Mile 4 Provisions: Cash Book and Bank Statement Gap
Mile 4 Provisions is a retail shop in Bamenda. On 31 March 20X5 its cash book (bank column) showed a debit balance of 594,200 FCFA, while the bank statement showed a credit balance of 612,750 FCFA. The owner cannot understand why the two figures differ and has asked you, as the newly appointed bookkeeper, to investigate. You find the following: unpresented cheques 95,400 FCFA; deposits not yet credited 38,600 FCFA; bank charges 7,250 FCFA not entered in the cash book; a standing order for rent 25,000 FCFA not entered; a customer's cheque for 42,000 FCFA deposited and later dishonoured, still shown as a receipt in the cash book; a receipt of 18,300 FCFA from a customer entered in the cash book as 13,800 FCFA; and a direct credit from a debtor 31,500 FCFA appearing only on the bank statement. The owner also wants to know whether the cash book must be corrected before a reconciliation statement is prepared.
1. Prepare the adjusted cash book (bank column) and a bank reconciliation statement at 31 March 20X5. Show clearly which items adjust the cash book and which are timing differences.
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Adjusted cash book (bank column)
| Item | FCFA |
|---|---|
| Balance b/d | 594,200 |
| Bank charges | (7,250) |
| Standing order: rent | (25,000) |
| Dishonoured cheque reversed | (42,000) |
| Correction of receipt: 18,300 - 13,800 | 4,500 |
| Direct credit from debtor | 31,500 |
| Adjusted balance c/d | 555,950 |
Bank reconciliation statement at 31 March 20X5
| Item | FCFA |
|---|---|
| Balance per bank statement (credit) | 612,750 |
| Add: deposits not yet credited | 38,600 |
| Less: unpresented cheques | (95,400) |
| Balance per adjusted cash book | 555,950 |
Reasoning: items already on the bank statement but missing from the cash book are entered in the cash book; items recorded in one book but not yet in the other are timing differences and appear in the reconciliation.
2. Explain why the dishonoured cheque and the transposition error are treated differently in the reconciliation, and identify two internal control weaknesses revealed by the facts.
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The dishonoured cheque is a cash book adjustment because the bank has refused payment: the earlier receipt must be reversed, reducing the cash book. The transposition error is also a cash book error: the receipt was understated by 4,500, so the cash book is increased. Neither is a timing difference. By contrast, deposits not credited and unpresented cheques are timing differences; both records are correct but the bank has not yet processed them. Weaknesses: (i) bank charges and standing orders are not recorded promptly, so the cash book is incomplete; (ii) the receipt was entered incorrectly, suggesting no independent check of paying-in slips against cash book entries. Recommendation: reconcile monthly, use a bank column with separate analysis, and have the owner review the reconciliation.