Bank Reconciliation with an Unexplained Suspense Item
Janakpur Agro Traders' cash book shows a debit balance of NPR 1,250,000 on 31 Ashadh, while the bank statement shows a credit balance of NPR 1,410,000. The following are known: outstanding cheques NPR 180,000; a deposit in transit NPR 75,000; bank charges NPR 5,000 not recorded; a customer's cheque for NPR 40,000 deposited and later bounced, not recorded; and a standing instruction for NPR 25,000 paid by the bank but not entered. The cashier prepares the reconciliation, keeps the cheque books, and has authority to write off small differences. Last year an unexplained difference of NPR 125,000 was carried as 'suspense' instead of investigated. The owner wants to know the correct adjusted bank balance, why the two sides do not agree, and whether the cashier's arrangement is acceptable.
1. Prepare the bank reconciliation and compute the adjusted cash book balance and the adjusted bank statement balance.
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Start with the bank statement: NPR 1,410,000 less outstanding cheques NPR 180,000 = NPR 1,230,000; add deposit in transit NPR 75,000 = NPR 1,305,000. Start with the cash book: NPR 1,250,000 less bank charges NPR 5,000 = NPR 1,245,000; less bounced customer cheque NPR 40,000 = NPR 1,205,000; less standing instruction NPR 25,000 = NPR 1,180,000. The adjusted cash book is NPR 1,180,000, but the adjusted bank side is NPR 1,305,000. They differ by NPR 125,000, with the bank side higher. That is exactly the amount previously carried as suspense. The reconciliation is therefore not complete. The NPR 125,000 must be investigated as a possible unrecorded cheque, unrecorded payment, duplicate credit, or bank error. It should not be forced into balance or left in suspense.
2. Give the correcting journal entries for the bank charges, the bounced cheque, and the standing instruction.
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Bank charges of NPR 5,000: debit bank charges expense NPR 5,000 and credit bank NPR 5,000. Bounced customer cheque of NPR 40,000: debit the customer receivable NPR 40,000 and credit bank NPR 40,000, because the earlier deposit must be reversed and the customer again owes the amount. Standing instruction of NPR 25,000: debit the relevant expense or loan installment NPR 25,000 and credit bank NPR 25,000. After these entries, the cash book should show NPR 1,180,000. The outstanding cheques and deposit in transit are timing differences and are not journalized in the cash book. The NPR 125,000 is different: it requires a source document before any entry. If it proves to be an unrecorded cheque, debit the appropriate payable and credit bank; if it is a bank error, request a correction from the bank.
3. Evaluate the internal controls and recommend improvements.
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The arrangement is unacceptable. The cashier prepares the reconciliation, keeps the cheque books, and can write off small differences. That combines custody of assets, record-keeping, and reconciliation, which allows a cashier to conceal a shortage or manipulate the books. Reconciliation should be prepared by an independent person, such as the owner or an accountant who does not handle cash or cheque books. Cheque books should be locked, with two signatures for payments, and write-offs should require documented approval. The recurring NPR 125,000 suspense is a red flag: it should be cleared with a proper investigation, not rolled forward. The owner should also request bank confirmations, perform surprise cash counts, review outstanding cheques for old items, and separate the duties of receiving cash, recording cash, and reconciling the bank account. These controls protect both cash and the integrity of the accounting records.