Bank reconciliation and a suspected lapping at Falcon Retail
Falcon Retail's cash book (bank column) showed a debit balance of €4,265 on 31 May 2025. The bank statement at the same date showed a credit balance of €5,280.
The following had not been entered in the cash book: bank charges €85, interest charged €120, a standing order for insurance €450, a direct credit from a customer for €2,000, and a cheque for €730 from a customer returned marked 'refer to drawer'. In addition, a cheque for €960 paid to a supplier had been entered in the cash book as €690.
Cheques issued but not yet presented totalled €2,150 and lodgements not yet credited totalled €1,480. Included in the unpresented cheques is €1,400 dated 10 September 2024: the supplier confirms it never received the cheque and the bank confirms it has never been presented.
The owner's nephew records customer receipts, prepares the paying-in slips, banks the money and prepares the bank reconciliation. The €1,480 of lodgements has appeared as 'in transit' at every month end for the last four months.
1. Prepare the adjusted cash book and the bank reconciliation at 31 May 2025, and state the corrected bank balance.
Read the worked answer
First correct the cash book, because the bank statement is the independent record and its entries are presumed right.
| Adjusted cash book (bank column) | € |
|---|---|
| Balance per cash book | 4,265 Dr |
| Bank charges | (85) |
| Interest charged | (120) |
| Standing order, insurance | (450) |
| Direct credit from customer | 2,000 |
| Dishonoured cheque | (730) |
| Cheque 960 entered as 690: understated payment 270 | (270) |
| Adjusted balance | 4,610 Dr |
The €270 error makes the cash book balance too high, because payments were under-recorded by 960 - 690 = 270, so it is deducted. The direct credit is added because it is money the bank has received that the cash book never recorded.
| Bank reconciliation at 31 May 2025 | € |
|---|---|
| Adjusted cash book balance | 4,610 Dr |
| Add: cheques issued not yet presented | 2,150 |
| Less: lodgements not yet credited | (1,480) |
| Balance per bank statement | 5,280 Cr |
This agrees with the statement. A credit balance on the bank statement means the bank owes the business, i.e. a favourable balance, which matches a debit balance in the cash book.
The corrected balance in the business's records is €4,610, not the €4,265 originally shown and not the €5,280 on the statement.
2. Advise on the €1,400 cheque dated 10 September 2024. Show the effect of your recommendation on the reconciliation and on the accounts.
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A cheque that has not been presented after more than eight months, which the supplier says it never received and the bank confirms it has never seen, is stale. It is no longer a payment; it is an unpaid liability that has been hiding in the unpresented list.
Treatment. Cancel the cheque in the cash book: add €1,400 back to the bank balance and restore €1,400 to trade payables. Before doing so, confirm in writing with the bank that a stop has been placed on the cheque, and agree a replacement payment with the supplier, so the business does not pay twice if the original turns up.
Effect on the reconciliation.
| € | |
|---|---|
| Adjusted cash book balance (4,610 + 1,400) | 6,010 Dr |
| Add: unpresented cheques (2,150 - 1,400) | 750 |
| Less: lodgements not credited | (1,480) |
| Balance per bank statement | 5,280 Cr |
The reconciliation still agrees at €5,280, because the correction removes the same €1,400 from both the cash book and the unpresented list. That is exactly why failing to deal with a stale cheque does not show up as a reconciliation difference; the error hides inside the list rather than breaking the arithmetic.
Effect on the accounts. Bank/cash increases by €1,400 and trade payables increase by €1,400. Profit is unaffected. If the supplier had already been paid a second time and the original was never cancelled, the business would have paid twice and the loss would fall on the person responsible for the payments.
3. Comment on the control implications of the 'in transit' lodgement of €1,480 appearing every month, given who performs the duties.
Read the worked answer
The reconciliation itself is arithmetically sound, but the pattern is a classic warning sign. A lodgement that is genuinely in transit clears within a few days. One that sits at €1,480 for four consecutive month ends is either a permanent error that has been carried forward, or cash that has been received and not banked.
The control weakness is the concentration of duties: the same person records customer receipts, prepares the paying-in slips, banks the money and prepares the reconciliation. That person is the only one who sees both the cash and the record of it, so a shortfall can be concealed by holding back a later receipt and using it to cover the earlier one. This is teeming and lading (lapping), and an unchanging 'in transit' figure is exactly how it presents.
Recommended checks:
- Agree each month's paying-in slip, in date order and with its unique serial numbers, to the lodgements on the bank statement, and look for gaps in the sequence.
- Circularise the largest customers directly for balances at the year end and compare the replies with the ledger.
- Compare the dates on the receipt counterfoils with the dates the money reached the bank.
- Separate the duties: whoever opens the post and lists the cheques should not bank them, and the reconciliation should be prepared or at least reviewed by the owner.
Until these checks are done, the €1,480 should not be accepted as merely in transit, and any shortfall found should be written off and treated as a fraud investigation, not a bookkeeping error.