Topic 4

Preparation of Accounting Records: Journal, Purchases and Sales, Book

and Posting in Ledger, Cash Book. Preparation of Final Accounts and
adjustments at the end of trading period. Preparation of Trial Balance
Banking Transactions and Bank reconciliation statements.
Introduction to Journal
SOME BASIC TERMINOLOGY USED IN ACCOUNTING
1. CREDITORS
The persons to whom the company owes money in return of the benefit (goods, services,
cash, etc) provided by them. Goods Purchase in credit from those Person Called creditors. Ex.
Goods Purchase from Ram Rs 3000.
2. DEBTORS
They are persons who owe money to the company, in return of, the benefits received by them.
The benefits may be in the form of goods, services, cash etc which is provided to him by the
company. Debtors are those persons to whom goods sold in credit. Ex. Good Sold to Sham
Rs. 4000.
3. JOURNAL
Journal is the ‘book of first entry’. All the financial transaction of the firm are first recorded
in a journal in a date wise (chronological) manner. It also records which account is to be
debited and which is to be credited. It is recording a brief statement regarding the particular
transaction; this statement is called Narration.
A book in which business transactions are recorded datewise and in the order in which
these transactions take place is known as journal.
Journal is a book of accounts in which all day-to-day business transactions are recorded in a
chronological order i.e. in the order of their occurrence. Transactions when recorded in a
Journal are known as entries. It is the book in which transactions are recorded for the first
time. Journal is also known as ‘Book of Original Record’ or ‘Book of Primary Entry’.
Every transaction can be recorded in journal. This process of recording transactions in the
journal is’ known as ‘Journalising’.
Format of Journal:
Every page of Journal has the following format. It is a columnar book. Each column is given
a name written on its top.
Format of journal is given below:
 Journal

Date Particulars Ledger Folio Amount Amount

(Dr) (Cr)

(1) (2) (3) (4) (5)

4. CAPITAL
The amount with which the trader starts his business i.e. the amount which has been invested
in the business, is called capital.
5. DRAWINGS
Drawings represent the withdrawals of money (cash) or money’s worth (goods) by the
proprietor from the business from capital for his personal use.
6. COMPOUND JOURNAL ENTRY
If two or more transactions can be combined, and shown in a single journal entry (without
changing the meaning of the transaction), it is called a combined journal entry.
There can be entries that affect more than two accounts; such entries are called compound or
combined entries.
A simple journal entry contains only one debit and one credit. But if an entry contains more
than one debit or credit or both, that entry is known as a compound journal entry.
One thing to be noted here is, whether it is a single journal entry or a compound journal entry,
the total debit should be equal to total credit.
7. SALES
Selling of goods in the normal course of business is called sales. It may be cash sales or credit
sales.
8. CURRENT LIABILITES
Those liabilities which are to be paid within one year are called current liabilities. For
example, trade creditors, Bills payable etc.
9. CURRENT ASSETS
Those assets which are meant for conversion into cash as soon as possible eg. stock of goods,
debtors etc.
10. GOODS
The commodities bought for the purpose of resale are termed as goods. A cloth merchant
deals in cloth, therefore for him cloth represents goods. Similarly for rice merchant Rice is
goods.
11. Depreciation
Depreciation means decline in the value of an asset due to its wear and tear. It is an
expense for the business. Increase in expenses and losses are debited, so depreciation is
also to be debited. The value of the asset will also be reduced because of depreciation. As
decrease in assets is credited, so the same asset account will be credited.

Examples of some common Business Transactions (along with their

analysis)
Consider the following transactions
Illustration 1

Date Particulars

March 1 Started business with Rs. 1000.

March 2 Received Rs. 50 From Mr. B.

March 3 Received Rs. 250 as commission.

March 4 Paid rent Rs. 50

March 5 Purchased a machine Rs. 500.

March 6 Purchased machine worth Rs. 1000 from AB and Co.

March 7 Proprietor with draws cash Rs. 80 for personal use.

March 8 Good returned to Mahesh Worth Rs. 200.

March 9 Goods worth Rs. 100 returned by Shyam.

Analysis

Date Foli Account Type of Rule Explanatio A/c to A/c to be

Transaction o s Account applied n be Credited
Number no. Involved for Dr. Debite (Cr.)
and Cr. d (Dr.)

1 Cash a/c Real (Dr) Cash comes Cash Capital

Personal comes in in the a/c Rs. a/c Rs.
Capital credit the business 1000 1000
 a/c giver and
Proprietor is
the giver of
cash

2 Cash a/c Real Comes in Cash in Cash Mr. B's

Personal (Dr) received a/c Rs. a/c Rs.
Mr. B. Giver* from Mr. B. 50 50
a/c (Cr)

3 Cash a/c Real Dr. What Cash Commiss

Nominal comes in a/c Rs. ion a/c
Commiss Cr. All 250 Rs. 250
ion a/c incomes

Note:

In cash transaction Always omit personal accounts.

In credit transaction Always omit cash account.

PREPARATION OF JOURNAL
A typical journal contains five columns -
1. Date: The date of transaction.
2. Particular: Details of transaction along with Narration.
3. L.F.: Ledger folio Number / page number all which the various accounts appear in the
ledger
4. Amount (Dr): Amount to be debited.
5. Amount (Cr): Amount to be Credited.
In addition to the above information, there is also a small narration of the transaction being
recorded.
Narration always appears in parentheses and always starts by the word “Being”. In journal
entries a prefix “To” is applied before the account which is to be credited.

Journal Entries for the Transactions Mentioned in illustration 1

Date Particular L. F Amount Amount

(Dr) (Cr)

2005
March 1 Cash a/c Dr 1000 1000
To capital A/c
(Being the business Started with cash)
March 2 Cash a/c Dr 50 50
To Mr. B’s a/c
(Being the money received from Mr.B.)
March 3 Cash a/c Dr. 250 250
 To commission a/c
(Being the Commission – earned)
March 4 Rent a/c Dr. 50 50
To cash A/c.
(Being the rent paid)
March 5 Machine A/c Dr. 500 500
To cash a/c
(Being the purchase of machine)
March 6 Machine A/c Dr. 1000 1000
To AB and Co., a/c
(Being Machine purchased on credit from AB
and Co.)
March 7 Drawing A/c Dr. 80 80
To Cash a/c
(Being the withdrawal of cash for personal use
by proprietor)
March 8 Mahesh’s A/c Dr. 200 200
To Purchase return a/c
(Being the goods returned to Mahesh)
March 9 Goods A/c Dr. 100 100
To Sales return a/c
(Being the goods returned by Shyam)

COMPOUND JOURNAL ENTRY

Many times, it is possible to pass entry a single journal entry for two or more transaction, (of
same date) instead of repeating the accounts and passing separate entries. Generally opening
and closing entries in a Journal are compound entries. The example of a compound entry is:
Transaction: “Started business with Rs. 10,000/-Cash and stock worth Rs. 10,000/-

The Journal Entry is:

Cash A/c Dr. 10,000/-
Stock A/c Dr. 10,000/-
To capital A/c 20,000/-
Another Example: “Purchased Machinery from K. K. and Co., worth Rs. 25,000 and paid Rs.
10,000 cash.”
The journal Entry is
Machinery a/c Dr. 25,000/-
To cash a/c 10,000/-
To K. K. and co. a/c 15,000/-
CLASSIFICATION OF JOURNAL
Journal is a book in which transactions are recorded in chronological order/ date
wise, therefore it will be practically difficult to record if the number of
transactions is large. To take the benefit of division of labour, journal should be
divided into number of journals. Journal can be classified into various special
journals and Journal proper. Special journals are also known as special purpose
books.
I. Special Journals
Special journals are those journals which are meant for recording all the
transactions of a repetitive nature of a particular type. For example, all cash
related transactions may be recorded in one book, all credit purchases in
another book and so on.
These are:
(i) Cash Journal/Cash Book: Cash Journal or Cash Book is meant for
recording all cash transactions i.e., all cash-receipts and all cash payments of
the ‘business. This book helps us to know the balance of Cash in hand at any
point of time.
It is of two types: (a) Simple Cash Book: It records only receipts and
payments of cash. It is like an ordinary Cash Account.
(b) Bank Column Cash Book: This type of Cash Book contains one more
column on each side for the Bank transactions. This Book provides
additional information about the Bank transactions.
(ii) Goods Journal: It is of four types:
(a) Purchases Journal/Purchases Book: This journal is meant for recording
all credit purchases of goods only as Cash purchases of goods are
recorded in the Cash Book. In this journal, purchases of other things like
 machinery, typewriter, stationery, etc. are not recorded. Goods means
articles meant for trading or the articles in which the business deals.
(b) Sales Journal/Sales Book: This journal is meant for recording all credit
sales of goods made by the firm. Cash Sales are recorded in the Cash
Book and not in the Sales Book. Credit Sale of items other than the goods
dealt in like sale of old furniture, machinery, etc. are not entered in the
Sales Journal.
(c) Purchase Returns or Returns Outward Journal: Whenever, the goods
are not as per the specifications, the buyer may return these goods to the
supplier. These returns are entered in a book known as Purchase Returns
Book. It is also known as Returns Outward Journal/Book.
(d) Sale Returns or Returns Inward Journal: Sometimes, when the goods
are sold to the customer and they are not satisfied with the goods, they
may return these goods to the businessman. Such returns are known as
Sales Returns. Just like Purchase Returns, they are also recorded in a
separate Book which is known as Sales Returns or Returns Inward
Journal/Book.
(iii) Bill Journal: It is of two types:
(a) Bill Receivables Journal/Book: When goods are sold on credit and
the date and period of payment is agreed upon between the seller and
the buyer, this is duly signed by both the parties. This written
document is called a Bill of exchange. For the seller it is a bill
receivable and for the buyer it is a bill payable. Bills Receivable
Journal/Book and Bills Payable Journal Book are two journals
prepared by a businessman. For example : Pranaya sells goods to
Gunakshi on credit for rs 5,000 payable after three months. A
document is prepared containing these facts and is duly signed by
Pranaya and Gunakshi. For Pranaya, it is a Bills Receivable and she
will record this transaction in Bill Receivable Book. For Gunakshi, it
 is a Bill Payable and she will record the transaction in her Bill Payable
Book.
(b) Bill Payable Journal: This is a journal in which record of those bills
is kept on which the firm has given its acceptance for making
payments on later dates.
II. Journal Proper
This journal is meant for recording all such transactions for which no
special journal has been maintained in the business. Therefore, in this
journal, all such transactions are recorded which do not occur
frequently and for these transactions, no special journal is required.
For example, if Machinery is purchased on credit, it will be recorded
in the journal proper, because in the Cash Book, we will record only
cash purchases of machinery. Similarly, many other transactions,
which do not find their place in the special journals, will be recorded
in the Journal Proper such as
(i) Outstanding expenses – Salaries outstanding, Rent outstanding,
etc.
(ii) Prepaid expenses – Prepaid Rent, Salaries paid in advance.
(iii) Income received in advance – Rent received in advance,
interest received in advance, etc.
(iv) Accrued Incomes – Commission yet to be received, interest yet
to be received.
(v) Interest on Capital
(vi) Depreciation
(vii) Credit Purchase and Credit Sale of fixed Assets – Machinery,
Furniture.
(viii) Bad debts.
(ix) Goods taken by the proprietor for personal use.
Posting in Ledgers and Balancing the Ledgers
INTRODUCTION
A ledger is represented by a “T” account. Separate T accounts (or ledgers) are
prepared for each and every account maintained by the company. For example,
we may have T accounts for cash, Mr. B.& company, Rent

The account book so maintained is called Ledger. Each transaction affects two
accounts. In each account transactions related to that account are recorded. For
example, sale of goods taking place number of times in a year will be put under
one Account i.e. Sales Account.

All the accounts identified on the basis of transactions recorded in different

journals/ books such as Cash Book, Purchase Book, Sales Book etc. will be
opened and maintained in a separate book called Ledger. So, a ledger is a book
of account; in which all types of accounts relating to assets, liabilities, capital,
expenses and revenues are maintained. It is a complete set of accounts of a
business enterprise.
Ledger is bound book with pages consecutively numbered. It may also be a
bundle of sheets.

Features of Ledger
 Ledger is an account book that contains various accounts to which
various business transactions of a business enterprise are posted.
 It is a book of final entry because the transactions that are first entered in
the journal or special purpose Books are finally posted in the ledger. It is
also called the Principal Book of Accounts.
 In the ledger all types of accounts relating to assets, liabilities, capital,
revenue and expenses are maintained.
 It is a permanent record of business transactions classified into relevant
accounts.
 It is the ‘reference book of accounting system and is used to classify and
summarise transactions to facilitate the preparation of financial
statements.

Format of a Ledger Sheet

The format of a ledger sheet is as follows :
 Title of An Account
Dr.
Cr.
Date Particulars J Amount Date Particulars JF Amount
F Rs. Rs.

Importance of Ledger/Utility of Ledger

Ledger is an important book of Account. It contains all the accounts in which
all the transactions of a business enterprise are classified. At the end of the
accounting period, each account will contain the entire information of all the
transactions relating to it.

Following are the advantages of ledger.

[Link] of Business Results: Ledger provides detailed information
about revenues and expenses at one place. While finding out business results
the revenue and expenses are matched with each other.
[Link] of Book Value of Assets: Ledger records every asset
separately. Hence, you can get the information about the Book value of any
asset whenever you need.
3. Useful for Management : The information given in different ledger
accounts will help the management in preparing budgets. It also helps the
management in keeping the check on the performance of business it is
managing.
4. Knowledge of Financial Position : Ledger provides information about
assets and liabilities of the business. From this we can judge the financial
position and health of the business.
[Link] Information : The business always need to know what it owes to
others and what the others owe to it. The ledger accounts provide this
information at a glance through the account receivables and payables.

Types of Ledger
 In large scale business organisations, the number of accounts may run into
hundreds. It is not always possible for a businessman to accommodate all
these accounts in one ledger. They, therefore, maintain more than one ledger.

These ledgers may be as follows :

1. Assets Ledger : It contains accounts relating to assets only e.g.
Machinery account, Building account, Furniture account, etc.
2. Liabilities Ledger : It contains the accounts of various liabilities e.g.
Capital (Owner or partner), Loan account, Bank overdraft, etc.
3. Revenue Ledger : It contains the revenue accounts e.g.. Sales account,
Commission earned account, Rent received account, interest received
account, etc.
4. Expenses Ledger : It contains the various accounts of expenses incurred,
e.g. Wages account, Rent paid account, Electricity charges account, etc.
5. Debtors Ledger : It contains the accounts of the individual trade debtors
of the business. Individuals, firms and institutions to whom goods and
services are sold on credit by business become the ‘trade debtors’ of the
business.
6. Creditors Ledger : It contains the accounts of the individual trade
Creditors of the business. Individuals, firms and institutions from whom a
business purchases goods and services on credit are called ‘trade creditors’
of the business.
7. General Ledger : It contains all those accounts which are not covered
under any of the above types of ledger. For example Landlord A/c, Prepaid
insurance A/c etc.

Ledger Posting
After preparing a separate ledger for each account, one has to refer to the
journal entries. After locating any transaction affecting the given account in the
journal, that journal entry (along with its date, amount, and credit/debit effect) is
to be posted in the ledger. This process of transferring a transaction from a
journal to the respective ledger account is called posting. The entry to be posted
in the ledger contains all information such as Date, Amount (Dr.) or Amount
(Cr.), Journal Folio no., and the name of the corresponding account to be
written in the “particulars” column.
The names of accounts which appear on the debit side of any ledger always
contain a prefix “To” whereas the names of accounts which appear on the credit
side of any ledger always contain a prefix “By”.

Rules of posting:
1. Debit the account in ledger that has been debited in journal.
2. Credit the account in ledger that has been credited in journal.
3. Use the name of the other account for referencing.
4. Use ‘To’ on the debit side and ‘By’ on the credit side.

Balancing a Ledger

The steps for balancing a given ledger are as follows:

• First the total of both (debit and credit) sides of the ledger account are done.
• If the debit side is greater than credit side by say Rs. 100, then the “difference
amount i.e Rs.100” is put into the credit side by passing an entry “By balance
c/d” Rs.100. By doing so, both the sides of the account become equal. The last
step is to transfer the amount written in “by balance c/d” (c/d stands for carried
down) to other side of the account (below the total line) by writing “to balance
b/d” (b/d stands for brought down). This becomes the opening entry for the next
accounting period.
• If the credit side is greater than debit side, then the “difference amount” is put
into the debit side by passing an entry “To balance c/d”. By doing so, both the
sides of the account become equal. The last step is to transfer the amount
written in “To balance c/d” to other side of the account (below the total line) by
writing “By balance b/d”. This becomes the opening entry for the next
accounting period.
• Note: only real and personal accounts are to be balanced. Nominal accounts
are generally not balanced rather at the end of the accounting period; their totals
are transferred to Profit and loss account.

Consider the following transactions and pass journal entries for them and
then post them into appropriate ledgers of “Wise Traders and Co.”

March
1. Started business with Rs.1,00,000 in Bank, Rs. 20,000 cash
1. Bought shop fittings Rs. 20,000 and a scooter Rs. 30,000, both by cheque.
2. Paid rent by cheque – Rs. 2500
3. Bought goods for Re sale on credit from “K. K. and Co.,” Rs. 25,000
4. Cash sales worth Rs. 2500
8. Paid wages of worker – Rs. 500 in cash.
10. Paid insurance by cheque – Rs. 250.
12. Cash sales – Rs. 4,000/-
15. Paid wages of worker – Rs. 500/-.
Goods returned to KK & Co. worth Rs. 3000/.
17. Paid to ‘K K and Co.,’ Rs. 15000 by cheque.
19. Bought goods for resale from “RC and Co” on credit – Rs. 12,500
19. Cash Sale - 3500
22. Paid wages to worker in cash Rs. 500
24. Bought stationary Rs. 250 by cash.
25. Cash sales Rs. 7500
27. Paid “RC and Co.” Rs. 7000 by cheque
29. Paid wages to worker Rs. 500.
31. Deposited Rs. 10,000 into bank.

To sales a/c 2500

(Being the cash sales)
8 Wages a/c Dr. 500
To cash a/c 500
 (Being the wages paid in cash)
10 Insurance a/c 250
To bank a/c 250
(Being the insurance paid by cheque)
12 Cash a/c Dr. 4000
To sales a/c 4000
(Being cash sales)
15 Wages a/c 500
To cash a/c 500
(Being wages paid by cash)
15 “K K and Co.,” a/c Dr. 3000
To returns outward a/c 3000
(Being goods returned)
17 “KK and Co” a/c Dr. 15000
To bank a/c 15000
(Being paid to “K K and Co” by cheque)
19 Goods a/c Dr 12500
To RC and Co a/c 12500
(Being goods brought on credit)
19 Cash a/c Dr 3500
To Sales a/c 3500
(Being cash sales)
22 Wages a/c Dr 500
To Cash a/c 500
(Being wages paid in cash)
24 Stationary a/c Dr 250
To Cash a/c 250
(Being stationery bough by cash)
25 Cash a/c Dr 7500
To Sales a/c 7500
(Being cash sales)
27 RC and Co' a/c Dr 7000
To Bank a/c 7000
(Being paid to 'RC and Co by cheque)
29 Wages a/c Dr 500
To Cash a/c 500
(Being wages paid in cash)
31 Bank a/c Dr 10000
 To Cash a/c 10000
(Being Cash deposited in to bank)
Consider the data given in illustration and prepare the individual
ledger Account from the journal entries.
Cash A/c
Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount

To Capital

1 A/c 20000 8 By wages 500

A/c
4 To 2500 15 By wages 500
Sale A/c
s A/c

12 To 4000 22 By wages 500

Sale A/c
s A/c

19 To 3500 24 By Stationary 250

Sale A/c
s A/c

25 To 7500 29 By wages 500

Sale A/c
s A/c

31 By Bank 10000
A/c
31 By Balance 25250
C/d
37500 37500

1.04 To 25250
Balanc
e B/d
Trial Balance
After preparing the individual ledger Accounts from the journal entries in the
above manner, and balancing or closing the Accounts, the next step is to prepare
a trial balance.
A trial balance is a statement that is prepared in order to check the accuracy of
journalising and posting of transactions. It is prepared by listing various debit
balance Account in one column and all the credit balance Account in another
column and checking the total of both the columns. If the total in both – the
debit column and credit column is same, then we can say that the trial balance
agrees and there does not seem to be any arithmetical error in the Accounts.
Such a trial balance prepared after balancing the individual ledgers (i.e after
ascertaining the net debit or credit balance in a ledger) is called a trial balance
by Net Balance method.

Objectives of a preparing trial balance:

1. To test the arithmetic accuracy.
2. To detect errors.
3. To provide data for preparing financial statement.
For the concept of opening entry in journal kindly refer to the link below:
[Link]

For any query regarding preparation of ledger and trial balance, refer to the link
below: [Link]

Define Subsidiary Books

Subsidiary Books are the books that record the transactions which are similar in
nature in an orderly manner. They are also known as special journals or
Daybooks. In big business institutions, it is not easy to record all the
transactions in one journal and post them into various accounts. So, for the easy
and accurate recording of all the transactions, the journal is subdivided into
many subsidiary books. For every type of transaction, there is a separate book.
Types of Subsidiary Books
8 Types of subsidiary books are used for recording different types of
transactions. So, let us know the types.
The 8 Subsidiary books are as follows:
1. Cash Book
2. Purchase Book
3. Sales Book
4. Purchase Return Book
5. Sales Return Book
6. Bills Receivable Book
7. Bills Payable Books
8. Journal Proper

Set of Subsidiary Books – A Brief Study

1. Cash Book
The first and most important subsidiary book is the cash book. It records all the
transactions related to cash and bank receipts and payments.
There are 3 types of cash books that are maintained by an organisation.
They are:
Single Column Cash Book: A single column cash book is like a ledger
account. It contains a debit side and a credit side. All Cash receipts are recorded
 on the debit side, and all the cash payments are recorded on the credit side of
the cash book.
Format of Single Column Cash Book:

Cash Book (Single Column)

Dr Cr
Date Particulars L.F. Cash Date Particulars L.F. Cash

Double Column Cash Book: Double Column Cash Book is the same as that of
Single Column Cash Book; only an extra column of discount is added on both
the debit and credit sides of the cash book. It records discounts allowed on the
debit side and discounts received on the credit side of the cash book.
The format of the double-column cash book is given below.
Cash Book (Double Column)

Dr
Cr
Date Particulars L.F. Discount Cash Date Particulars L.F. Discount Cash
Allowed Receive
d

Triple Column Cash Book: Triple Column Cash Book contains all the
columns of a double column cash book and also has an extra column for the
bank.
The format of the triple column cash book is given below:

Cash Book (Triple Column)

Dr Cr
Date Particulars L. Discount Cash Bank Date Particulars L. Discount Cash Bank
F. Allowed F. Received
 2. Purchase Book
Purchase Book is a subsidiary book that is used to record all the transactions
related to credit purchases. The purchases of the asset are never recorded in the
purchase book.
Format of Purchase Book:
Purchase Book
Date Particulars Inward Invoice No. L.F. Amount

3. Sales Book
The Sales Book records all the transactions related to credit sales. The sales
book cannot record the sale of assets.
The sales book format is given below.
Sales Book
Date Particulars Outward Invoice L.F. Amount
No.

4. Purchase Return Book

The purchase return book, also known as the return outward book, is used to
record transactions of all the returns made to the supplier. A debit note is issued
against every return and is recorded in the Purchase Return Book.
Format of Purchase Return Book:
Purchase Return Book
Date Particulars Debit Note L.F. Details Amount
No.

5. Sales Return Book

The sales return book records all the transactions related to inward returns. It is
also known as a return inward book. When the customer returns goods, a credit
note is issued to the customer for every return, and it is recorded in the Sales
Return Book.

Sales Return Book Format:

Sales Return Book
Date Particulars Credit Note L.F. Details Amount
No.

6. Bills Receivable Book

The Bills Receivable Book records all the transactions of bills drawn in favour
of the business. The total of the bills receivable book is posted on the debit side
of the Bills Receivable account. The Format of Bills Receivable Book is as
follows.
Bills Receivable Book
Date of Bill Bill No. Acceptor From Terms Due Amount
Date

7. Bills Payable Book

The Bills Payable Book records all the transactions related to bills that are
drawn on the business and are payable by the business. The Bills Payable Books
Format is as follows.
Bills Payable Book
Date of Bill Bill No. Drawee Payee Terms Date of Amount
Maturity

8. Journal Proper
Certain transactions cannot be recorded in any of the above-mentioned books;
these transactions are termed miscellaneous transactions. So, the Journal Proper
is used to record all the miscellaneous transactions. It includes transactions such
as credit purchase and sale of assets, depreciation, etc.
Bank Reconciliation Statement
Definition: A statement which is prepared to reconcile the causes of difference
between Bank Balance as per Cash Book and Bank Balance as per Pass Book/
Bank Statement is known as a Bank Reconciliation Statement.

Features of a Bank Reconciliation statement

[Link] is a statement.
[Link] is not a part of the process of Accounts.
[Link] is prepared to reconcile the causes of difference between the Bank balance
as per Cash Book and the Bank balance as per Pass Book.
[Link] can be prepared at any time during the financial year, as and when it is
required.
5. Since it is prepared on a particular date, it is written as Bank Reconciliation
statement as at/as on……………………

It is necessary for a beginner to understand the mechanism of how to prepare

the Bank Reconciliation statement. The first milestone on this journey is to
understand the various reasons for differences between the two records.

Reasons for Differences between Cash Book and Pass Book The differences
are basically of two types:
A. Items appear in Cash Book but not appearing in Pass Book and
B. Items appear in Pass Book but not appearing in the Cash Book
Let us understand these reasons:
(A) Items not appearing in Bank Pass Book
(1) Cheques issued by business entity not debited by the Bank. This may be
because they might not have been Banked by the payee or it may still be under
clearance. The entry in Cash Book will be made immediately when the cheque
is issued thereby reducing the Bank balance in the books of entity’s books of
A/cs. Here, bank balance as per Cash Book will be less, but as per Bank Pass
Book it will be more. This is also termed as unpresented cheques.
(2) Cheques deposited but not credited by the Bank – The business entity may
receive cheques or draft which is deposited into the Bank for collecting the
payment. Again, entry in Cash Book will be instant thereby increasing the
balance. Here, bank balance as per Cash Book will be more than the balance as
per Bank passbook. This is also called as outstanding cheques.
(3) Errors – The Bank may by mistake miss out entering the debit or credit
which results in the difference.
(4) Standing Instructions – The entity may give standing instruction to the Bank
for certain regular payments like loan repayment instalment, transfer of funds
etc. This may get entered in the Pass Book immediately, but Cash Book entry
may be delayed.
(B) Items not appearing in the Cash Book
(1) Bank interest, Bank charges etc. – The Bank will charge interest on
overdraft or also charges for services, issue of demand draft, pay orders etc.
Here, being the source of transaction, the Bank will record in the Pass Book
immediately and send the debit advice slips to the business entity. The entry in
the Cash Book may be delayed. Similarly, the Bank could credit interest on
fixed deposits, which may get entered in business books at a later date.
(2) Direct deposits in Bank account – Sometimes customers or others may
directly deposit an amount in the Bank for goods or services rendered. The
Bank will enter it immediately, but entry in Cash Book will appear later.
(3) Bills for collection – The Business Entity may send bills of exchange for
collection. The Bank will collect the payment and credit the same in the
passbook. The entry in Cash Book will be made only after receipt of
information from the Bank.
(4) Errors – The records may be missed out by the book-keeper of the Business
Entity.
Need of Bank Reconciliation Statement
[Link] helps to understand the actual Bank balance.
[Link] helps to identify the mistakes in the Cash Book and the Pass Book.
[Link] helps to detect and prevent frauds and errors in recording the Banking
transactions.
[Link] helps to incorporate certain expenditures/income debited/credited by
Bank in the books of accounts.