Bank Statement Versus Cash Book at MmaMma Traders
On 30 June the cash book of MmaMma Traders showed a debit balance of P3,140. The bank statement on the same date showed a credit balance of P4,905. The following were discovered: (1) cheques paid to suppliers totalling P1,860 had been entered in the cash book but had not yet been presented; (2) a customer's cheque for P620 deposited on 28 June had been dishonoured and returned, but no entry had been made in the cash book; (3) bank charges of P95 and a standing order for insurance of P240 appeared on the statement only; (4) a deposit of P1,400 made on 30 June did not appear on the statement; (5) the bank had credited the account with P510 belonging to another customer in error. The owner wants to know why the two balances differ and what the true cash book balance is.
1. Prepare the cash book adjustments and calculate the corrected cash book balance. Then explain whether the corrected cash book balance should agree with the bank statement balance.
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Items already in the cash book but not the statement (timing differences) do not change the cash book: unpresented cheques P1,860 and the unbanked deposit P1,400.
Items on the statement not in the cash book must be entered:
- Dishonoured cheque P620: reduce cash book (credit) - the earlier deposit is reversed.
- Bank charges P95: credit cash book.
- Standing order P240: credit cash book.
- Wrong credit of P510: this is the bank's error, not the firm's; it must not be entered in the cash book. It is dealt with in the reconciliation statement.
Corrected cash book: 3,140 - 620 - 95 - 240 = P2,185 debit.
The corrected cash book balance will not equal the bank statement balance because timing differences remain. Proof via reconciliation: statement balance 4,905 credit, less unpresented cheques 1,860, plus deposits not credited 1,400, less the bank's erroneous credit 510 = 4,905 - 1,860 + 1,400 - 510 = P3,935 credit, which equals the corrected cash book debit of P2,185 plus... check: a credit statement balance of 3,935 corresponds to a debit cash book of 3,935, so the two still differ. The remaining P1,750 difference is unexplained and must be investigated before the accounts are finalised; it may be an unrecorded cheque or a further bank error. Presenting a reconciliation that 'balances' by plugging the figure would conceal a real control weakness.
2. Explain why the dishonoured cheque and the bank's erroneous credit are treated differently, and state the effect on the statement of financial position of ignoring the dishonoured cheque.
Read the worked answer
The dishonoured cheque is a transaction of the business: the customer failed to pay, so the business's asset (bank) has genuinely fallen and the customer owes the money again. The cash book must record it, and the amount should be restored to receivables (or treated as a bad debt if uncollectible). The bank's erroneous credit is not a transaction of the business at all; the firm has no right to the P510, so it must not be recorded as income or as a bank asset. It is corrected by the bank and shown only as a reconciling item.
If the dishonoured cheque is ignored, bank is overstated by P620 and receivables are understated by P620. Total assets are overstated by P620, profit is overstated (since the sale may never be collected), and the current ratio is flattered. The owner would believe cash is stronger than it is.