Question 3: Explain the process of preparing bank reconciliation statement with amended cash balance.
Answer:
While preparing a bank reconciliation statement, under the amended cash balance approach, the balance as per cash book or as per the cash book or as per the cash book means the balance of deposits held at the bank.
Such a balance will be a credit balance as per the pass book.It is also called the favourable balance as per cash book or favourable balance as per pass book. Such a balance exists when the deposits made by the firm are more than its withdrawals. On the other hand, the credit balance as per the cash book indicates bank overdraft.In other words, the excess amount withdrawn over the amount deposited in the bank.It is also known as unfavourable balance as per cash book or unfavourable balance as per pass book.
The following steps will be followed in preparation of the bank reconciliation statement :-
i) The first step is to balance the cash book. The first item in the statement is generally the balance as shown by the cash book.Alternatively, the starting point can also be the balance as per pass book.Considering the balance as per cash book, the following further steps will be followed.
ii) The cheques deposited but not yet collected are deducted.
iii) All the cheques issued but not yet presented for payment directly deposited in the bank account are added.
iv) All the items of charges such as interest on overdraft,payment by bank on standing instructions and debited by the bank in the pass book but not entered in the cash book, bills and cheques dishonoured etc are deducted.
v) All the credits given by the bank such as interest on dividends collected etc and direct deposits in the bank are added.
vi) Adjustments for errors are made according to the interest to the principle of rectification of errors.
vii) Now, the net balance shown by the statement should be the same as shown by the pass book.
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