1.15     Query

Disclosure of bank balance –whether as per

cash book or as per the bank statement.

1.A Company is showing in its balance sheet the bank balance as per its cashbook. On reconciliation, the necessary entries are made in the cash book in respect of bank charges etc., but no reversal entry has been passed regarding cheques deposited but not realised and cheques issued but not presented for payment at the balance sheet date.

2.The querist is of the view that the disclosure of bank balance as per cash book in the balance sheet does not give a true and fair view of the state of affairs because the aforesaid balance does not represent the actual availability of funds with the bank, for instance, cheques deposited but not realised may be dishonoured. Therefore, according to the querist, entries in respect of cheques deposited but not realised and cheques issued but not presented for payment should be reversed to show the balance as per the bank statement.

3.The querist further argues that if the disclosure of bank balance as per cash book is allowed in the balance sheet, then it can be used to the disadvantage of the users or the financial statement. For example, The Chief Executive Officer of a company may draw money from the company by issuing a cheque in favour of the company without modifying the balance in the books. He can use this facility till the cheque because stale, i.e., for six month. The querist is of the view that if the balance as per the bank statement is insisted upon, the money withdrawn by the Chief Executive Officer by issuing the cheque will be shown as a debt to the company.

4.In this context, the querist has raised the following issues for the opinion of the Expert Advisory Committee:

i)          Whether the disclosure of the balance in the balance sheet as per the bank statement is the accepted accounting practice.

 

ii)         Whether the disclosure of bank balance in the balance sheet as per cash book gives a true and fair view of the state of affairs as per the provisions of Section 211 (3) of the Companies Act, in case the balance as per the bank statement is different from the balance as per cash book.

 

iii)         If not, what is the purpose of obtaining confirmation from the bank as regards the balance in the company’s account relevant for the purpose of disclosing the bank balance in the balance sheet?

                                                 Opinion                                               August 8, 1983

1. The Committee notes that in the bona-fide business transactions it is a normal commercial and accounting assumption that cheques would not normally be dishonoured. Consequently, the balances of debtors and creditors in the books of account are reduced and the Bank Account in the cash book debited/credited on the receipt and issue of cheques even though these are realised/presented for payment at a later date. The difference between the balance as per cash book and the balance as per the bank statement on the balance sheet date is reconciled through a Bank Reconciliation Statement for the purpose of internal scrutiny. Therefore, in the view of the Committee, the disclosure of bank balance as per cash book is the proper method to be followed.

2.  The Committee considered the suggestion of the querist that the balance as per the bank statement should be taken for the balance sheet purposes would necessitate reversal of entries in respect of cheques deposited but not realised and cheques issued but not presented for payment on the balance sheet date, which would necessitate, restatement of debtors’ and creditors’ balances as if the outstanding cheques have not been received/paid. In the view of the Committee, this is not the proper method since the parties to whom cheques have been issued will be shown on the same footing as the creditors (A similar situation will arise in case of debtors).

3. Regarding the example given by the querist, in para 3 of the query, in support of his contention that the balance as per cash book can be used to the disadvantage of the users of the financial statements, it may be stated that an entry in the bank statement without a corresponding entry in the cash book and vice versa can be discovered only by making a comparison between the two and preparing a Bank Reconciliation Statement. On the basis of the Bank Reconciliation Statement, fraudulent transactions of the type described by the querist can be discovered by the auditors while reviewing the internal control system or by examining the relevant documents e.g., discharged cheques returned by the bankers. In the view of the Committee, therefore, the disclosure of the balance as per cash book cannot normally be used for covering up fraudulent transactions against the users of financial statements.

4.On the basis of the above, the point-wise opinion of the Committee on the issues raised by the querist is a below:

(i)         The correct accounting practice is to show the balance as per cash book in the balance sheet. This balance should be reconciled with the balance as per the bank statement by preparing a Bank Reconciliation Statement.

 

(ii)        Since the disclosure of the balance as per cash book is in accordance with the accounting and commercial practice generally followed, it gives a true and fair view of the state of affairs in accordance with the provisions of Section 211 (3) of the Companies Act, 1956, even though the balance as per cash book and the balance as per the bank statement differ.

 

(iii)       The general objective of obtaining the bank statement is to get confirmation of various entries made in the cash book and to reconcile the differences between the two.

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