Bello Ventures: Bank Reconciliation Where the Cash Book and Bank Statement Both Mislead
Bello Ventures keeps one current account with Zenith Bank. At 31 March 2025 the bank column of the cash book showed a credit balance of ₦63,400, but the cashier could not reconcile it with the bank statement. Investigation revealed:
- Cheques issued to suppliers totalling ₦74,600 had not been presented. This figure includes ₦12,000 issued to Ladipo & Sons in October 2024, which the supplier confirms was lost in the post and has asked to be replaced.
- Lodgements of ₦55,200 had not yet been credited by the bank.
- Bank charges of ₦8,900 and a standing order for insurance of ₦24,000 appear on the statement only.
- A dividend of ₦52,000 was credited directly by the bank.
- A customer's cheque for ₦31,000 was returned unpaid, marked 'refer to drawer'.
- A cheque for ₦18,000 paid to a supplier was entered in the cash book as ₦81,000.
- The bank wrongly debited the account with ₦20,000, being a cheque drawn by another customer.
The cashier has simply added the unpresented cheques to the statement balance and concluded that the remaining difference is 'a bank error'.
1. Prepare the adjusted cash book (bank column) at 31 March 2025 and state the corrected balance, explaining the direction of each entry.
Read the worked answer
In the bank column of the cash book, receipts are debits and payments are credits; a credit balance is an overdraft.
| Dr ₦ | Cr ₦ | |
|---|---|---|
| Balance b/d (overdraft) | 63,400 | |
| Bank charges | 8,900 | |
| Standing order – insurance | 24,000 | |
| Dividend received | 52,000 | |
| Dishonoured cheque – customer | 31,000 | |
| Transposition: cheque entered as 81,000 instead of 18,000 | 63,000 | |
| Reversal of lost cheque to Ladipo & Sons | 12,000 | |
| Totals | 127,000 | 127,300 |
| Balance c/d (overdraft) | 300 |
Reasoning on the two judgement items:
The transposition. The cash book was credited with ₦81,000 when only ₦18,000 left the bank, so the overdraft is overstated by ₦63,000. A debit of ₦63,000 removes the excess; the corresponding credit goes back to the supplier's account.
The lost cheque. This is not an unpresented cheque at all - it will never be presented. Leaving it in the reconciliation would carry a false liability to the bank forever. The original payment entry must be reversed (Dr Bank ₦12,000, Cr Ladipo & Sons ₦12,000); the supplier is once again owed the money and a replacement cheque is issued.
The true position is therefore a small overdraft of ₦300, not ₦63,400 - the cashier had been managing the account on a figure that was wrong by more than ₦60,000.
2. Prepare the bank reconciliation statement at 31 March 2025 and explain why each item is added or deducted.
Read the worked answer
Start from the corrected cash book position, converting the overdraft to a negative favourable balance of ₦(300).
| ₦ | |
|---|---|
| Balance per adjusted cash book (overdraft) | (300) |
| Add: cheques issued but not yet presented (74,600 − 12,000 lost cheque) | 62,600 |
| Less: lodgements not yet credited by the bank | (55,200) |
| Add: amount wrongly debited by the bank to our account | 20,000 |
| Balance per bank statement (favourable) | 27,100 |
Why each line behaves as it does:
- Unpresented cheques are added. We have already reduced our cash book, but the bank has not yet reduced its records, so the bank's balance is higher than ours.
- Uncredited lodgements are deducted. We have already increased our cash book but the bank has not, so the bank's balance is lower.
- The bank's wrong debit of ₦20,000 is added back. It is a bank error against our account; only the bank can correct it, so it is an adjusting item in the reconciliation, not in the cash book.
- The lost cheque is excluded entirely. It no longer belongs in the list because the underlying payment has been reversed in the cash book; including it would double count.
As a cross-check, the reconciliation explains the whole gap between the reported ₦63,400 overdraft and the bank's ₦27,100 favourable balance. Any residual would signal an error not yet found, which is precisely the control the reconciliation is supposed to provide.
3. Advise management on the control weaknesses revealed by this exercise and on the accounting treatment of a stale cheque that has not been confirmed as lost.
Read the worked answer
Control weaknesses. Three separate failures are visible:
- No independent reconciliation. The cashier both writes up the cash book and reconciles it, and has been 'plugging' the difference as a bank error. Reconciliation must be performed by someone with no custodial role over cash, reviewed and signed monthly, with every unresolved item listed and aged.
- No checking of postings. A ₦63,000 transposition survived unchallenged, meaning the supplier statement reconciliation is either not done or not acted upon. Monthly supplier statement reconciliation would have exposed it immediately.
- No monitoring of old unpresented items. A cheque outstanding since October 2024 was carried forward without enquiry. Any item unpresented for more than, say, 90 days should be investigated.
Stale cheque that has not been confirmed lost. The liability to the supplier is not extinguished merely because the cheque is old. Until the bank confirms the cheque is stale or the payee confirms it was never received, the item stays in the unpresented list and the cash book is left alone - reversing it early would understate payables and overstate the bank balance. Once the bank confirms it can no longer be presented, the payment entry is reversed (Dr Bank, Cr Payables) and, if payment is still intended, a fresh cheque is issued. The date of that confirmation determines the period in which the reversal is made.