Chapter 3 Solutions: Modern Banking System and Bank Reconciliation Statement

Answers to the Chapter 3 exercises. Each answer is as long as its marks call for: a sentence or two for 1 mark, five clear points or a five-row table for 5 marks, and full working for numerical problems.

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

1. What is a Crossed Cheque?

A Crossed Cheque is a cheque with two parallel transverse lines drawn across its top-left corner, with or without words such as “A/c Payee Only”. It cannot be encashed over the counter; the amount must be credited directly into the payee’s bank account.

2. Name the three parties involved in a cheque.

The three parties are the Drawer (the account holder who writes and signs the cheque), the Drawee (the bank directed to pay) and the Payee (the person or entity named on the cheque to receive the payment).

3. Give any two reasons for the dishonor of a cheque by a bank.

(1) Insufficient funds in the drawer’s account (“Refer to Drawer”), and (2) the drawer’s signature differs from the specimen signature kept by the bank.

4. Write the full form of ABBS and ATM.

ABBS: Any Branch Banking Service. ATM: Automated Teller Machine.

5. Define a Bank Reconciliation Statement.

A Bank Reconciliation Statement (BRS) is a periodic statement prepared by the account holder on a specific date to reconcile and explain the causes of difference between the bank balance shown by the Cash Book (Bank column) and the balance shown by the Passbook or Bank Statement.

6. What is meant by Bank Overdraft?

A Bank Overdraft is a facility under which a bank allows a creditworthy current account holder to withdraw more than the balance in the account, up to an agreed limit. The excess drawn is a short-term liability of the business, on which the bank charges interest, and it appears as a credit balance in the Bank column of the Cash Book.

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.

The business records its bank transactions in the Bank column of the Cash Book, while the bank records them in the Passbook. On a given date the two balances often differ, because some transactions reach one book before the other and some are recorded by the bank alone. Five reasons for the disagreement are:

1. Cheques issued but not yet presented for payment: When the business issues a cheque, it credits the Bank column of the Cash Book at once, but the bank debits the Passbook only when the payee presents the cheque. Until then, the Cash Book balance is lower than the Passbook balance.
2. Cheques deposited but not yet collected or credited by the bank: A cheque paid into the bank is debited in the Cash Book on the day of deposit, but the bank credits the Passbook only after the cheque is cleared. Meanwhile, the Cash Book balance is higher than the Passbook balance.
3. Direct deposit by a customer into the bank: A customer may pay money directly into the business’s account, for example through ConnectIPS, without informing the business. The bank credits the Passbook at once, but the Cash Book shows nothing until the business learns of the deposit, so the Cash Book balance is lower.
4. Interest credited, or dividend or bill collected, by the bank: The bank credits interest on deposits, and dividends or bills it collects for the customer, directly in the Passbook. The business records them only when it receives the bank statement, so until then the Cash Book balance is lower.
5. Bank charges, commission or interest on overdraft debited by the bank: The bank debits its service charges, commission and interest on overdraft directly in the Passbook. They are not yet in the Cash Book, so the Cash Book balance is higher than the Passbook balance.

Other causes are payments made directly by the bank on standing instruction (insurance premium, electricity bill, loan installment), the dishonor of a deposited cheque or discounted bill, and clerical errors such as undercasting or overcasting the Bank column of the Cash Book or a wrong debit or credit by the bank.

2. Explain modern banking instruments (ABBS, Debit/Credit Cards, and Electronic Banking) used in Nepal.

Banks in Nepal, regulated by Nepal Rastra Bank, now offer services built on centralized core banking software and electronic payment systems. The main instruments are:

1. ABBS (Any Branch Banking Service): ABBS lets a customer of a bank deposit cash, withdraw money by cheque or transfer funds at any branch of the same bank across Nepal, not only at the branch where the account was opened. It works because all the branches are linked through centralized core banking software, so a trader in one city can pay into or draw from an account held in another.
2. Debit Card (ATM card): A debit card is linked directly to the customer’s bank balance and works on the “Pay Now” principle. The holder can withdraw cash from ATMs and pay for purchases with it, and each amount is deducted from the account balance at once, so it cannot be used beyond the money available in the account.
3. Credit Card: A credit card allows the holder to buy goods and services up to a pre-approved credit limit even without a balance in the bank, on the “Buy Now, Pay Later” principle. The bank pays the seller, and the cardholder repays the bank later. Debit and credit cards together are called plastic money, because they reduce the need to carry cash.
4. Internet Banking and Mobile Banking: Through the bank’s website or mobile app, the customer can check the balance, transfer funds and pay bills at any time without visiting a branch. These are real-time electronic fund transfers (EFT); each transaction generates an instant digital voucher or advice and is debited or credited in the bank statement immediately.
5. ConnectIPS, QR Payments and Electronic Cheque Clearing (ECC): ConnectIPS and QR payments transfer money instantly from one bank account to another, for example when a customer pays a shop by scanning its QR code. Under ECC, operated by Nepal Clearing House Ltd. (NCHL), physical cheques of one bank deposited into another bank are scanned and cleared electronically, so cheques are collected faster.

Because these instruments change the Passbook (bank statement) at once, often before the business records the transaction in its Cash Book, a customer’s direct deposit through ConnectIPS is a common item that the Bank Reconciliation Statement has to explain.

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.

We start from the Passbook balance, so the Cash Book is the target book. For each item, ask whether it makes the Cash Book balance higher (add) or lower (deduct) than the Passbook balance.

Lalitpur Enterprises
Bank Reconciliation Statement
As on the Last Day of Ashadh

Answer: Debit balance as per Cash Book = Rs. 88,700.

Working notes:

• (a) Unpresented cheques: Of the Rs. 35,000 of cheques issued, Rs. 20,000 were cashed only in Shrawan, after the date of the statement. The Cash Book was reduced by them when they were issued, but the Passbook was not reduced by the last day of Ashadh, so the Cash Book is lower: deduct Rs. 20,000. The other 35,000 - 20,000 = 15,000 was cashed in Ashadh and appears in both books, so it needs no adjustment.
• (b) Uncollected cheques: Only 28,000 - 10,000 = 18,000 was collected by the bank. The Rs. 10,000 still uncollected was already added in the Cash Book but not in the Passbook, so the Cash Book is higher: add Rs. 10,000.
• (c) Dishonored bill: When the discounted bill was dishonored, the bank debited the Passbook with the bill and the noting charges, 6,000 + 200 = 6,200. The Cash Book has not yet recorded it, so the Cash Book is higher: add Rs. 6,200.
• (d) Interest and commission: Interest of Rs. 1,800 credited only in the Passbook makes the Cash Book lower, so it is deducted. Commission of Rs. 300 debited only in the Passbook makes the Cash Book higher, so it is added.
• (e) Overcasting: Overcasting the debit (receipt) side overstated the Cash Book balance by Rs. 2,000, so the Cash Book is higher: add Rs. 2,000.
• Totals: Added items 10,000 + 6,200 + 300 + 2,000 = 18,500; deducted items 20,000 + 1,800 = 21,800.
• Check: 92,000 + 18,500 - 21,800 = 88,700.