Thato Traders: Reconciling When the Bank Is Also Wrong
Thato Traders' cash book showed a debit balance on the bank column of P14,620 at 31 May 2025, while the bank statement on the same date showed a balance of P16,370 in the firm's favour. Investigation revealed the following:
- Cheques for P2,150 and P980 issued to suppliers had not been presented.
- A deposit of P4,300 banked on 30 May had not yet been credited by the bank.
- Bank charges of P180 and a standing order for rent of P1,200 appeared on the statement only.
- A cheque for P640 from a customer was dishonoured; the bank's advice had not been entered in the cash book.
- A cheque for P1,500 paid to a supplier had been entered twice in the cash book.
- A customer had paid P2,000 directly into the bank; Thato had not recorded it.
- The bank had debited the account with P900 that belonged to another customer.
1. Update the cash book (bank column) and state the adjusted balance at 31 May 2025.
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Cash book (bank column)
| Dr | P | Cr | P |
|---|---|---|---|
| Balance b/d | 14,620 | Bank charges | 180 |
| Customer's direct payment (6) | 2,000 | Standing order – rent (3) | 1,200 |
| Supplier's cheque entered twice (5) - correction | 1,500 | Dishonoured cheque (4) | 640 |
| Balance c/d | 16,100 | ||
| 18,120 | 18,120 |
Adjusted cash book balance = P16,100 debit (favourable).
Reasoning:
- Item 5: the payment was deducted twice, so the cash book balance is P1,500 too low - it must be added back.
- Item 6: a receipt the firm has not recorded - add it.
- Items 3 and 4: payments/charges the firm has not recorded - deduct them.
- Item 7 is not a cash book item: the firm never made the payment, so there is nothing to record. The bank must reverse it; it is handled in the reconciliation statement only.
2. Prepare a bank reconciliation statement at 31 May 2025 that starts from the bank statement balance and ends at the adjusted cash book balance.
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Bank reconciliation statement at 31 May 2025
| P | |
|---|---|
| Balance per bank statement (favourable) | 16,370 |
| Add: amount wrongly debited by the bank to this account (7) | 900 |
| 17,270 | |
| Less: deposit banked 30 May, not yet credited (2) | (4,300) |
| 12,970 | |
| Add: unpresented cheques (2,150 + 980) (1) | 3,130 |
| Balance per adjusted cash book | 16,100 |
Check in the other direction: 16,100 + 4,300 − 3,130 − 900 = 16,370, which agrees with the bank statement. The difference between the two opening figures (16,370 − 14,620 = P1,750) is simply the net effect of the unrecorded items now posted to the cash book: +2,000 + 1,500 − 180 − 1,200 − 640 = +1,480, plus the P270... - note that the reconciliation, not that shortcut, is the reliable test, because item 7 lies outside the cash book entirely.
3. Explain why the bank's P900 error is dealt with in the reconciliation statement and not in the cash book, while the bank charges are dealt with in the cash book and not in the reconciliation statement.
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The rule is: each party corrects only its own records.
- Item 7 (the P900) is the bank's mistake. Thato Traders' cash book is already right - it has no record of the payment because the firm never made it. Making an entry in the cash book would create a fictitious payment and understate the firm's real balance. Instead, the error is shown as an adjustment to the bank statement balance in the reconciliation, effectively saying: if the bank had not made this mistake, its statement would show P900 more. Thato should also notify the bank so the entry is reversed.
- Item 3 (charges P180 and standing order P1,200) are the firm's omissions. The bank has correctly reduced the account, and the firm genuinely owes those amounts, so its own cash book must be updated to show the true bank balance. Once recorded in the cash book, the item appears on both records and therefore cancels out - it cannot also appear in the reconciliation.
- The same logic explains items 5 and 6 (firm's errors, cash book) versus items 1 and 2 (timing differences, reconciliation only).
In short, the reconciliation statement exists to explain timing differences and bank errors; the cash book is updated for anything the firm has failed to record or recorded incorrectly.