. 500, which was not recorded in the Cash Book. If you start the BRS with an overdraft balance as per Pass Book, how will this item be adjusted?
3. Cheques worth Rs. 15,000 were issued in December but only Rs. 10,000 were presented for payment by 31st December. If starting with a credit balance (overdraft) as per Cash Book, what adjustment is needed for the unpresented cheques to arrive at the Pass Book balance?
4. Bank charges of Rs. 100 were debited in the Pass Book but not yet in the Cash Book. If starting with an favorable Cash Book balance, how is this adjusted to reach the Pass Book balance?
5. A payment made by the bank as per standing instructions was Rs. 1,000. It was not recorded in the Cash Book. If the BRS starts with a favorable Pass Book balance, how will this item be treated to reconcile with the Cash Book balance?