Bank reconciliation with unpresented cheques and bank error
Rivergate Traders' cash book showed a debit balance of £4,860 at 31 March 20X5, while the bank statement showed a credit balance of £2,800 on the same date. The following were then discovered: bank charges of £120 and a standing order of £600 had not been entered in the cash book; a customer's cheque for £740 had been dishonoured and no entry made; a receipt of £1,200 had been entered twice in the cash book; cheques totalling £3,400 had been sent to suppliers but had not yet cleared the bank; lodgements of £1,850 had been recorded in the cash book but did not appear on the bank statement; and the bank had debited a cheque for £950 to the account twice, although it had been paid once. The owner cannot understand why the two balances differ and is worried that the bank statement shows a credit balance when the cash book also shows a debit balance.
1. Prepare the corrected cash book balance at 31 March 20X5.
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Only items that the business has not yet recorded belong in the cash book:
| Item | £ |
|---|---|
| Cash book debit balance | 4,860 |
| Bank charges | (120) |
| Standing order | (600) |
| Dishonoured cheque | (740) |
| Receipt entered twice | (1,200) |
| Corrected cash book balance | 2,200 |
The duplicate receipt is removed because the cash book has been increased twice for the same money. The dishonoured cheque reverses the earlier receipt: the bank has taken the money back, so the cash book must be reduced. Bank charges and the standing order are payments shown on the statement but missing from the cash book. The unpresented cheques, outstanding lodgements and bank error are timing or bank-record differences, so they are used in the reconciliation rather than the cash book.
2. Prepare a bank reconciliation statement starting from the bank statement balance and reconcile it to the corrected cash book balance.
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| Bank reconciliation at 31 March 20X5 | £ |
|---|---|
| Balance per bank statement (credit) | 2,800 |
| Less unpresented cheques | (3,400) |
| Add outstanding lodgements | 1,850 |
| Add bank error: cheque debited twice | 950 |
| Balance per corrected cash book | 2,200 |
Unpresented cheques are deducted because the cash book has already reduced the balance, but the bank has not yet done so. Outstanding lodgements are added because the cash book has already increased the balance, but the bank has not yet received the money. The bank error is added back because the bank has reduced the account twice for a single payment. The two records now agree. The fact that both balances are described differently-cash book debit and bank statement credit-is normal: they are written from opposite points of view.
3. The dishonoured cheque was from a customer who has promised to pay next month. Should the £740 be treated as an irrecoverable debt?
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Not automatically. When a cheque is dishonoured, the bank has not received the funds, so the cash book must be reduced and the customer's account reinstated as a receivable. The debt then becomes an ordinary trade receivable. A promise to pay next month is evidence that the customer may still settle, so writing it off immediately would be premature. The decision depends on the customer's financial position and the likelihood of recovery. If there is objective evidence that the customer cannot pay, the £740 should be written off as an irrecoverable debt and the expense recognised in profit or loss. If recovery remains probable, it stays as a receivable and is not treated as a bad debt. The dishonour itself affects cash and receivables, not profit.