Reconciling a Cash Book with Unrecorded Bank Items
Marina runs a wholesale stationery business and asks you to reconcile her cash book at 31 March. Her cash book shows a debit balance of $4,215, while the bank statement shows a credit balance of $5,930. You find: cheques totalling $1,840 issued to suppliers have not yet appeared on the statement; a deposit of $620 banked on 31 March is not on the statement; bank charges of $45 and a standing order for insurance of $250 appear on the statement but not in the cash book; a customer's cheque for $300 was returned dishonoured; a supplier refund of $590 was paid directly into the bank and not recorded; and the bank has wrongly credited the business account with $500 that belongs to another customer. Marina wants to know why the two balances differ and whether the $500 should be entered in her cash book. She also asks whether the dishonoured cheque should be treated as a bad debt at year end.
1. Prepare the adjusted cash book and a bank reconciliation statement at 31 March, and state the corrected cash book balance.
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Adjust the cash book only for items the business has not yet recorded:
| Item | $ |
|---|---|
| Balance per cash book (Dr) | 4,215 |
| Bank charges | (45) |
| Standing order - insurance | (250) |
| Dishonoured cheque | (300) |
| Supplier refund paid directly into bank | 590 |
| Adjusted cash book balance | 4,210 |
The $500 bank error is not a cash book item because Marina's records are correct; the bank has made the mistake. It is dealt with in the reconciliation:
| Item | $ |
|---|---|
| Balance per bank statement (Cr) | 5,930 |
| Add deposit not yet credited | 620 |
| Less unpresented cheques | (1,840) |
| Less bank error - wrong credit | (500) |
| Adjusted cash book balance | 4,210 |
Reasoning: deposits in transit will increase the bank balance when cleared, unpresented cheques will reduce it, and the mistaken $500 credit must be removed because it is not Marina's money. Both routes must agree at $4,210; any difference means an item has been omitted or mistyped.
2. Record the journal entries required in Marina's books for the four cash book adjustments. Explain why the $500 bank error is not journalised.
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Journal entries:
| Entry | Dr | Cr |
|---|---|---|
| Bank charges | Bank charges expense 45 | Bank 45 |
| Insurance standing order | Insurance expense 250 | Bank 250 |
| Dishonoured cheque | Receivables 300 | Bank 300 |
| Supplier refund | Bank 590 | Payables 590 |
The refund entry assumes the supplier account was previously settled or owed; the credit reduces the payable or creates a debit balance recoverable from the supplier. It is not income, because it reverses an earlier purchase cost.
The $500 is not journalised because the cash book already shows the correct amount. The bank statement is wrong, so the correction belongs to the bank, not to Marina's ledger. If Marina entered it, she would create a fictitious receipt and overstate her bank balance and profit. She should notify the bank and check that the correction appears on the next statement. If the bank refuses to correct it, Marina would then record a receivable from the bank, not income.
3. Advise Marina whether the dishonoured cheque should be treated as a bad debt at 31 March and how the treatment affects profit.
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A dishonoured cheque is not automatically a bad debt. When the bank returns it, the customer's debt is restored: debit receivables $300 and credit bank $300. At that point Marina has a receivable, not an expense, so profit is unaffected.
She must then assess recoverability. If the customer pays, or has sufficient resources, no bad debt arises. If the customer cannot pay, Marina writes off the debt: Dr bad debts expense $300, Cr receivables $300. That reduces profit by $300 in the period the irrecoverability is identified. If recovery is uncertain but not hopeless, an allowance for receivables may be more appropriate than a write-off.
The key judgement is evidence at the year-end date: correspondence, the customer's financial position, and any subsequent payment. A cheque being dishonoured is a warning sign, not proof of irrecoverability. Marina should also consider whether the $300 is material; even if small, the correct treatment is to keep it as a receivable until there is evidence to write it off.