What Wanjiku Traders Can Honestly Put on the Loan Application
Wanjiku Traders is a hardware retailer applying for a Ksh 2,000,000 bank loan. The cash book (bank column) shows a debit balance of Ksh 84,300 at 31 March, but the bank statement for that date shows a different figure. On inspection you find: bank charges of Ksh 1,200 never entered in the cash book; a customer's cheque of Ksh 15,000 returned dishonoured on 29 March; a standing order of Ksh 6,000 for insurance; a cheque of Ksh 5,400 paid to a supplier but recorded in the cash book as Ksh 4,500; cheques issued to suppliers totalling Ksh 27,400 not yet presented; and a deposit of Ksh 9,800 banked on 31 March not yet credited. The owner wants the Ksh 9,800 counted as available cash in the loan application and insists the dishonoured cheque 'will be collected next week anyway'.
1. Prepare the adjusted cash book and the bank reconciliation, and state the balance that should be reported to the lender.
Read the worked answer
Step 1 – decide which items belong where. Items the bank already knows about but the cash book does not are cash book adjustments. Items known to one side only because of timing are reconciliation items.
Adjusted cash book
| Ksh | |
|---|---|
| Balance per cash book | 84,300 |
| Less bank charges | (1,200) |
| Less dishonoured cheque | (15,000) |
| Less standing order | (6,000) |
| Less understatement of cheque (5,400 − 4,500) | (900) |
| Adjusted balance | 61,200 |
Bank reconciliation
| Ksh | |
|---|---|
| Adjusted cash book balance | 61,200 |
| Add cheques issued not yet presented | 27,400 |
| Less deposits not yet credited | (9,800) |
| Balance per bank statement | 78,800 |
Reasoning: the 5,400 cheque was paid but only 4,500 was credited in the cash book, so the book balance is too high by 900 - an adjustment, not a timing item. The reconciliation is proved only if it produces the statement figure of 78,800, which it does.
2. The owner wants the uncredited deposit treated as available cash and the dishonoured cheque ignored. Advise on the reporting position and on what the reconciliation reveals about the business.
Read the worked answer
Reporting position. The Ksh 9,800 was banked on 31 March but is not in the bank's records, so it is not money the business can draw against; presenting it as available cash misstates liquidity to a lender and could amount to misrepresentation. The dishonoured cheque must be reinstated as a receivable from the customer - it is not cash, and recovery is uncertain.
Cash genuinely available: 61,200 − 27,400 (cheques that will be presented) = Ksh 33,800, not the 84,300 the cash book shows. That is the number the owner should be working from.
What the errors reveal:
- The cash book has not been reconciled regularly - three bank-known items were never recorded.
- A payment was keyed at the wrong amount (900 error), suggesting no independent check of cheque entries.
- A standing order was forgotten, implying commitments are not monitored.
- A customer's cheque bounced, pointing to weak credit control on new customers.
Recommended action: month-end reconciliation by someone other than the cashier, a cheque-signing review, and a rolling cash-flow forecast so the loan application is supported by defensible figures.