Nadia's Bank Reconciliation: Cash Book or Statement?
At 31 May Nadia's cash book shows a debit balance of £3,400, while the bank statement shows a credit balance of £3,102. The following are not yet reflected in both records: cheques issued to suppliers of £780 and £145 have not been presented; a lodgement of £520 does not appear on the statement; the bank has charged £38 in fees and paid a £260 insurance standing order, neither of which is in the cash book; a customer's cheque for £310 that Nadia paid in has been dishonoured; and the bank has mistakenly debited Nadia's account with £95 that belongs to another customer. Nadia wants to "just put the difference through as a sundry expense".
1. For each of the five differences, state whether it requires an entry in Nadia's cash book or is purely a bank reconciliation item, and why.
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| Item | Treatment | Reasoning |
|---|---|---|
| Unpresented cheques £780 and £145 | Reconciliation only | Nadia has already recorded them; the bank simply has not seen them yet. Nothing is wrong with her books. |
| Lodgement £520 not credited | Reconciliation only | Already a cash book receipt; it is in transit between the two records. |
| Bank charges £38 | Cash book entry | Nadia has not recorded them. Her cash book balance is out of date. |
| Standing order £260 | Cash book entry | A payment made on her behalf that she has not entered. |
| Dishonoured cheque £310 | Cash book entry | She debited bank when the cheque was received; it is now worthless, so reverse it: Dr Receivables £310 / Cr Bank £310. The customer owes the money again. |
| Bank error £95 | Reconciliation only | The bank's mistake. Nadia's cash book is correct; the bank must adjust its own records. |
The test is simple: does Nadia's own record differ from the truth? If yes, the cash book is wrong and must be corrected. If the bank's record is the one that is temporarily incomplete or wrong, it stays in the reconciliation.
2. Prepare the bank reconciliation at 31 May, starting from the bank statement balance, and prove the corrected cash book figure.
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Reconciliation of the bank statement balance
| £ | |
|---|---|
| Balance per bank statement (credit) | 3,102 |
| Less: unpresented cheques (780 + 145) | (925) |
| Add: lodgement not yet credited | 520 |
| Add: amount wrongly debited by the bank | 95 |
| Balance per corrected cash book | 2,792 |
Proof - corrected cash book
| £ | |
|---|---|
| Balance per cash book | 3,400 |
| Less: bank charges | (38) |
| Less: standing order | (260) |
| Less: dishonoured cheque | (310) |
| Corrected balance | 2,792 |
The two routes agree at £2,792, which is the true bank asset at 31 May and the figure that goes into the statement of financial position.
Note that £2,792 is a debit balance in the cash book - an asset - even though the statement said "credit £3,102". The credit balance simply reflects cheques not yet cleared.
3. Explain why the £95 must not be written off as a sundry expense, and what Nadia should do about it.
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The £95 is the bank's error, not a business cost. Nadia's cash book already tells the correct story; writing it off to sundry expenses would reduce profit by £95 for a payment she never made, and would permanently hide an amount that is recoverable.
Correct treatment:
- Leave the cash book untouched.
- Show the £95 as an addition in the bank reconciliation, so the two records agree.
- Contact the bank in writing, quote the statement date and amount, and ask for a correction. Many banks require notification within a stated period, so this should not wait.
- When the bank reverses it, the item drops out of the reconciliation and nothing in Nadia's ledger changes.
The £2,792 already includes the benefit of the £95, so the asset in the statement of financial position is correct. Writing it off would understate both bank and profit.