Pemberton Trading: reconciling a cash book that is not the same as the bank
At 31 May 20X4 the cash book of Pemberton Trading showed a debit balance of £1,845.20 and the bank statement showed a credit balance of £1,857.10. The following had not been entered in the cash book: bank charges £28.50, a standing order for insurance £150.00, and a customer's cheque for £96.00 returned by the bank marked 'refer to drawer'. A receipt of £270.00 from a customer had been entered in the cash book as £207.00. Comparison with the statement showed unpresented cheques totalling £612.40 and lodgements not yet credited of £389.00. One unpresented cheque, for £118.00, is dated 12 October 20X3 and relates to a supplier who says it was never received.
1. Prepare the adjusted cash book and the bank reconciliation at 31 May 20X4. State clearly which items change the cash book and which are only reconciling items.
Read the worked answer
Adjusted cash book (bank column)
| £ | |
|---|---|
| Balance per cash book | 1,845.20 Dr |
| Bank charges | (28.50) |
| Standing order - insurance | (150.00) |
| Cheque returned unpaid (refer to drawer) | (96.00) |
| Receipt understated (270.00 − 207.00) | 63.00 |
| Adjusted balance | 1,633.70 Dr |
All four of these items have already passed through the bank account, so the business must record them. They are corrections to the cash book, not reconciling items.
Bank reconciliation at 31 May 20X4
| £ | |
|---|---|
| Balance per bank statement | 1,857.10 Cr |
| Less unpresented cheques | (612.40) |
| Add lodgements not yet credited | 389.00 |
| Balance per adjusted cash book | 1,633.70 Dr |
The two remaining items are timing differences: the bank has not yet seen them, so the statement will catch up. They belong only in the reconciliation.
2. Explain why the £118 cheque requires separate consideration and state the treatment you recommend, with its effect on both sides of the reconciliation.
Read the worked answer
A cheque dated 12 October 20X3 still unpresented at 31 May 20X4 is roughly seven months old, and the supplier says it was never received. It is not a normal timing difference - the bank will probably never see it, because it has been lost or the payee has destroyed it.
If the reconciliation treats it as 'unpresented' indefinitely, the cash book understates the bank balance and the payable to the supplier is treated as settled when it is not. The liability is still owed.
Recommended treatment
- Ask the bank to stop the cheque.
- Reverse it in the cash book: Dr Bank £118.00, Cr Payables £118.00 - the supplier is owed the money again.
- Reissue the payment.
Effect on the figures
- Adjusted cash book: 1,633.70 + 118.00 = £1,751.70 Dr
- Unpresented cheques: 612.40 − 118.00 = £494.40
- Reconciliation: 1,857.10 − 494.40 + 389.00 = £1,751.70 - agrees.
Note the reconciliation must be redone; adjusting only one side would break the agreement.
3. The owner says: 'If my cash book is right, why doesn't the bank agree?' Explain the two causes of difference and which one requires an entry in the cash book.
Read the worked answer
There are exactly two categories.
1. Timing differences - a transaction is recorded by one party but not yet by the other.
- Unpresented cheques: the business has paid, the bank has not yet seen the cheque.
- Lodgements not yet credited: the business has banked, the bank has not yet cleared it. These appear only in the reconciliation. No cash book entry is made, because the cash book is already correct; the bank will catch up.
2. Items the business has not recorded, or has recorded wrongly
- Bank charges, interest, standing orders and direct debits - the bank knows, the business does not.
- Dishonoured cheques - the bank has reversed a receipt the business still shows.
- The business's own errors, such as £270 entered as £207. These must be entered in the cash book, because the bank statement is the evidence of what actually happened and the cash book is wrong.
The test to apply to any item: has it already gone through the bank account? If yes, adjust the cash book. If no, put it in the reconciliation.