Bank reconciliation and petty cash control
Falcon Retail Ltd's cash book showed a bank overdraft of €1,240 at 31 May 2025. The bank statement at that date showed an overdraft of €2,745. The following items had not been dealt with in the cash book: bank charges €95; a standing order for insurance €420; a customer's cheque for €610 that was dishonoured. In addition, cheques totalling €3,150 had been issued but were not on the bank statement, lodgements of €2,480 had not been credited, and the bank had wrongly debited the company's account with €350 for another customer's cheque. A lodgement of €700 had been entered twice in the cash book. The bookkeeper who prepared the cash book has left and the directors are concerned that the same person opened the post, kept the cash book and prepared the reconciliation. The petty cash imprest is €250; the box holds €186 and vouchers total €51.
1. Update the cash book and prepare a bank reconciliation at 31 May 2025.
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Updated cash book
| € | |
|---|---|
| Balance per cash book (overdraft) | (1,240) |
| Bank charges | (95) |
| Standing order - insurance | (420) |
| Dishonoured cheque | (610) |
| Duplicated lodgement removed | (700) |
| Corrected balance (overdraft) | (3,065) |
Bank reconciliation at 31 May 2025
| € | |
|---|---|
| Balance per bank statement (overdraft) | (2,745) |
| Add: bank error - another customer's cheque wrongly debited | 350 |
| Add: lodgements not yet credited | 2,480 |
| Less: unpresented cheques | (3,150) |
| Balance per corrected cash book (overdraft) | (3,065) |
The two balances agree at an overdraft of €3,065.
2. Explain why the dishonoured cheque and the duplicated lodgement are entered in the cash book, while the unpresented cheques and the bank error are not.
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The cash book records the business's own bank transactions. The dishonoured cheque is a transaction the business must record because the earlier receipt has been reversed: the bank has taken the money back, so the cash book must be credited by €610. The duplicated lodgement is a bookkeeping error in the cash book itself. One of the two entries must be removed; otherwise the cash book shows €700 more than was actually received. Bank charges and the standing order are also transactions the bank has already processed, so they are entered in the cash book.
By contrast, unpresented cheques and lodgements not yet credited are timing differences. The business has already recorded them, but the bank has not yet processed them, so they appear only in the reconciliation. The bank error is the bank's mistake, not a transaction of the business, so no entry is made in the cash book; it is adjusted in the reconciliation until the bank corrects its records. If the business entered the bank error in its own books, it would create a false transaction and the error would double-count when the bank puts it right.
3. Identify the internal control weaknesses revealed and recommend improvements, including the treatment of the petty cash discrepancy.
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Weaknesses
One person opens the post, records receipts in the cash book and prepares the bank reconciliation. That person could misappropriate a customer's cheque and then alter the cash book or the reconciliation to hide it. The duplicated lodgement and the unrecorded bank charges also suggest that the cash book is not reviewed independently.
Recommendations
- Separate the duties of receiving cash, recording cash and preparing the bank reconciliation. No one person should control all three.
- Have the post opened by two people, with cheques listed immediately and restrictively endorsed.
- Require two signatories on the bank mandate and keep the cheque books secure.
- Have a director or senior manager review and sign the monthly reconciliation.
- Investigate the duplicated lodgement and any unexplained difference, and consider using online bank feeds.
Petty cash
Imprest €250; cash €186 + vouchers €51 = €237, so the box is €13 short. The vouchers should be checked for validity and authorised signatures. The €13 shortage should be written off or charged to the custodian, and the imprest restored by a transfer of €64 (€51 valid vouchers + €13 shortage). If the €13 is recovered from the custodian, only €51 needs to be reimbursed. Surprise counts and a maximum reimbursement limit should be introduced.