Lime Street Cycles: A Bank Reconciliation, a Stale Cheque and a Short Petty Cash Tin
Lime Street Cycles is a sole trader. On 31 May 2025 the cash book showed a debit balance of $3,412.60 and the bank statement showed a balance of $2,716.30. The following were then discovered: cheques for $1,020.40 and $318.75 had been issued but not yet presented; lodgements of $1,455.80 had not been credited by the bank; bank charges of $47.25 and interest received of $12.60 appeared only on the statement; a standing order of $220.00 for insurance had not been entered in the cash book; a customer's cheque for $380.00 had been dishonoured and the bank had debited it; the bank had wrongly debited the account with $150.00 belonging to another customer; and a cheque for $205.00 issued eight months earlier to a supplier had still not been presented. Separately, the petty cash imprest is $250.00, reimbursed on the first of each month. On 31 May the tin held $48.30, paid vouchers totalled $189.70 and there was an IOU signed by the office manager for $8.00.
1. Prepare the corrected cash book and the bank reconciliation statement at 31 May 2025, stating clearly how you have treated the cheque issued eight months ago.
Read the worked answer
Corrected cash book (bank column)
| $ | |
|---|---|
| Balance b/d | 3,412.60 |
| Interest received | 12.60 |
| Stale cheque cancelled (Dr Bank / Cr Payables) | 205.00 |
| Bank charges | (47.25) |
| Standing order - insurance | (220.00) |
| Dishonoured customer cheque | (380.00) |
| Balance c/d | 2,982.95 |
The dishonoured cheque is charged back to the customer's personal account as well as to the bank column: Dr Receivables 380 / Cr Bank 380.
Bank reconciliation at 31 May 2025
| $ | |
|---|---|
| Balance per bank statement | 2,716.30 |
| Add: bank wrongly debited our account | 150.00 |
| Add: lodgements not yet credited | 1,455.80 |
| Less: unpresented cheques ($1,020.40 + $318.75) | (1,339.15) |
| Balance per corrected cash book | 2,982.95 |
The eight-month-old cheque: it is cancelled, not left as unpresented. The bank will not normally pay a cheque over six months old, so it is not a timing difference at all - it is a liability that the books wrongly show as settled. Restore it (Dr Bank 205 / Cr Payables 205), then either reissue a current cheque or settle by bank transfer. The $205 is therefore excluded from the unpresented list; if it were included, the reconciliation would still appear to agree while both the bank balance and trade payables were understated by $205.
2. Explain the risk to the financial statements if the stale cheque is simply left as an unpresented item, and state the double entry if it is cancelled.
Read the worked answer
If left as unpresented
- The cash book balance is $205 lower than the true bank balance and trade payables are $205 lower than the amount actually owed. Both figures in the statement of financial position are wrong, and the error is self-cancelling in the reconciliation - which is why it survives undetected.
- The supplier's statement will show the invoice as unpaid while Lime Street's payables ledger shows it as settled. The supplier may suspend credit or issue a formal demand; the owner may also pay twice.
- The bank might still honour a cheque within its own time limit, or honour it by mistake, taking the account into an unexpected overdraft. Nothing in the reconciliation would warn the owner.
- Profit is not affected; only classification and disclosure of liabilities and cash.
Double entry on cancellation
Dr Bank 205.00 Cr Trade payables 205.00
Being restoration of a cheque now stale and not presented, the liability to the supplier still being outstanding.
If a replacement cheque is then issued, Dr Payables 205 / Cr Bank 205 - and that new cheque enters the unpresented list. If the supplier has since been paid by other means, the credit goes to the supplier's account as normal and the bank side must be traced to the original payment.
Control recommendation: review the unpresented cheque list every month, not just at the year end; investigate any item over three months old; and keep a cheque register so cancelled and reissued cheques are visible.
3. Reconcile the petty cash imprest, calculate the reimbursement and explain the accounting treatment of the IOU and of the shortage.
Read the worked answer
Petty cash reconciliation at 31 May
| $ | |
|---|---|
| Imprest | 250.00 |
| Cash counted | 48.30 |
| Paid vouchers | 189.70 |
| IOU - office manager | 8.00 |
| Total accounted for | 246.00 |
| Shortage | 4.00 |
Reimbursement: the imprest is restored by replacing the cash spent, excluding money that is not a valid payment.
Reimbursement = $250.00 − $48.30 (cash still held) − $8.00 (IOU not yet a payment) = $193.70
Equivalently: vouchers $189.70 + shortage $4.00 = $193.70. After the cheque is cashed, the tin holds $242.00 plus the $8.00 IOU = $250.00, and the imprest is intact.
Entries
Dr Various expenses 189.70 Dr Petty cash shortage (profit or loss) 4.00 Dr Receivable - office manager 8.00 Cr Bank 193.70 Cr Petty cash 8.00
Treatment of the IOU: an IOU is not a voucher - it has no third-party evidence and no expense has been incurred. It must not be included in the reimbursement, otherwise the float is restored using money that has simply been borrowed. It is a receivable from the manager, to be repaid or deducted from salary.
Treatment of the shortage: it is a genuine loss, written off to profit or loss unless the custodian agrees to make it good. It is not hidden in the voucher total.
Control points: count the tin independently each month; prohibit IOUs; keep every voucher numbered and signed; investigate even small shortages, because a pattern usually means weak custody.