Zeal Stores: Which of the Seven Items Belong in the Cash Book?
Kelechi prepares the bank reconciliation of Zeal Stores at 31 March. The cash book shows a debit balance of ₦48,500; the bank statement for the same date shows a credit balance of ₦40,700. The following information has been gathered: unpresented cheques totalling ₦12,400; a lodgement of ₦7,300 paid in on 30 March and not yet credited by the bank; bank charges of ₦1,200; a standing order of ₦5,000 paid by the bank to an insurance company; a direct credit of ₦9,000 from a customer settling an invoice; a cheque for ₦3,500 paid in by Zeal Stores that the bank has returned unpaid; and a debit of ₦2,000 on the statement which the bank has confirmed was posted to Zeal Stores' account in error and belongs to another customer with a similar name. Kelechi's cousin, who has completed one term of bookkeeping, advises him to adjust both balances by all seven items and to post the same figures into the cash book so that everything agrees.
1. Sort the seven items into those that require entries in the cash book and those that appear only in the reconciliation, giving the reason for each classification.
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The test to apply. Ask: does Zeal Stores already know about this item? If the bank has acted and the firm has not recorded it, the cash book is incomplete and must be updated. If the firm has recorded it and the bank has not yet acted, or the bank has made a mistake, the cash book is correct and the item belongs only in the reconciliation.
Cash book items (bank knows, firm does not):
- Bank charges ₦1,200 - reduce cash book balance.
- Standing order to the insurance company ₦5,000 - reduce cash book balance.
- Direct credit from the customer ₦9,000 - increase cash book balance.
- Dishonoured cheque ₦3,500 - reverse the earlier receipt, so reduce cash book balance.
Reconciliation-only items: 5. Unpresented cheques ₦12,400 - already entered in the cash book; the bank has not yet presented them for payment. Timing difference. 6. Uncredited lodgement ₦7,300 - already entered in the cash book; the bank has not yet cleared it. Timing difference. 7. Bank error ₦2,000 - the firm's records are right and the bank's are wrong, so the cash book must not be touched; the bank is asked to reverse it, and meanwhile it appears as an adjustment to the statement balance.
Judgement. Classifying an item wrongly is the classic error here: posting an unpresented cheque to the cash book would double-count a payment that has already been recorded.
2. Prepare the adjusted cash book and the bank reconciliation at 31 March, and show that they agree.
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Adjusted cash book (debit balance)
| Item | ₦ | ₦ |
|---|---|---|
| Balance as per cash book | 48,500 | |
| Add: direct credit from customer | 9,000 | |
| Less: bank charges | 1,200 | |
| Less: standing order (insurance) | 5,000 | |
| Less: dishonoured cheque | 3,500 | (9,700) |
| Adjusted (revised) cash book balance | 47,800 |
Bank reconciliation statement at 31 March
| Item | ₦ | ₦ |
|---|---|---|
| Balance as per bank statement (credit) | 40,700 | |
| Add: unpresented cheques not yet debited by the bank | 12,400 | |
| Add: amount wrongly debited to our account by the bank | 2,000 | |
| Less: lodgement not yet credited by the bank | (7,300) | |
| Balance agreeing with adjusted cash book | 47,800 |
Check the arithmetic. 40,700 + 12,400 = 53,100; 53,100 + 2,000 = 55,100; 55,100 − 7,300 = 47,800. Both sides agree at ₦47,800, so the reconciliation closes with no unexplained difference.
Direction check. Unpresented cheques make the bank statement higher than the cash book, so they are added to the statement balance; an uncredited lodgement makes the statement lower, so it is deducted; a wrongful bank debit makes the statement too low, so it is added back.
3. Critique the cousin's advice that both balances should be adjusted by all seven items and the same figures posted to the cash book.
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What is wrong with it.
- Double counting. Unpresented cheques and the uncredited lodgement are already in the cash book. Posting them again would record the same payment or receipt twice, and the cash book balance would no longer match the firm's real cash position.
- Wrong side of the account. The bank error is not the firm's error. Entering ₦2,000 in the cash book would understate the firm's own records to compensate for a mistake the bank must correct. The right action is to notify the bank and show it as a reconciling item until it is reversed.
- Category confusion. A reconciliation separates timing differences (both sides have recorded the item, at different dates) from errors (one side is simply wrong) and from omissions (one side has not recorded the item at all). Only omissions of items the bank has already processed are corrected in the cash book.
The principle to state. The cash book is part of the double-entry system and must reflect what the firm actually received and paid. The reconciliation is a proof, not a ledger; it exists to explain why two independently correct records differ at a point in time, and it should end at nil difference.
Practical consequence. If the cousin's method were followed, the adjusted balance would be ₦47,800 ± further postings and the reconciliation would no longer agree - the very outcome the exercise is designed to detect. Kelechi should also confirm that the customer's ₦9,000 direct credit is a genuine settlement and not a misposted receipt before accepting it, and should check that bank charges are reasonable and recurring, since they will need to be budgeted for in future months.