Sin Huat: Two Bank Balances and a 'Free Money' Cheque
Perniagaan Sin Huat, a wholesale stationer in Ipoh, closed its books on 30 September 20X5. Its cash book showed a debit balance on the bank column of RM8,462, but the bank statement for the same date showed a favourable balance of RM6,437. The owner, Madam Tan, wants the gap explained before the year-end statements are prepared, and she has already formed her own views on what should be done.
Your review shows: deposits of RM2,050 banked on 30 September are not yet on the statement; cheques totalling RM3,180 have not been presented; bank charges of RM85 and a standing order of RM360 for insurance appear only on the statement; a customer, Rozita, paid RM1,240 directly into the bank; a customer's cheque for RM520 was returned dishonoured and no entry has been made; the bank wrongly credited the account with RM900 belonging to another customer; and a cheque of RM740 paid to a supplier was entered in the cash book as RM470. Madam Tan also proposes to add back RM1,500 for a cheque issued eight months ago that has never been presented.
1. Update the cash book and prepare a bank reconciliation statement at 30 September 20X5. Explain how you decided which items go where.
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Step 1 - Decide what belongs in the cash book. Only items the business has not yet recorded are posted to the cash book: the direct credit from Rozita, the bank charges, the standing order, the dishonoured cheque and the trader's own transposition error. Unpresented cheques, uncredited deposits and the bank's own error are timing or statement items and must not be entered in the cash book.
| Cash book (bank column) | RM | RM |
|---|---|---|
| Balance b/d (Dr) | 8,462 | |
| Rozita - direct credit | 1,240 | |
| Bank charges | 85 | |
| Standing order - insurance | 360 | |
| Dishonoured cheque - customer | 520 | |
| Cheque of RM740 recorded as RM470 (payment understated by RM270) | 270 | |
| Balance c/d (Dr) | 8,467 | |
| 9,702 | 9,702 |
Step 2 - Reconcile.
| RM | |
|---|---|
| Balance per adjusted cash book (Dr) | 8,467 |
| Add: deposits banked but not yet credited | 2,050 |
| Less: cheques issued but not yet presented | (3,180) |
| Less: amount wrongly credited by the bank | (900) |
| Balance per bank statement (favourable) | 6,437 |
The RM900 is deducted, not added: the statement is overstating the money the business really has, and only the bank can remove it, so it stays in the reconciliation. Note the transposition error is a two-sided error in the bank column only - it makes the cash book balance wrong but does not create a suspense balance.
2. Advise Madam Tan on her proposal to add back the RM1,500 stale cheque as income.
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The proposal should be rejected.
- A cheque is only a method of payment. The liability to the supplier is discharged when the cheque is presented and cleared, not when it is written.
- The stale cheque is still an unpresented cheque at 30 September 20X5, so it is already part of the reason the two balances disagree and it belongs in the reconciliation statement.
- Adding RM1,500 to income would overstate profit and understate payables by RM1,500. That breaches prudence and faithful representation, and it would mislead any bank reading the statements.
Correct treatment: confirm with the supplier whether the cheque will still be presented. If it will not, cancel it and issue a replacement - a reissued cheque is still a payment, not income. Only where the supplier confirms the debt is waived, or the debt becomes time-barred and the bank confirms the item can no longer be cleared, may the amount be recognised as income, with disclosure of the amount and the reason.
3. Madam Tan wants the dishonoured cheque of RM520 written off as a bad debt immediately. Advise her, showing the entry and the reasoning.
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Entry required now: Dr Rozita (receivable) RM520; Cr Bank RM520. The bank has reversed the earlier deposit, so the customer owes the money again. Her account must be reinstated before any question of writing it off arises.
Whether to write it off is a separate judgement. A dishonoured cheque is evidence of non-payment, not proof of irrecoverability. Before writing it off, ask:
- Is there a reason (insufficient funds, a technical error, a disputed invoice)? A technical error will usually be represented successfully.
- Has the customer been contacted, and is there any security or guarantor?
- Does the existing 5% provision for doubtful debts already absorb the risk? If the RM520 is reinstated as a receivable, it simply enters the base for the provision, which is the normal, prudent treatment for a doubtful - but not yet bad - debt.
Writing off immediately would understate receivables and overstate the bad debt expense by RM520, and would also remove the need to chase the customer. Write off only when there is evidence the debt is irrecoverable; otherwise keep it as a receivable covered by the provision.