So for we have assumed that all the business transactions are settled by the

receipt and payment of actual cash. In actual practice, however most of the
business transactions are carried out with the help of banks and cheques. It is
therefore necessary to understand how banking transactions are recorded in the
books of accounts.

How To Record The Banking Transactions

Sr. # Transaction Journal entry Debit Credit
01 When account is opened Bank A/c xxxxx
with a bank by depositing Cash A/c xxxxx
cash.
02 Cash withdrawn from Cash A/c xxxxx
bank for business use. Bank A/c xxxxx
03 Cash withdrawn from Drawings A/c xxxxx
bank for personal use. Bank A/c xxxxx
04 Received a cheque from Bank A/c xxxxx
Debtor (customer) and Debtor’s Personal A/c xxxxx
paid into bank on the
same day.
05 Received a cheque from Cash A/c xxxxx
Debtor (customer) but not Debtor’s Personal A/c xxxxx
paid into the bank on the
same day, it should be
treated as a part of cash.
06 Previous cheque received Bank A/c xxxxx
paid into bank on the next Cash A/c xxxxx
day or at later date.
07 When a cheque is Debtor’s Personal A/c xxxxx
received from the Debtor Bank A/c xxxxx
and paid into the bank is
dishonoured.
08 Cheque issued in favour Creditor’s Personal A/c xxxxx
of a creditor. Bank A/c xxxxx
09 For recording the Interest Interest A/c xxxxx
on bank Overdraft –OR- Bank A/c xxxxx
intimation received by the
bank for Debiting our
business account with
Interest (In case of any
bank loan availed)
10 For recording the Interest Bank A/c xxxxx
Income on bank deposits Interest A/c xxxxx
–OR- Intimation received
by the bank for Crediting
our business account with
Interest (Profit on bank
deposits).

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 RULES ABOUT BANK RECONCILIATION STATEMENT
As far as the banking transactions are concerned, two reciprocal accounts are
kept i.e., in the books of Depositor and in the books of Bank. The rules for
recording transactions in both books are as follows:-
Bank A/c (Bank Column) Bank A/c
(In the books of Depositor) (In the books of Bank)
Cash Book Balance Pass Book Balance
Deposits :
When cash is deposited Debit = Bank A/c Debit = Cash A/c
Into the bank Credit = Cash A/c Credit = Depositor’s A/c
Withdrawals:
When cash withdrawn Debit = Cash A/c Debit = Depositor’s A/c
From the bank Credit = Bank A/c Credit = Cash A/c
Principally the Cash Book balance (bank column) should always be in agreement
with the balance shown by the Pass book/Bank Statement but they seldom
agree. So with a view to enlist the reasons for disagreement between the
balances as shown by Cash book and the Pass book on a particular date a
statement is prepared periodically, called “Bank Reconciliation Statement”.
However while preparing this statement it is to be remembered that only those
items should be considered which cause disagreement up to that specific date.

CAUSES OF DISAGREEMENT
There are three basic areas of disagreements between depositor’s book (bank column of
the cash book) and bank’s book (Pass book), which are as follows:
Adjustments Errors Timing
Differences
Standing instructions: Errors in cash book: Un-Presented cheques:
This is a payment facility. It These are the cheques,
is the instruction given by Undercasting or which the business has
the payer to its bank to pay overcastting errors issued but have not yet
a fixed amount on pre It occurs when there is any been presented to the
defined dates to a third error while entering any bank. The accounting entry
party who cannot request amount or calculating of such payments is passed
payment from a bank on his balance of the account. in cash book at the time
own. cheques are issued by the
Incorrect treatments business.
Direct debit: If any debit entry is treated
This is also a payment as credit entry or vice Un-Credited cheques:
facility. An authority given versa. These are the cheques
by the payer to third party Any entry entered twice. which the business has
to debit the payers account received from its debtors
on a specified date. This Omissions and deposited into the bank
authority can be for fixed If any entry is omitted from but still pending transfer in
payment or for variable being recorded. the business bank account.

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payment. The accounting entry for
Errors in bank statement: such receipts is passed in
Bank charges: the cashbook at the time
These are service charges
deducted by the bank.
* Any amount wrongly when business receives
credited to business bank these cheques.
Credit transfer: account (Receipt).
Deposits in Transit
These are automatic/online
payments that are directly ** Any amount wrongly These are the cheques
which the business has
received in the bank charged/debited to
received from its debtors
account. business bank account
but have not yet been
(Payment).
Dishonoured cheque: banked or omitted to be
It refers to the cheque that sent to the bank for
has been received by the *** Cash/cheque deposited collection. The accounting
business but the customer’s into the bank but it was entry for such receipts is
bank has failed to honour it. wrongly credited to another passed in the cashbook at
account (Payment). the time when business
Bank interest: receives these cheques.
This refers the amount that **** Cheque issued but it
has been paid by the bank was wrongly debited to
to the business on its another account (Receipt).
account balance/deposits.

REVISED CASH BOOK

(Bank Column Only)
Here it is to be remembered that Revised Cash book will be prepared with the help of
Depositor’s book balance (bank column of the cash book). Moreover Revised Cash
Book is prepared with the item of “Adjustments” and “Cash Book Errors”

Receipts Rs. Payments Rs.

Balance b/d xxxx Balance b/d xxxx
Credit transfer/Directly transfer Direct debit/Standing instructions xxxx
from a debtor xxxx Dishonoured cheque xxxx
Under-casting/Overcastting error xxxx Under-casting/Overcastting error xxxx
Debit balance wrongly treated as Credit balance wrongly treated as
credit balance (with double amount) xxxx debit balance (with double amount) xxxx
Receipt recorded as payment Payment recorded as receipt
(with double amount) xxxx (with double amount) xxxx
Any debit omission xxxx Any credit omission xxxx
Any payment recorded twice xxxx Any receipt recorded twice xxxx
Bank interest/Interest on investments xxxx Bank charges/Interest on O/D xxxx
Incorrect treatments xxxx Incorrect treatments xxxx
Balance c/d xxxx Balance c/d xxxx
xxxx xxxx

Bank Reconciliation Statement

After preparation of the Revised Cash Book, the Bank Reconciliation Statement is
prepared with the items of “Timing Differences” and “Errors made by the bank”.

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How the causes of Disagreement be located:
A trader’s cash book (Bank column) & bank statement for Feb 2012 appear as follows:

CASH BOOK (BANK COLUMN) A/c # 1

Date Receipts Amount Date Payments Amount
(Rs.) (Rs.)
2012 2012
Feb1 Balance b/d 123,410 Feb 8 Muhammad Junaid 11,520
3 Mohsin Raza 23,500 12 Baber Ramzan 65,000
15 Usman Ameen 14,150 18 Nauman saleem 40,700
21 Sarosh Jalil 7,000 28 Malik Abdul 2,200
24 Suffyan Akram (*) 38,800 29 Rehman 16,660
28 Ali Raza 15,500 29 Amir Shehzad 58,760
29 Muhammad Qasim 12,420 29 Balance c/d 39,940
Total 234,780 Total 234,780

BANK STATEMENT (A/c # 1)

Date Particulars Dr. Cr. Balance Status
(Rs.) (Rs.) (Rs.)
2012
Feb1 Balance 123,410 Cr.
1 Insurance Premium 12,500 110,910 Cr.
3 Cheque deposited 23,500 134,410 Cr.
11 Cheque # 3271350 11,520 122,890 Cr.
15 Cheque deposit 14,150 137,040 Cr.
16 Service Charges 770 136,270 Cr.
16 Dividend Warrant # 56270 6,250 142,520 Cr.
18 Cheque 3271351 65,000 77,520 Cr.
20 Credit transfer (**) 15,700 93,220 Cr.
21 Cheque deposit 7,000 100,220 Cr.
21 Cheque # 3271352 40,700 59,520 Cr.
22 Dishonoured Cheque 7,000 52,520 Cr.
24 Cheque # 4137560 (***) 6,600 45,920 Cr.
27 Remittance received (****) 35,400 81,320 Cr.
27 Cheque # 3271353 38,800 42,520 Cr.
29 Bank Interest 11,110 31,410 Cr.
29 Bank Interest 1,560 32,970 Cr.
29 Balance 32,970 Cr.
* Cheque drawn in favour of creditor wrongly recorded as receipt
** Wrongly credited by bank
*** Cheque issued in favour of creditor against A/c # 2
**** Online remittance from a Debtor
Required: Write down the causes of disagreement, and also prepare a
Bank Reconciliation Statement.

Answer: Balance as per Revised Cash Book 25,830 (Cr)