The Overdraft That Looks Bigger Than It Is
You are the assistant accountant at Meridian Traders, a small wholesaler. At 30 June 2025 the cash book bank column shows a debit balance of Rs 184,620 while the bank statement shows an overdrawn balance of Rs 21,760. You establish that: cheques paid to suppliers totalling Rs 96,300 are entered in the cash book but not yet on the statement; a customer's cheque for Rs 41,500 was returned unpaid by the bank on 29 June and has not been recorded in the cash book; bank charges of Rs 3,180 appear only on the statement; a standing order for rent of Rs 22,000 was posted in the cash book as Rs 2,200; a receipt of Rs 58,000 from a customer was credited by the bank to another customer's account in error; and a cheque for Rs 12,400 issued to a supplier was entered twice in the cash book. The owner, who is not an accountant, asks why the overdraft 'looks bigger than it should' and suggests simply ignoring the unpresented cheques.
1. Prepare the corrected cash book and a reconciliation of the corrected cash book balance to the balance on the bank statement at 30 June 2025. State the corrected balance.
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Step 1 – decide which items belong in the cash book. An item goes through the cash book only if the bank has already dealt with it and our records have not, or if our own entry is wrong. Unpresented cheques are a timing difference and stay out of the cash book.
| Item | Treatment | Rs |
|---|---|---|
| Opening cash book balance (Dr) | 184,620 | |
| Cheque returned unpaid 29 June | Credit cash book, debit receivables | (41,500) |
| Bank charges not recorded | Credit cash book | (3,180) |
| Standing order posted as 2,200 instead of 22,000 | Further credit of 19,800 | (19,800) |
| Cheque 12,400 entered twice | Debit cash book to cancel duplicate | 12,400 |
| Corrected cash book balance | 132,540 Dr |
The duplicate cheque is corrected by Dr Bank 12,400 / Cr Payables 12,400 – both sides of the original double entry were duplicated, so it is purely a bookkeeping correction.
Step 2 – reconcile to the statement.
| Rs | |
|---|---|
| Balance per bank statement (overdrawn) | (21,760) |
| Add: cheques issued but not yet presented | 96,300 |
| Add: deposit credited by bank to the wrong account | 58,000 |
| Balance per corrected cash book | 132,540 |
Reasoning check: the Rs 58,000 is added because the bank has not credited our account, so our statement balance is lower than our records by that amount; it must be pursued with the bank and reversed by them, not written off. The answer is only complete when the reconciliation proves the corrected cash book figure exactly.
2. Explain the correct accounting treatment of the returned cheque and of the duplicated cheque entry, stating the effect on profit if the returned cheque is not recorded.
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Returned (dishonoured) cheque – Rs 41,500. The bank reversed its earlier credit on 29 June, so at the year end there is no cash. The double entry is Dr Receivables 41,500 / Cr Bank 41,500. This is not an expense in itself; it reinstates the customer's debt, which is then assessed for impairment along with other receivables. If the entry is omitted, bank is overstated by 41,500, receivables are understated by 41,500 and profit is overstated by 41,500, because a loss has effectively been hidden inside a fictitious bank balance. It may also understate any allowance needed on that customer.
Duplicated cheque – Rs 12,400. The cheque was credited to the cash book twice and, presumably, debited to the supplier twice. The correction Dr Bank 12,400 / Cr Payables 12,400 restores both balances. There is no profit effect because no income or expense was involved; only the statement of financial position was misstated by 12,400 in each direction.
Judgement point: students often treat the returned cheque as a bad debt expense immediately. The better analysis is that the dishonour converts cash back into a receivable; the bad debt question is a separate, subsequent assessment supported by evidence about the customer.
3. The owner proposes ignoring the unpresented cheques so that the overdraft 'disappears'. Evaluate this proposal and explain how the overdraft should be presented in the financial statements.
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Why the proposal fails. An unpresented cheque does not reduce the liability to the bank until it is presented and cleared. Once Meridian has issued the cheque, it has already reduced its records and its supplier balance; the bank has simply not yet moved the money. Removing the 96,300 from the reconciliation would overstate the bank balance and understate the overdraft by 96,300, breaching faithful representation and prudence (the liability exists). The bank statement itself is evidence that the obligation is real. The reconciliation is not a tool for making a balance look better; it is a proof of two independently maintained records.
Presentation. A bank overdraft is a financial liability. Under IAS 1 it is presented as a current liability unless the entity has a facility agreement giving the right to defer settlement for at least twelve months after the reporting date. It cannot be netted against a positive balance at another bank unless there is a legally enforceable right of set-off and an intention to settle net.
Further action. The Rs 58,000 miscredit must be notified to the bank in writing with supporting documents, and the Rs 41,500 dishonoured cheque must be pursued and reflected in the impairment assessment. The owner should receive a short written explanation of the difference between the cash book and the bank statement so the reconciliation is understood, not merely prepared.