A ₹2,690 Gap that the Manager Wants to Call Income
Meera Traders, a wholesale dealer in Kanpur, received its bank statement for the year ended 31 March 2025 showing a credit balance of ₹45,290, while the bank column of the cash book showed a debit balance of ₹42,600. The accountant's working paper lists the following. Cheques for ₹8,400 deposited on 28 March were credited by the bank on 3 April. Cheques for ₹6,150 issued in March were still with suppliers on 31 March. The bank collected a dividend of ₹1,500 and allowed interest of ₹700; neither appears in the cash book. Bank charges of ₹260 and a standing-instruction payment of ₹2,000 for insurance premium were debited by the bank only. A customer's cheque for ₹4,000 deposited on 27 March was dishonoured and returned by the bank on 29 March; no entry was passed. A cheque for ₹3,500 issued to a supplier on 20 March was entered twice in the cash book. The bank wrongly debited the firm's account with ₹1,000, being a cheque drawn by another customer of the bank. Meera's manager wants the ₹2,690 gap between the two balances treated as 'miscellaneous income' and closed.
1. Prepare the adjusted cash book and the bank reconciliation statement as on 31 March 2025.
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Adjusted (amended) cash book - bank column
| Dr | ₹ | Cr | ₹ |
|---|---|---|---|
| Balance b/d | 42,600 | Bank charges | 260 |
| Dividend collected | 1,500 | Insurance (standing instruction) | 2,000 |
| Interest allowed | 700 | Dishonoured cheque | 4,000 |
| Supplier's cheque entered twice (add back) | 3,500 | Balance c/d | 42,040 |
| Total | 48,300 | Total | 48,300 |
Bank reconciliation statement as on 31 March 2025
| Particulars | ₹ |
|---|---|
| Balance as per bank statement (credit) | 45,290 |
| Add: cheques issued but not yet presented | 6,150 |
| Less: cheques deposited but not yet credited | (8,400) |
| Less: cheque wrongly debited by bank | (1,000) |
| Balance as per adjusted cash book | 42,040 |
The statement agrees with the adjusted cash book, so nothing is unexplained.
2. Explain why the duplicate cheque entry and the wrong bank debit are treated differently, and why the dishonoured cheque is not shown in the reconciliation statement.
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The test is: whose records are wrong, and has the other party already recorded the item?
- Duplicate cheque (₹3,500): the error is in the firm's own cash book - one payment has been recorded twice, so the book balance is ₹3,500 too low. The bank has debited the account only once, so its statement is correct. The correction therefore belongs in the adjusted cash book as an addition; putting it in the reconciliation statement would be wrong because there is nothing to reconcile with the bank.
- Wrong bank debit (₹1,000): the firm's books are right; the bank has made the error. Either adjust the cash book and claim a refund, or leave the cash book alone and deduct ₹1,000 from the statement balance. Here it is shown in the reconciliation statement, and the firm should write to the bank for reversal.
- Dishonoured cheque (₹4,000): the bank has already debited the account and the entry is final; the firm has simply not recorded it. It is therefore a cash book adjustment, not a timing difference, and does not appear in the reconciliation statement.
Timing items - unpresented cheques and uncredited deposits - are the only ones that stay in the reconciliation statement once the cash book is adjusted, because both parties will record them eventually.
3. Comment on the manager's proposal to treat ₹2,690 as miscellaneous income, and state the control and audit implications.
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The proposal is unacceptable. The ₹2,690 is simply the difference between the unadjusted cash book (₹42,600) and the bank statement (₹45,290); it is the net result of five identifiable items, not income. Writing it to income would:
- overstate profit and understate liabilities/charges - bank charges, the insurance premium and the dishonour are real costs of the year;
- hide the duplicate cheque entry, which is a book-keeping error and a signal that the cash book is not being checked;
- abandon the firm's valid claim of ₹1,000 against the bank;
- leave the dishonoured cheque unrecorded, so debtors and profit remain overstated.
Control implications: a reconciliation prepared only at year-end, and by someone willing to plug the difference, means errors and irregularities can persist for months. The reconciliation should be prepared monthly by a person who does not write the cash book, signed and reviewed by a senior, with every difference explained. From an audit view, a plugged reconciliation is a red flag: the auditor should re-perform it, obtain bank confirmations and investigate the duplicate posting, and should not accept the 'miscellaneous income' entry as valid income.