The cash book and the bank statement disagree for known reasons. Some items are in one record and not yet in the other. A reconciliation explains the difference. It does not hide it.
The idea
Start from the cash book balance and deal with items the bank knew and you did not: bank charges, interest, standing orders, and dishonoured cheques. Enter those in the cash book first. The balance you then have is the updated cash book balance. Items you knew and the bank did not yet record stay out of that update. Unpresented cheques were credited in your cash book and have not yet left the bank. Uncredited lodgements were debited in your cash book and have not yet been added by the bank.
From the updated cash book balance, add unpresented cheques and subtract uncredited lodgements to arrive at the balance the statement should show, when the cash book balance is a debit, meaning cash at bank. The direction follows from timing. Cheques you have issued have already reduced your cash book, but the bank still shows the money, so the statement is higher until they are presented. Work one side at a time. A statement that does not tie to a named balance is arithmetic with no conclusion.
What earns the marks
Update the cash book before you reconcile. Bank charges never appear as a reconciling item if you have already entered them. They appear in the cash book. Unpresented cheques and uncredited lodgements are the reconciling items. State whether the cash book balance is a debit. The layout here assumes a favourable, debit cash book balance. A credit balance, an overdraft, reverses the story. Read which one you were given.
Practice questions
These are practice questions in the style of the paper, with a model answer and a mark scheme. They are not a promise of what your paper will ask.
1Question 1
5 marks
The cash book shows a debit balance of 6,200 cedis. Bank charges of 100 cedis have not been entered. Unpresented cheques are 900 cedis. Lodgements not yet credited are 400 cedis.
(a) Find the updated cash book balance. (2 marks)
(b) Find the balance the bank statement should show. (3 marks)
Model answer
(a) 6,200 − 100 = 6,100 cedis debit.
(b) 6,100 + 900 − 400 = 6,600 cedis.
Mark scheme
Deducts bank charges in the cash book1 mark
Updated balance 6,100 cedis1 mark
Adds unpresented cheques of 9001 mark
Subtracts uncredited lodgements of 4001 mark
Statement balance 6,600 cedis1 mark
2Question 2
2 marks
Why are unpresented cheques added when you move from the cash book to the statement, in the case above? (2 marks)
Model answer
You have already reduced the cash book, but the bank has not yet paid the cheques, so the bank's balance is still higher by that amount.
Mark scheme
The cash book has already been credited, or reduced1 mark
The bank has not yet paid them, so its balance is higher1 mark
3Question 3
1 mark
Why must bank charges be entered in the cash book rather than left only on the reconciliation? (1 mark)
Model answer
The bank has already taken them. The cash book is wrong until it records that fact. The reconciliation is for timing differences, not for errors of omission you can correct.
Mark scheme
The charge is already known from the statement and must update the cash book1 mark
Practise Financial Accounting with Anna
More questions on this topic are inside GLearn, marked as you answer, with the reason written out. The first ones need no account.
To explain why the cash book balance and the bank statement balance differ, after you have entered in the cash book anything the bank knew and you had omitted. Timing differences, such as unpresented cheques, then remain.
What do you do with bank charges?+
Enter them in the cash book, as a credit to bank, because the money has left the account. They are not a timing difference. In the example, charges of 100 cedis reduce a debit balance of 6,200 cedis to 6,100 cedis before the reconciliation begins. All WASSCE Financial Accounting past questions