PROBLEMS of PARTNERSHIP ACCOUNTS

P & Q are partners sharing profit and losses in the ratios of 2 : 1

respectively. On 31st December they decided to dissolve the partnership when Their Balance Sheet was as follows.

AssetsRs.LiabilitiesRs.
Cash at bank
Sundry assets
10,000
70,000
Sundry Creditors
Capitals:
P 40,000
Q 20,000
20,000


60,000
Total80,000Total80,000

The assets except cash realized Rs. 90,000, and the creditors were paid in full. Expenses of dissolution were Rs. 2,000.

Pass the Journal entries; prepare the realisation account and Capital accounts.

2.         The Balance Sheet of A, B and C sharing profits and losses in the ratios of

3:2:1 was as follows on 3lst.Januarv, 2005.

Assets

Rs.

Liabilities

Rs.

Machinery

25,000

Sundry Creditors

12,000

Stock

11,000

Contingency Reserve

3,000

Debtors                  10,000 Capitals:       ‘
Less provision            500

9,500

A                    20,000

Patents

5,000

B                    15,000

Goodwill

8,000

C                    10,000

45,000

Cash

1,500

Total

60,000

Total

60,000

 

On the above date the firm was dissolved. The assets except cash realized Rs. 50,000.The creditors were paid Rs. 11,500 in full settlement. Expenses of dissolution came to Rs. 1,000.

Give journal entries and ledger Accounts to close the books of the firm.

Answer: Loss on Realization Rs. 9,000, A receives Rs. 17,000, B Rs 13,000, C Rs. 9,000.

 

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ADJUSTMENTS WHICH ONLY EFFECT THE CASH BOOK

The items which affect only the cash book are as under: •

i)          Bank charges, commission and interest

These are charges which bank deducted from customer account but are not

recorded by the customer into the cash book.

ii)               Unrecorded Receipts or Credits:

These are receipts, interest or any income received by the bank on behalf of the

customer but the customer has come to know only when the statement supplied

to him, so these are not recorded into the cash book.

iii)             Dishonoured Cheques

These cheques which are deposited into bank but refused by the concerned bank

for payment so the bank returned the cheques but such information could not be

conveyed to the customer in time.

iv.          Errol’s in Cash Book:

These are errors committed in the cash book which only effect the cash book but

not to bank records e.g. errors of omission, undercasting or overcastting etc. Now previous illustration will be solved by adjusted balance method:

Solution:                                           Cash Book

Dr.

Cr.

Date

Particulars Bank

Date

Particulars

Bank

To balance b/d To interest on Securities 1,580300 Bank charges Bank interest Adjusted balance.

20

1,850

Total

1,880

Total

1,880

 

 

Bank Reconciliation Statement Adjusted balance as per cash book (Dr.)Less:                  Un-credited chequesAdd:                   Un-presented chequesBalance as per Pass Book (Cr.)


Rs. 1,850 430 1,420 510 Rs. L930

 

Prepare the Bank Reconciliation Statement as on 31st December 2006 from the following particulars.

(a)              Balance as per Pass Book overdraft Rs. 69,000.

(b)             Markup on overdraft debited by the bank Rs. 2,500.

(c)             Out of the cheques of Rs. 2,800 paid on 25 December. One cheque of Rs. 1,000 was not yet credited by the bank.

(d)             Rs. 2,000 being the proceed of bills Receivable collected by the bank appears in bank statement but not in the cash book.

(e)              A cheque of Rs. 400 received from the customer and entered in the bank column of cash book was omitted to.paid in the bank.

(f)              That out of the cheques of Rs. 2,000 issued on 25 December, cheques worth Rs. 1,500 were not presented to the bank before 3 1 St December.

Bank Reconciliation Statement As on 31st December 2006

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SPECIMAN OF BANK RECONSILATION STATEMENT

Name of the business

Bank reconciliation statement As on

Balance as Per Cash Book………. Dr.

Less Uncredited on uncollected cheques

Add Unpresented cheques

Add Unpresented cheques

Add Incomes of all types credited by the bank less expenses paid or debited by ta bank.

Balance as per pass book (Cr.)

‘illustration –

The Cash Book of a Trader showed a balance of Rs. 1,580 at the Bank. This did not agree with the Pass Book. From the following particulars ascertain the

balance as per pass book.

(a)                Cheques paid in but not yet credited by the Bank Rs. 430.

(b)                Cheques issued but not yet presented for payment Rs. 510.

(c)                Bank charges made by the Bank not yet entered in the Cash Book Rs. 10.

(d)                  Interest charged by the Bank not yet entered in the Cash Book Rs. 20.

(e)                Amount collected as interest by the government securities not yet entered in the Cash Book Rs. 300.

Solution:                    Bank Reconciliation Statement

Rs.

Balance as per cash book (Dr.)                                                                           1,580

Less:                  Un-credited Cheques                                                                   430

1,150

Add:                   Un-presented cheques                                                                  510

1,660

Less:                  Bank charges

1,650

Less :                 Interest charged by the bank                                                          20

1,630

Add:                 Interest on Govt.. Securities collected by the bank                          300

Balance as per Pass Book (Cr.)                                                1.930

SECOND METHOD

*2.         Adjusted Balance Method:

An alternative method for preparing Bank Reconciliation Statement is to find out

the adjusted balance of the Cash Book by making all the adjustment i.e. recording their all those items which do not appear in it but which are found in the Pass Book. After computing the correct balance of the Cash Book, then with the help of the above method,

we can prepare the Bank Reconciliation statement.

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FIRST METHOD Starting with Debit Balance of Cash Book or Pass Book

Case A           Starting with Debit Balance of Cash Book or Pass Book

In case of debit balance of either Cash Book or Pass Book the following rules may be followed:

I. Deduct all cheques, drafts etc. deposit into Bank for collection not yet collected, credited or cleared by the Bank up to date of closing.

  1. Add to it all cheques drawn, issued or passed for payment, but they have not yet presented to the Bank for payment with in the date of closing.
  2. Add to it all payment received by the Banker directly on our behalf such as the
    Banker might have credited our account with the amount of the bills receivable, interests, dividends or any payment received by him and the same might not have been recorded in Cash Book.
  3. Deduct amount paid or debited on our behalf by the Bank such as interest on overdraft Bank charges and discount charges made by the Bank, collection charges, incidental charges, bills or cheques dishonoured.

Case – B:       Starting with Credit Balance of Cash Book or Pass Book:

Note: In case of credit balanCe of Cash Book or Pass Book, the above situation will be reversed and the following rules may be adopted:

  1. Add all cheques, drafts etc. deposit into Bank for collection not yet collected, credited or cleared by the Bank up to date of closing.
  2. Less to it all cheques drawn, issued or passed for payment, but they have not yet presented to the Bank for payment with in the date of closing.
  3. Less to it all payment received by the Banker directly on our behalf such as the
    Banker might have credited our account with the amount of the bills receivable, interests, dividends or any payment received by him and the same might not have been recorded in Cash Book.
  4. Add amount paid or debited on our behalf by the Bank such as interest on overdraft Bank cheques, Bank charges, discount charges made by the Bank, collection charges, incidental charges, bills or cheques dishonoured.A.      Following Items Will Be Added To The Debit Balance Of Either CashBook Or Pass Book And In Case Of Credit Balance Of Cash Book Or Pass Book The Treatment Will Be Reversed:
    1. Unpresented cheques
    2. Outstanding cheques
    3. Cheque issue by him self but dishonour
    4. Cheque dishonour on technical ground
    5. Any amount credited by the bank
    6. On receiving the credit advice or credit not from the bank
    7. Any amount directly deposited by himself or by an other in the bank account
    8. Any receipt like Interest, Commission, -Dividend, Rent, Discount, Interest on Investment (Govt., securities etc.) Interest credited by the bank, any collection by himself or by bank on customer’s.behalf.
    9. Credit side of cash book is overcasted of over added
    10. Debit side of the cash book is undercasted, less debited or under added
    11. Any amount wrongly debited to an other account (means the account to whom a reconciliation is not to be made)
    12. Any amount wrongly entered in the credit side of cash book

    B.      Following Items Will Always Be Deducted From The Debit Balance

    Of Cash Book Or Pass Book And In Case Of Credit Balance The Treatment Will Be Reversed.

    1. Uncredited cheques or Uncleard cheques or Uncollected cheques
    2. Omitted cheques
    3. Cheque received and deposited in the bank but dishonoured.
    4. Any amount debited by the bank or charged by the bank.
    5. Any amount paid by bank to any other party on customer behalf
    6. on receiving the debit advice or debit not from the bank.
    7. Any payment like Interest, Commission , Rent, Discount, Wages, Salaries, etc.
    8. Debit side or the cash book is overcasted or overadded.
    9. Credit side the cash book is undercasted or underadded.
    10. Any amount wrongly debited the account (means the account to whom reconciliation is to be made)

    11                  Any amount credited wrongly to an other account (means account to whom
    reconciliation is not to be made)

    12.     Any amount wrongly entered in the debit side the cash book twice or more

    13.     Any cash or cheque is in transit at the reconciliation date.

  5. METHODS OF PREPARING

 

S. No

.                                                                                                           —  — …-.. ….. ….. ,.

Causes of discrepancy


Debit balance of cash book or pass book

A

Credit balance of cash book or pass book

  1. 1.   
Uncredited or Uncollected cheques

Less (-)

Add (+)

Cheques  deposited but not  collected orcredited by the Bank/cheques dishonoured/

cheques  ‘omitted   to  be     paid  into             bank.

Cheques entered in the cash book twice

Unpresented cheques

*Add (+)

Less (-)

Cheques issued but not yet presented for payment. Unpresented cheques.Cheques issue but returned by the bank on

technical grounds.  Cheque  issued but

dishonored by the bank

  1.  ’
Incomes credited by the Bank

Add (+)

Less (-)

Incomes credited  by the   Bank such. asdividend or interest on investment, interest

on   Govt.  securities,  bills  receivable
collected by the Bank and amounts directly

paid    by    the   customers    into   depositor
account. Credit advice from the bank etc.

Expenses paid or debited by the Bank

Less (-)

Add (+)

Expenses debited by the bank such as bankcharges, interest on  overdraft,            insurance
premium, bill payable paid by the bank. Any amount paid by the bank on over behalf etc.

 

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INDIVIDUAL POINTS OF DIFFERANCE AND THEIR EFFECT ON BANK RECONSILATION STATEMENT

Case – 1.          Starting with a debit balance of cash book or credit balance of

the pass book.

Cheques issued but not presented:

• Suppose on 1 st March, 2007 the bank balance of cash book of Mr. Imran is Rs. 10,000 and Mr. Imran has issued cheques on 5th March to Mr. Karim Rs. 2500. Mr. Imran will enter the cheque on the credit side of the cash book, but the bank will made a debit entry in the pass book. Suppose that Mr. Karim has not presented cheques to the bank for payment. In such a case the balance in the cash book and pass book will appear as under:-

Cash Book with bank column

Date

Particulars

Amount

Date Particulars

Amount

2007 2007 By Karim

2,500

March

To balance

10,000

March By balance

7,500

10,000

10,000

 

Pass Book

Date Particulars

Credit

Debit

Dr. or Cr.

Balance

2007Match_ Balance

Cr.

10,000

 

It is clear from the above situation that the difference of Cash Book or Pass Book is due to the amount of cheque issued to Karim but that has not yet been presented him for payment and so not recorded in the Pass Book. In order to reconcile the two balances of both books if the balance is starting with the cash book a sum of Rs. 2,500 is to be added in the cash book balance and if the balance is starting from the pass book, it is to be deducted from the pass book balance.

Case – 2:           Cheques deposited in the bank but not yet collected and
credited in the Pass Book:

In the second case it is supposed that Mr. Imran has received cheque for Rs. 1,000 from Mr. Rahim and deposited in the bank on 10th March, 2007. Mr. Imran has entered this cheque on the debit side of the Cash Book but the bank has not yet credited the customer account. Naturally there will be difference between the balance of the cash book and pass book as illustrated as under:-

Cash Book bank column onl

Date

Particulars

Amount

Date

Particulars

Amount

2007 March 10 To balance To Rahim

10,000

1,000

2007 March 10

By balance

11,000

11,000

11,000

 

Pass Book

Date Particulars

Credit

Debit

Dr. or Cr.

Balance

2007 March Balance

Cr.

10,000

 

To reconcile the two balances the amount of the cheque deposited in the bank either it should be deducted from the cash book balance or added in the pass book balance.

Case – 3:         Amounts received or credited to the depositor’s Account:

The bank might have credited Mr. Imran account with the amount Rs. 2,000 on account of bills receivable interest dividends or any payment received by bank and credited in the depositor’s account in the bank but the same have not been recorded in the cash book.

Cash Book bank column onl

Date

Particulars

,

Amount

Date

Particulars

Amount

2007 2007
March

To balance

10,000

March

By balance

10,000

10,000

10,000

 

Pass Book

Date Particulars

Credit

Debit

Dr. or Cr.

Balance

2007
March Balance

10,000

Bills receivable/
dividend/interest

2,000

Cr.

2,000

12,000

 

Case – 4:         Amounts paid Or debited by the bank to the depositor’s account:

In this case suppose bank has debited the Imran’s account on account of interest on overdraft, bank charges etc amounting Rs. 1,000 on 6th March 2007 but that has not yet been entered in the cash book. In such a case the balance in the cash book and pass book will appear as under:

Cash Book bank column onl

Date

Particulars

Amount

Date

Particulars

Amount

2007 March

To balance

10,000

2007 March

By balance

10,000

10,000

10,000

 

Pass Book

Date Particulars

Credit

Debit

Dr. or Cr.

Balance

2007 Balance

10,000

March 6 Interest & bank
charges

1,000

Cr.

9,000

 

To reconcile the above two balances either Rs. 1,000 bank charges and interest on overdraft will be deducted from the cash book or to added to the pass

book balance.

 

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METHODS OF PREPARING BANK RECONCILIATION STATEMENT

METHODS OF PREPARING BANK RECONCILIATION STATEMENT
The Bank Reconciliation can be prepared either of the following methods:

  1. 1.              Starting with cash book or pass book
  2. 2.              Reconciliation with adjusted cash book balance
  3. 3.              Corrected method or adjusted method

Before discussing about the methods of preparing Bank Reconciliation statement, it is necessary to understand that how the transactions relating to the bank are practically recorded in the cash book bank column and pass book. It is explained with the help of the

following illustration.

‘Illustration – 1:1

Enter the following transactions of a trader in the cash book and pass book:

2007

March 1            Opened the current account By Rs. 5,000.

5         Cash Rs. 10,000 deposited into the bank.

10       Cash drew from bank Rs. 2,000.

14       Made payment to a creditor by cheque Rs. 300. This cheque is presented

into the bank

15       Cheque received from a debtor amounting to Rs. 500 deposited into the
bank and bank has collected and credited the amount of this cheque, Bank column onl

A.-ll/•••••11./•••Date

___ _

Particulars

_ _ _ __ ,

Bank

Date

,

Particulars

Bank

2007 2007
Mar. 1 To Cash

5,000

Mar. 10 By Cash -

2,000

5 To Cash

10,000

Mar. 14 By Creditor

300

15 To Debtor

500

Balance c/d

13,200

Total

15,500

Total

15,500

 

Date

Particulars

Deposits
(Cr.)

Withdrawls
(Dr.)

Balance

Dr. or
Cr.

2007

Jan. 1

Cash

5,000

5,000

Cr.

5

Cash

10,000

15,000

Cr.

10

Cash

2,000

13,000

(By cheque No.)

Cr.

14

Cash

300

12,700

Cr.

“”         15

By Cheque No.

500

13,200

Cr.

 

From the above illustration it is clear that the debit balance of cash book (bank column) means the bank is debtor. Same purpose serve the credit balance of pass book i.e. the customer is creditor (it means debtor is bank) when all the entries relating to bank are made in the cash book and also in the Pass Book then the balance of cash book must – agree with the balance of pass book. This balance would disagree only when any entry relating to bank is made in cash book but not in the pass book or vice versa.

The above situation can be more clarified by taking out the treatment of individual points of difference and their effect on Bank Reconciliation statement.

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Fundamentals of Financial Accounting

 ‘Illustration: 1

The firm of Rashid & Co. of Karachi consigned to Vazir & Co. of Hyderabad 50 cases of piece goods valued at Rs. 350 each.

  1. The consignors paid freight and insurance thereon Rs. 1,800.
  2. They received as an advance from Vazir & Co. Rs. 8,000.
  3. Received an Account Sales from Vazir & Co. giving particulars as under:‑

Gross proceeds Rs. 28,000; expenses of Warehousing, Carriage, Dock dues, etc. incurred

by them amounted to Rs. 900 and their commission Rs. 1,000.

Received a Bank Demand Draft of the balance due by them on the consignment.

From the above particulars, pass journal entries and prepare the necessary ledger

Accounts in the books of consignors and those of consignee.

Solution:

In The Books of Rashid & Co. (Consignors)

Journal Entries

Date

Particular

L.F.

Debit

Credit

Rs.

Rs.

Consignment to Hyderabad A/c

17,500

To Goods sent on Consignment A/c

17,500

(Being 50 cases of piece goods at Rs.
350 cash sent to M/s. Vazir & Co.
Hyderabad, to be sold on our Account)
Consignment to Hyderabad A/c

1,800

To Bank A/c

1,800

(Being payment of freight and insurance)
Bank A/c

8,000

To Vazir & Co. (Consignee)

8,000

(Being amount received from them as an advance against the consignment)
Vazir & Co. (Consignee)

28,000

To Consignment to Hyderabad A/c

28,000

(Being    the    gross   proceeds   of    theconsignment as per the (Account Sales).
Consignment to Hyderabad A/c

1,900

To Vazir & Co. (Consignees)

1,900

(Being    expenses    incurred   and    theircommission as per Account Sales).
Consignment to Hyderabad A/c

6,800

To Profit & Loss A/c

6,800

(Being transfer of profit on consignment)

 

 

Consignment Account

Bank A/c

To Vazir & Co. (Consignees)

(Being demand draft received from

them for balance ,lue).
18,100

18,100

nsi nment to Hyderabad A/C

DateParticularsAmountDateParticularsAmount
To Goods sent on

Consignment A/c

To Bank (Freight &
Insurance) A/c

To Vazir & Co
Expenses and Commission)

To Profit & Los



Total:
Rs.

17,500

1,800


1,900



6,800



28,000
By Vazir & Co

(Gross Proceeds)











Total:
Rs,

28,000












28,000

DateParticularsJ/FAmountDateParticularsJ/FAmoigat


To Trading A/c
Rs.

17,500
By Consignment to Hyderabad A/cRs.

17,500
Total:17,500Total:17,500

DateParticulars J/FAmount Rs.DateParticularsJ/FAmount Rs.

To Consignment


Hyderabad A/c





28,000
By bank A/c


By Consignment
to Hyderabad

A/c


By Bank
8,000



1,900






18,100
Total:28,000Total:28,000

In The Books of Rashid & Co. (Consignee)
Journal Entries

DateParticularL.F.DebitCredit

Rashid & Co. (Consignors)
To Bank A/c
(Being amount paid to them as an advance)

Rashid & Co. (Consignors)
To Bank A/c
(Being expenses paid on consignment).

Bank A/c
To Rashid & Co. (Consignors)
(Being sale proceeds of 50 cases of piece goods)

Rashid & Co. (Consignors)
To Commission A/c
(Being our commission on
consignment)

Rashid & Co. (Consignors)
To Bank A/c
(Being demand draft remitted for the balance)
Rs.
8,000



900



28,000




1,000




18,100
Rs.

8,000



900



28,000




1,000




18,100

DateParticularsAmount Rs.DateParticularsAmount Rs.
To Bank A/c

To Bank A/c

To Commission A/c

To Bank A/c

Total:
8,000

9,00

1,000


18,100

28,000
Bank A/c








Total:
28,000








28,000

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Short Answer Questions of PARTNERSHIP ACCOUNTS

Write the short Answers of the following questions

Q.1.              What is meant by dissolution of partnership?

Q.2.              Under what circumstances firm is dissolved?

Q.3.              What is dissolution by agreement?

Q.4.              Define the dissolution by Notice.

Q.5.              When the dissolution of partnership takes place compulsory.

Q.6.              Define the Contingent dissolution.

Q.7.              Under what circumstances partnership may dissolve by the order of the court?

Q.8.              Differentiate between dissolution of firm and dissolution of partnership.

Q.9.              What is realization account?

Q.10.       What is Garner vs. Murray Rule?

Q.11.       What are the implications of the Garner vs. Marry decision?

Q.12.       In which situation the Garner vs. Murray rule is applicable?

Q.13.       Explain the application of Garner vs. Murray rule when capitals are fluctuating.

Q.14.       What are contra asset accounts?

Q.15.       How the accounts are settled among the partners at the time of dissolution?

Q.16.       How the losses of the firm on dissolution have to be made up?

Q.17.       What Journal entry will be passed for closing various assets account in case of dissolution of the firm?

Q.18.       What Journal entry should be passed for transfer of all the liabilities to realisation account in case of dissolution of the firm?

Q.19.       Pass Journal entry if the assets are sold for cash in case of dissolution of the firm?

Q.20.       What will be the Journal entry for the payment of the liabilities in case of dissolution of the firm?

Q.21.       Pass Journal entry for the payment of expenses of realisation in case of dissolution of the firm?

Q.22.       What will be the Journal entry for assets taken over by any partner in case of dissolution of the firm?

Q.23.       Pass Journal entry for the liabilities taken over by the partner in case of dissolution of the firm.

Q.24.       Pass Journal entry for the sales of unrecorded assets in case of dissolution of the firm?

Q.25.       What will be the entry for the payriit..t of the unrecorded liabilities in case of dissolution of the firm?

Q.26.   What Journal entry should be passed for transfer of reserve or undivided profit to the partners’ capital account in case of dissolution of the firm?

Q.27.   Show Journal entry for transfer of profit on realisation to partners’ capital account.

Q.28.   Pass Journal entry for transferring of loss to realisation account.

Q.29.   What Journal entry will be passed for payment of partners’ loan in cash in case of dissolution of the firm?

Q.30.   Show Journal entry for the repayment of partners’ surplus capital balances in case of dissolution oft the firm?

Q.31.   Pass Journal entry for bringing in cash by the partners to make up the deficiency in their capital accounts in case of dissolution of the firm.

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DISTINCTION BETWEEN CASH BOOK AND PASS BOOK

DISTINCTION BETWEEN CASH BOOK AND PASS BOOK

In Both the books although we record the same transaction yet there are some points of difference, which are listed below.

 

Cash Book (Bank column)

Pass book

I.

The entries in the cash book are made by the depositor himself 1. The entries in the pass book are made by the bank
2.3. Its debit balance shows cash at bank and credit balance shows bank overdraft, When the money is deposited in the bank it is recorded in the debt side of the cash book when it is with drawn it is recorded on the credit side Its debit balance shows bank overdraft and credit balance shows cash at bank. When money is deposited in the bank it is recorded on the credit side and when with drown it is recorded on the debit side.
For collection purpose when the cheque is deposited in the bank it is recorded on the date of deposited in the cash book. 4. In pass book it is recorded when it is actually collected from the debtor’s bank.
5. For payment purpose when cheque is issued to creditor is recorded on the date of issue in the cash book. 5. In pass bank it is recorded when it is paid by the bank to the creditor.

 

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ADVANTAGES OF BANK RECONCILIATION STATEMENT

After finding out the causes of discrepancy the Bank Reconciliation is prepared in order to derive the following advantages:‑

  1. Any mistake in cash book and pass book is detected.
  2. Through the preparation of Bank Reconciliation true bank balance can be ascertained. It facilitates the conduct and control of bank transaction.
  3. Any delay in collecting a cheque is detected and necessary steps are taken.
  4. If by mistake, pass book balance is shown less, the bank may wrongly dishonour our cheques for insufficiency of funds. As a result, the goodwill of the business will be injured and the creditors will refuse to accept cheques in future. Such a situation can be avoided if Bank Reconciliation Statement is prepared at regular intervals.

I. It prevents the employees of the business as also of the bank from adopting unfair means since defalcations, if any, can be easily detected through Bank Reconciliation Statement.

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