Bank Reconciliation with a Bank Error and Dishonoured Cheque
Halima runs a wholesale business. On 31 May 2025 her cash book showed a debit balance of $4,860, while the bank statement showed a credit balance of $3,620. A comparison revealed: deposits not yet credited by the bank $1,900; unpresented cheques $2,450; bank charges $120 not entered in the cash book; a standing order for $350 paid by the bank but not recorded by Halima; a customer's cheque for $780 that had been deposited and entered in the cash book was dishonoured, and Halima had not recorded the dishonour; and the bank had debited Halima's account with $540 for a cheque drawn by another customer. Halima proposes to simply adjust the bank statement balance for all five items to arrive at the cash book balance, and she does not want to record the dishonoured cheque until the customer pays.
1. Update Halima's cash book and state the adjusted cash book balance at 31 May 2025.
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Start with the cash book debit balance and enter items the bank has already processed but the business has not recorded:
| Cash book (bank column) | $ |
|---|---|
| Balance b/d | 4,860 Dr |
| Bank charges | (120) |
| Standing order | (350) |
| Dishonoured cheque | (780) |
| Adjusted balance c/d | 3,610 Dr |
The dishonoured cheque reverses the earlier deposit: the bank has taken back the 780, so the business must credit the bank column and reinstate the customer as a receivable. The charges and standing order are payments made by the bank on Halima's behalf and must be recorded as expenses or payments.
2. Prepare a bank reconciliation statement starting from the bank statement balance of $3,620 to prove the adjusted cash book balance. Treat the bank error correctly.
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Bank reconciliation statement at 31 May 2025
| $ | |
|---|---|
| Balance per bank statement (favourable) | 3,620 Cr |
| Add: deposits not yet credited | 1,900 |
| Add: bank error - cheque wrongly debited | 540 |
| Less: unpresented cheques | (2,450) |
| Balance per adjusted cash book | 3,610 Dr |
The bank error increases the statement balance for reconciliation because the bank has made the balance too low by 540. Unpresented cheques are deducted because the bank has not yet paid them. Deposits not credited are added because the bank has not yet recorded them.
3. Explain why the dishonoured cheque and bank charges require cash book entries, while unpresented cheques do not, and state the effect of the dishonoured cheque on receivables.
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The cash book is the business's own record. When the bank has already acted - charges, standing orders, dishonour - the cash book is incomplete and must be updated. Unpresented cheques are already recorded in the cash book; they are only a timing difference between the two records, so they appear in the reconciliation, not as a cash book entry.
The dishonoured cheque reduces the bank balance by 780 and creates a receivable from the customer again. If the customer later pays, the bank and receivables will both be restored.