Dishonoured Cheque and the Bank Reconciliation
On 31 March 2025 the cash book of Meera Traders showed a debit balance of ₹42,500. The bank statement showed a credit balance of ₹40,550. The accountant noted: (i) cheques of ₹8,400 deposited on 29 March were credited by the bank on 2 April; (ii) cheques of ₹5,600 issued on 28 March were presented on 3 April; (iii) bank charges ₹450 and interest credited ₹1,200 appear only in the bank statement; (iv) a customer’s cheque for ₹3,000 was dishonoured on 30 March but no entry was made in the cash book; (v) the bank paid an insurance premium of ₹2,500 under a standing instruction, not recorded in the cash book. The accountant is unsure whether the dishonoured cheque should first be entered in the cash book or shown only in the reconciliation statement, and whether the statement balance of ₹40,550 agrees after adjustment.
1. Compute the adjusted cash book balance and prepare a reconciliation statement from the adjusted cash book to the bank statement. Explain why each item is added or deducted.
Read the worked answer
First update the cash book for items already recorded by the bank:
- Opening cash book balance: ₹42,500 Dr
- Add interest credited by bank: ₹1,200
- Less bank charges: ₹450
- Less dishonoured customer cheque: ₹3,000
- Less insurance premium paid by bank: ₹2,500
Adjusted cash book balance = 42,500 + 1,200 − 450 − 3,000 − 2,500 = ₹37,750 Dr.
Reconciliation from adjusted cash book to bank statement:
| Particulars | ₹ |
|---|---|
| Balance as per adjusted cash book | 37,750 Dr |
| Add: cheques deposited but not yet credited | 8,400 |
| Less: cheques issued but not yet presented | (5,600) |
| Balance as per bank statement | 40,550 Cr |
The cheques deposited are added because the bank has not yet increased its recorded balance; the cheques issued are deducted because the bank has not yet reduced its recorded balance. The statement balance agrees after adjustment.
2. The accountant suggests ignoring the dishonoured cheque in the cash book because it was already recorded when deposited. Evaluate this suggestion and state the effect if it is followed.
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The suggestion is incorrect. When the customer’s cheque was deposited, the entry was Bank A/c Dr and Customer A/c Cr. On dishonour, that entry must be reversed: Customer A/c Dr ₹3,000 and Bank A/c Cr ₹3,000. If the reversal is omitted, the cash book debit balance is overstated by ₹3,000.
Adjusted cash book would then be 42,500 + 1,200 − 450 − 2,500 = ₹40,750 Dr. Using the same timing differences, the reconciliation would produce 40,750 + 8,400 − 5,600 = ₹43,550, not ₹40,550. To force agreement only in the reconciliation statement, the dishonour would have to be deducted there, but the cash book would still be wrong. The dishonour is not a timing difference; it is a transaction requiring a cash book entry.
3. Explain why interest credited and bank charges are adjusted in the cash book rather than treated as reconciling items.
Read the worked answer
Interest credited and bank charges have already been recorded by the bank, so they are not timing differences between the two records. The cash book is simply incomplete. The correct entries are Bank A/c Dr to Interest Income and Bank Charges A/c Dr to Bank A/c. Adjusting them in the cash book makes the cash book reflect the same transactions as the bank statement, leaving only genuine timing differences - deposits not yet credited and cheques not yet presented - in the reconciliation statement.