Ada runs a business. On 31 December 2024, her cash book showed a debit balance of $5 120 in the bank column. The bank statement on the same date showed a cr...
Question 1 Report
Ada runs a business. On 31 December 2024, her cash book showed a debit balance of $5 120 in the bank column. The bank statement on the same date showed a credit balance of $5 180.
On comparing the cash book with the bank statement, the following differences were found.
| Item | Details | $ |
|---|---|---|
| 1 | Bank charges not recorded in the cash book | 60 |
| 2 | A direct debit for insurance not recorded in the cash book | 180 |
| 3 | A standing order for loan repayment not recorded in the cash book | 300 |
| 4 | A credit transfer from customer M. Okafor not recorded in the cash book | 420 |
| 5 | Interest received from the bank not recorded in the cash book | 80 |
| 6 | A cheque received from N. Patel was returned dishonoured. Not recorded in the cash book | 150 |
| 7 | An unpresented cheque paid to supplier R. Mensah | 680 |
| 8 | A deposit paid into the bank on 30 December not yet credited by the bank | 430 |
(a) Prepare the updated cash book showing the new balance. [10]
(b) Prepare a bank reconciliation statement starting with the balance per the bank statement. [6]
(c) Explain two reasons why the cash book balance and the bank statement balance may differ. [4]
Answer Details
(a) Updated cash book (bank column)
The cash book must be updated for items that have not yet been recorded in it. Items 1 through 6 affect the cash book. Items 7 and 8 are timing differences and appear only in the bank reconciliation statement.
| Dr (Receipts) | $ | |
|---|---|---|
| Balance b/d | 5 120 [1] | |
| Credit transfer - M. Okafor | 420 [1] | |
| Interest received | 80 [1] | |
| Total | 5 620 | |
| Cr (Payments) | $ | |
|---|---|---|
| Bank charges | 60 [1] | |
| Direct debit - insurance | 180 [1] | |
| Standing order - loan repayment | 300 [1] | |
| Dishonoured cheque - N. Patel | 150 [1] | |
| Balance c/d | 4 930 | |
| Total | 5 620 | |
Updated balance: $4,930 Dr [1]
The cash book has correct Dr and Cr sides, and the balance is correctly carried down. [1] [1]
The credit transfer and interest received increase the bank balance (Dr entries). Bank charges, direct debit, standing order, and the dishonoured cheque all reduce the bank balance (Cr entries). The dishonoured cheque reverses the original receipt because the cheque from N. Patel was returned unpaid by the bank.
(b) Bank reconciliation statement
| Bank Reconciliation Statement at 31 December 2024 | $ |
|---|---|
| Balance per bank statement (Cr) | 5 180 [1] |
| Less: Unpresented cheque - R. Mensah | (680) [1] |
| Add: Outstanding deposit | 430 [1] |
| Balance per updated cash book | 4 930 [1] |
The adjusted balance of $4,930 agrees with the updated cash book balance. [1]
Correct layout starting from the bank statement balance and reconciling to the cash book balance. [1]
The unpresented cheque is deducted because Ada has recorded the payment in her cash book, but the cheque has not yet been processed by the bank. The outstanding deposit is added because Ada has recorded the receipt in her cash book, but the bank has not yet credited the amount.
(c) Two reasons why the cash book and bank statement balances may differ
Reason 1: Timing differences occur when items have been recorded in the cash book but not yet processed by the bank. [1] For example, cheques issued to suppliers may not have been presented for payment yet (unpresented cheques), or deposits made shortly before the statement date may not have been credited by the bank (outstanding deposits). [1]
Reason 2: Items may appear on the bank statement before they are recorded in the cash book. [1] For example, bank charges, standing orders, direct debits, and credit transfers are processed by the bank automatically, and the business owner may not be aware of them until the bank statement arrives. [1]
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