Bank reconciliation: cash book adjustments versus timing differences
Thornbury Services has a bank column cash book showing a debit balance of £3,482 at 31 May 20X5. The bank statement at the same date shows a favourable balance of £4,296. The following have been identified: unpresented cheques £2,274; lodgements banked but not yet credited £860; bank charges £68, a standing order for insurance £145 and a customer's cheque for £310 returned unpaid, none of which appear in the cash book; a receipt from a customer entered in the cash book as £257 when the bank statement shows £275; and a cheque for £95 drawn by another customer of the bank which the bank has wrongly debited to Thornbury's account. The bookkeeper wants to put all six items through the cash book so that it then agrees to the bank statement.
1. Restate the cash book at 31 May 20X5, stating which items are adjusted in the cash book and why.
Read the worked answer
Only items the business could not know about from its own records are entered in the cash book. Timing differences and bank errors are not.
| Cash book (bank column) | £ |
|---|---|
| Balance b/d | 3,482 Dr |
| Bank charges | (68) |
| Standing order – insurance | (145) |
| Dishonoured customer cheque | (310) |
| Transposition correction (275 − 257) | 18 |
| Adjusted balance | 2,977 Dr |
Workings: 3,482 − 68 − 145 − 310 + 18 = 2,977.
The transposition is the business's own error - the correct amount of £275 was received, so the cash book must be increased by £18: Dr Bank £18 / Cr Receivables (customer) £18. Bank charges and the standing order are only notified by the bank, and the dishonoured cheque is only known once the bank returns it, so all three are recorded now: Dr Bank charges £68, Dr Insurance £145, Dr Receivables £310, Cr Bank £523 in total.
2. Prepare the bank reconciliation statement at 31 May 20X5.
Read the worked answer
| Reconciliation | £ |
|---|---|
| Balance per bank statement (favourable) | 4,296 |
| Add: lodgements not yet credited | 860 |
| 5,156 | |
| Less: unpresented cheques | (2,274) |
| 2,882 | |
| Add: cheque wrongly debited by the bank | 95 |
| Balance per adjusted cash book | 2,977 |
Reasoning:
- Lodgements are added because the bank has not yet recorded money the business has banked.
- Unpresented cheques are deducted because the business has recorded payments the bank has not yet seen.
- The £95 is added back because the bank statement is £95 lower than it should be. It is a bank error, not a business error, so it stays in the reconciliation and is never entered in the cash book.
- The two sides agree at £2,977, which confirms no item has been missed.
3. Explain why the bookkeeper's plan to clear all six items through the cash book is wrong, and state the double entry for the dishonoured cheque and its effect on receivables.
Read the worked answer
Unpresented cheques and uncredited lodgements are pure timing differences. Both have already been correctly recorded by the business; they simply have not yet passed through the bank. Posting them to the cash book a second time would double count them and leave the cash book wrong - and permanently wrong, because the entries would never reverse themselves. The £95 is not the business's transaction at all, so it cannot be posted to the business's ledger; the bank will reverse it once notified.
Dishonoured cheque: Dr Receivables (customer) £310 / Cr Bank £310.
Effect on receivables: the customer's account is restored to a debit balance of £310, so the debt is recoverable again and must be considered when setting the allowance for doubtful debts. If it is not reinstated, receivables is understated by £310 and the customer will never be chased for the money.