Q.While preparing a Bank Reconciliation Statement starting from a favourable balance as per Cash Book, interest collected by the bank on the firm's investments (credited in the Pass Book, but not yet recorded in the Cash Book) should be:
(A) Subtracted
(B) Added
(C) Ignored, since it is not the firm's own transaction
(D) Shown as a contra entry

This checks whether the student can correctly apply the 'bank has already recorded it, the firm hasn't' rule to a receipt rather than a charge.

The correct option is (B).

The bank has already collected and credited this interest in the Pass Book — from the bank's point of view, the firm's balance is already higher by this amount. The firm, however, has not yet made any entry for it in its own Cash Book, so the Cash Book balance is understated relative to the Pass Book by exactly this amount. To reconcile from the (lower) Cash Book balance to the (already higher) Pass Book balance, this item must therefore be ADDED.

Why the other options are wrong:

• (A) would apply to an item the bank has already DEDUCTED (like bank charges), not one it has credited.
• (C) is wrong — this interest genuinely belongs to the firm and must eventually be entered in its Cash Book; a BRS exists precisely to bring such bank-only items to light so they can be recorded. …

Students sometimes assume every 'bank-only' entry must be subtracted, without checking whether it is a RECEIPT (credited by the bank — add) or a CHARGE (debited by the bank — su …