Chapter 3: Modern Banking System and Bank Reconciliation Statement

3.1 Modern Banking System in Nepal

3.1.1 Concept of Modern Banking and Types of Bank Accounts

Banks in Nepal (regulated by Nepal Rastra Bank, the central bank, classified into Class A Commercial Banks, Class B Development Banks, Class C Finance Companies, and Class D Microfinance Financial Institutions) accept deposits and facilitate business payments through three primary deposit accounts:

1. Current Account: Designed for businesses with frequent daily deposits and withdrawals. No restriction on transaction frequency; generally carries zero interest and offers Bank Overdraft facility to creditworthy clients.
2. Saving Account: Designed for individuals and small savers to encourage thrift; earns moderate interest with certain withdrawal limits.
3. Fixed Deposit Account: Money deposited for a fixed tenure (e.g., 6 months to 5 years) earning the highest interest rate; premature withdrawal incurs penalties.

3.1.2 Cheques: Meaning, Parties, Types, Endorsement, and Dishonor

A Cheque is an unconditional written order signed by an account holder directing a specified banker to pay a certain sum of money to a named person, or to their order, or to the bearer on demand.

Three Parties to a Cheque:

1. Drawer: The account holder who writes and signs the cheque.
2. Drawee: The bank on which the cheque is drawn and directed to pay.
3. Payee: The person or entity named on the cheque to receive the payment.

Types of Cheques:

• Bearer Cheque: Payable across the bank counter to anyone who presents it (“Pay … or Bearer”). High risk if lost.
• Order Cheque: Payable only to the specific person named on the cheque or to someone endorsed by them (“or Bearer” is struck out). The bank verifies the payee’s identity.
• Crossed Cheque: Two parallel transverse lines (//) are drawn across the top-left corner of the cheque (with or without words like “A/c Payee Only”). It cannot be encashed over the counter; the amount must be credited directly into the payee’s bank account, ensuring maximum safety.

Endorsement and Dishonor of a Cheque:

• Endorsement: Signing on the back (or face) of a negotiable instrument (Order Cheque or Bill) by the holder/payee for the purpose of transferring the right to receive money to another person (Endorsee).
• Dishonor of a Cheque: Refusal by the bank to pay a cheque upon presentation. Common reasons include:
  1. Insufficient funds in the drawer’s account (“Refer to Drawer”).
  2. Signature of the drawer differs from the specimen signature on record.
  3. Amount in words and figures differs.
  4. Cheque is Stale (presented more than 6 months after issue date) or Post-dated (presented before the date written on it).
  5. Mutilated cheque or unauthenticated overwriting/alteration.

3.1.3 Modern Banking Vouchers and Digital Banking Services

1. ABBS (Any Branch Banking Service): Enables a customer of a bank to deposit cash, withdraw cheques, or transfer funds from any branch of the same bank across Nepal through centralized core banking software.
2. Electronic Cheque Clearing (ECC): Automated clearing system operated by Nepal Clearing House Ltd. (NCHL) where physical cheques of one bank deposited into another bank are scanned and cleared electronically.
3. Plastic Money (ATM / Debit Card & Credit Card):
   • Debit Card: Linked directly to the customer’s bank balance (“Pay Now”).
   • Credit Card: Allows the cardholder to purchase goods/services up to a pre-approved credit limit without immediate bank balance (“Buy Now, Pay Later”).
4. Internet Banking, Mobile Banking & ConnectIPS / QR Payments: Real-time electronic fund transfers (EFT) that generate instant digital transaction vouchers/advices, immediately crediting or debiting the bank statement.

3.2 Bank Reconciliation Statement (BRS)

3.2.1 Meaning and Importance of BRS

A business records its banking transactions in the Bank Column of the Cash Book, while the bank records the same customer’s transactions in the Bank Statement (or Passbook).

• In the Cash Book, deposits are Debited (Dr.) and withdrawals are Credited (Cr.).
• In the Passbook / Bank Statement, deposits are Credited (Cr.) (as customer’s money is a liability for the bank) and withdrawals are Debited (Dr.).

Often, on a given date, the bank balance shown by the Cash Book does not agree with the balance shown by the Passbook. A Bank Reconciliation Statement (BRS) is a periodic statement prepared by the account holder (business) to reconcile and explain the causes of difference between the Cash Book bank balance and the Passbook balance on a specific date.

Importance / Objectives of BRS:

1. Identifies Causes of Disagreement: Pinpoints unpresented cheques, uncredited cheques, and direct bank entries.
2. Detects Errors and Embezzlement: Uncovers clerical errors or unauthorized withdrawals in either the Cash Book or Passbook.
3. Tracks Clearance Delays: Helps management monitor cheques stuck in clearing or dishonored by customers.
4. Verifies Accuracy of Bank Balance: Ensures the true cash-at-bank figure is verified before auditing.

3.2.2 Causes of Disagreement Between Cash Book and Passbook

3.3 Rules for Preparing Bank Reconciliation Statement

Golden Principle of BRS: Start from the balance in one book (the starting book) and adjust it, item by item, until you reach the balance in the other book (the target book).

• If starting with Cash Book Balance, ask: “What happened to the Passbook?” If Passbook is higher, Add (+); if Passbook is lower, Deduct (-).
• If starting with Passbook Balance (or Cash Book Overdraft), do the opposite.

Master Rule Table (Normal Favorable Balance vs. Overdraft Balance)

3.4 Worked Numerical Examples (NEB 5-Mark / 8-Mark Standard)

Illustration 3.1: Normal Favorable Balance as per Cash Book

On the last day of Ashadh 2082, the Cash Book of Pokhara Traders showed a debit bank balance of Rs. 85,000. On comparing it with the Passbook, the following differences were noticed:

1. Cheques issued amounting to Rs. 40,000, out of which cheques of Rs. 25,000 only were presented for payment up to the last day of Ashadh (Unpresented cheque = Rs. 40,000 - Rs. 25,000 = Rs. 15,000).
2. Cheques of Rs. 30,000 were deposited into the bank, but a cheque of Rs. 12,000 was credited by the bank only on 4th Shrawan.
3. A customer directly deposited Rs. 18,000 into the bank via ConnectIPS without informing Pokhara Traders.
4. Bank credited Rs. 2,500 as interest on deposit and debited Rs. 500 as bank service charges.
5. Insurance premium of Rs. 6,000 was directly paid by the bank as per standing instruction.
6. The payment side (Cr.) of the Cash Book (Bank column) was undercast by Rs. 1,000.

Required: Prepare a Bank Reconciliation Statement as on the last day of Ashadh 2082.

Solution:

Pokhara Traders
Bank Reconciliation Statement
As on the Last Day of Ashadh 2082

Illustration 3.2: Overdraft Balance as per Cash Book

Prepare a Bank Reconciliation Statement of Biratnagar Suppliers as on 30th Chaitra 2082 from the following particulars:

1. Bank Overdraft (Cr. balance) as per Cash Book on 30th Chaitra: Rs. 60,000.
2. Cheques deposited into the bank Rs. 22,000, but only Rs. 14,000 were cleared by 30th Chaitra (Uncollected = Rs. 8,000).
3. Cheques issued for Rs. 18,000 were not presented for payment during Chaitra.
4. Interest on overdraft charged by the bank Rs. 3,200 was recorded only in the Passbook.
5. Dividend on shares collected directly by the bank Rs. 5,000.
6. A cheque of Rs. 4,000 received from a debtor and entered in the Cash Book was omitted to be sent to the bank.

Solution: (Using Overdraft Method — starting with Overdraft as per Cash Book)

Biratnagar Suppliers
Bank Reconciliation Statement
As on 30th Chaitra 2082

3.5 NEB Board Exam Practice Questions

Group A: Very Short Answer Questions (1 Mark Each)

1. What is a Crossed Cheque?
2. Name the three parties involved in a cheque.
3. Give any two reasons for the dishonor of a cheque by a bank.
4. Write the full form of ABBS and ATM.
5. Define a Bank Reconciliation Statement.
6. What is meant by Bank Overdraft?

Group B: Short Answer & Numerical Questions (5 Marks Each)

1. State any five reasons for the disagreement between the balance shown by the Cash Book and the Passbook.
2. Explain modern banking instruments (ABBS, Debit/Credit Cards, and Electronic Banking) used in Nepal.
3. Numerical Problem: On the last day of Ashadh, the Passbook of Lalitpur Enterprises showed a credit balance of Rs. 92,000. Prepare a Bank Reconciliation Statement from the following information:
   • (a) Cheques issued for Rs. 35,000 out of which cheques for Rs. 20,000 were cashed in Shrawan.
   • (b) Cheques sent to bank for collection Rs. 28,000, but cheques of Rs. 10,000 were still uncollected on the last day of Ashadh.
   • (c) A bill receivable for Rs. 6,000 previously discounted with the bank was dishonored on 30th Ashadh, and noting charges of Rs. 200 were paid by the bank.
   • (d) Bank credited interest of Rs. 1,800 and debited commission of Rs. 300.
   • (e) Debit side of the Cash Book (Bank column) was overcast by Rs. 2,000. (Ans: Starting with Passbook Balance Rs. 92,000 + Add [10,000 + 6,200 + 300 + 2,000 = 18,500] - Less [20,000 + 1,800 = 21,800] = Debit Balance as per Cash Book Rs. 88,700)

Worked answers to these exercises are in Chapter 3 Solutions.