Topic: Bank reconciliations

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  • 20 Marks

FA – May 2021 – L1 – Q3 – Bank reconciliations

Preparation of an adjusted cash book, bank reconciliation statement, and explanation of the petty cash book operations.

a) On 4 April 2020, Kofi Ntam received his bank statements for the month ended 31 March 2020. The bank statement showed a balance of GH¢417,400 (overdraft) as at 31 March, whilst the cash book showed a balance of GH¢525,990 (credit) as at that date. Upon examination of the cash book and the bank statement, the following were discovered:

  • Bank charges of GH¢2,010 had not been recorded in the cash book.
  • Kofi Ntam exceeded his overdraft limit during the month of March. The bank had therefore charged a penalty of GH¢2,500. This has not been recorded in the cash book.
  • A sum of GH¢12,500 had been wrongly credited to Kofi Ntam’s bank account by the bank.
  • A cheque for GH¢12,300 had been returned by the bank as dishonored. As the cheque had been dishonored, the bank charged Kofi Ntam GH¢150. This has not reflected in the cash book.
  • Cash receipts of GH¢37,400 were posted as cash payment of GH¢47,300 in the cash book.
  • On 21 March, Kofi Ntam deposited an amount of GH¢6,500 into his personal bank account. This was deposited to the business bank account in error by the bank.
  • Standing orders and direct debits of GH¢11,150 had not been posted to the cash book.
  • Customers had deposited GH¢21,700 directly to the bank account. This has not been recorded in the cash book.
  • Receipts of GH¢51,200 deposited to the bank account on 31 March 2020, had not been credited by the bank.
  • The following cheques, drawn on the bank account, had not been presented to the for payment as at 31 March 2020:
Cheque Number Date Cheque was Written Amount (GH¢)
No. 45280 11 March 2020 8,400
No. 45350 28 March 2020 17,400
No. 45370 31 March 2020 36,700

Required:
i) Prepare the adjusted cash book for the month of March 2020.
(8 marks)

ii) Prepare a statement on 31 March 2020 reconciling the adjusted cash book with the bank statement balance.
(6 marks)

iii) Explain TWO (2) reasons for preparing bank reconciliation on a regular basis.
(2 marks)

b) A petty cash book is created to facilitate small payments in a business or organization. It is meant to meet the day-to-day expenses and it is entrusted into the hands of the petty cashier.

Required:
Prepare a brief note to Kofi Ntam explaining how the petty cash book operates.
(4 marks)

iii) Reasons for Preparing Bank Reconciliation Regularly:

  1. Identification of Errors:
    Regular bank reconciliation helps in identifying any discrepancies between the bank statement and the company’s cash book. Errors may have been made by either the bank or the company, such as incorrect postings, and these need to be rectified to ensure accurate financial records.
  2. Detection of Unauthorized Transactions:
    Regular reconciliation helps in detecting any unauthorized transactions, such as fraud or bank errors, which may not have been immediately apparent. This ensures the integrity of the company’s financial records.

(2 points @ 1 mark each = 2 marks)

b)
Note to Kofi Ntam: Operation of Petty Cash Book

  • The petty cash system operates by setting aside a small amount of cash, known as the float, which is used to make small, day-to-day payments within the business, such as purchasing office supplies or covering minor staff expenses.
  • A responsible person, usually the petty cashier, manages this cash. Every time cash is disbursed, a petty cash voucher is completed, documenting the reason for the payment and the amount. The voucher is signed by the person receiving the cash and then retained as evidence.
  • The petty cash book records all transactions and ensures that at any given time, the remaining cash plus the total of all petty cash vouchers equals the original float.
  • At the end of a set period, typically monthly, the total of the vouchers is used to replenish the petty cash to its original float amount through a reimbursement from the main cash book, ensuring accurate tracking of all expenditures.

(4 marks)

  • 20 Marks

FA – May 2020 – L1 – Q3 – Bank reconciliations | Correction of errors

This question involves preparing an adjusted cash book, reconciling it with the bank statement, and explaining the reasons for regular bank reconciliation.

a) On 15 October 2019, Mr. Ladzagla received his bank statement for the month ended 30 September 2019. The statement showed a balance of GH¢208,700 (overdraft) as at 30 September, while the cash book showed a balance of GH¢262,995 (credit) as at that date.

On examination of the cash book and the bank statement, the following were discovered:

i) Mr. Ladzagla exceeded his overdraft limit during the month of September. The bank had therefore charged him a penalty of GH¢1,250. This has not been effected in the cash book.
ii) A sum of GH¢6,250 had been credited to Ladzagla’s bank account in error by the bank.
iii) Bank charges of GH¢1,005 had not been recorded in the cash book.
iv) A cheque for GH¢6,150 had been returned by the bank as dishonoured. Due to the dishonoured cheque, the bank charged Ladzagla GH¢75. Both the dishonoured cheque and the fee charged have not been effected in the cash book.
v) Cash receipts of GH¢18,700 were posted as cash payment of GH¢23,650 in the cash book.
vi) On 21 September, Mr. Ladzagla lodged cash of GH¢3,250 to his personal bank account. This was lodged into the business bank account in error by the bank.
vii) Standing order and direct debits of GH¢5,575 had not been posted to the cash book.
viii) Payment of GH¢10,850 received from customers had been lodged in the bank account but is yet to be posted to the cash book.
ix) Lodgements of GH¢25,600 to bank on 30 September 2019 had not been credited by the bank.
x) The following cheques drawn on the bank accounts had not been presented to the bank for payment as at 30 September 2019:

Cheque Number Date cheque was written Amount (GH¢)
No. 3528 11 September 2019 4,200
No. 3535 28 September 2019 8,700
No. 3557 30 September 2019 18,350

Required:
i) Prepare the adjusted cash book for the month of September 2019. (8 marks)
ii) Prepare a statement on 30 September 2019 reconciling the adjusted cash book with the bank statement balance. (8 marks)
iii) State TWO (2) reasons for preparing bank reconciliation on a regular basis. (4 marks)

c) Reasons for Preparing Bank Reconciliation on a Regular Basis

  1. Identification of Errors: Preparing bank reconciliations regularly helps in identifying errors made by the bank, the company, or both. For example, a business may have omitted to post receipts from receivables.
  2. Account for Unrecorded Transactions: Items such as bank interest, charges, standing orders, direct debits, and dishonoured cheques are often known by the bank but not identified by a business until it receives the bank statement and prepares the bank reconciliation.

(2 points well explained for 4 marks)

  • 20 Marks

FA – Nov 2019 – L1 – Q3 – Bank reconciliations

Prepare bank reconciliation, adjust the cash book, and explain the reasons for bank reconciliation preparation.

Yevugah has provided you with the following bank statement and bank account details in respect of the month ended 31 January 2018.

Statement Date: 31 January 2018
Account No: 13456892

Date Particulars Debit (GH¢) Credit (GH¢) Balance (GH¢)
01-Jan-18 Balance forward 55,940 Cr
03-Jan-18 Cheque 596 2,500 53,440 Cr
03-Jan-18 Lodgement 14,140 67,580 Cr
06-Jan-18 Cheque 597 120 67,460 Cr
06-Jan-18 Direct debit 2,020 65,440 Cr
12-Jan-18 Credit transfer 4,660 70,100 Cr
13-Jan-18 Cheque 600 1,420 68,680 Cr
14-Jan-18 Cheque 601 12,028 56,652 Cr
16-Jan-18 Lodgement 9,000 65,652 Cr
19-Jan-18 Cheque 599 18,004 47,648 Cr
23-Jan-18 Bank charges for December 2017 422 47,226 Cr
25-Jan-18 Quarterly interest received 62 47,288 Cr
27-Jan-18 Dishonoured cheque 1,600 45,688 Cr
27-Jan-18 Cheque 598 26,090 19,598 Cr
30-Jan-18 Cheque 603 5,048 14,550 Cr
31-Jan-18 Lodgement 14,500 29,050 Cr
31-Jan-18 Standing order: rent first quarter 2018 27,000 2,050 Cr

The books and records of Yevugah show the following transactions through the bank account for the month of January 2018:

Required:

a) Prepare Yevugah’s adjusted cash book including the necessary correcting entries as at 31 January 2018. (The answer format must clearly indicate whether each entry is a debit or credit). (10 marks)

b) Prepare a bank reconciliation as at 31 January 2018. (4 marks)

c) Explain TWO (2) reasons for preparing a bank reconciliation. (6 marks)

a) Reconciliation of Cash Book and Bank Statement

Opening balance as per bank balance: 55,940
Add outstanding lodgement: 14,140
Less outstanding cheques: (2,500)
Balance as per bank T account: 67,580

c) Reasons for Preparing Bank Reconciliation:

  1. Identification of Errors: Preparation of regular bank reconciliation will help to identify errors, such as discrepancies between the cash book and the bank statement, which may be due to errors by either the bank or the company.
  2. Highlighting Unrecorded Transactions: Bank reconciliation helps to identify transactions such as bank charges, direct debits, or dishonoured cheques that may not have been recorded in the cash book until the bank statement is received.
  • 20 Marks

FA – May 2017 – L1 – Q3 – Bank reconciliations | Preparation of financial statements of a sole trader

Preparation of adjusted cash book, bank reconciliation, and corrected net profit statement for Unity Trading Enterprise.

The Income Statement of Unity Trading Enterprise (UTE) for the year ended 31 December 2016 as prepared by an Accounts Assistant indicated a net profit of GH¢49,360,000. However, the cash book on 31 December 2016 showed a balance at bank to be GH¢6,440,000. Your attention is however drawn to the following:

i) Cheques from customers totaling GH¢4,980,000 which were recorded in the cash book on 20 December 2016 were actually not credited by the bank until 2 January 2017.

ii) Cheques issued on 13 December 2016 totaling GH¢7,420,000 in favour of suppliers were actually not paid by the bank until after the end of the year (that is after 31 December 2016).

iii) On 22 November 2016, the bank paid an amount of GH¢3,600,000 with respect to a standing order from UTE for rent of business premises for the three months to 31 January 2017 but unfortunately, no entry for this payment had been made in the cash book. Additionally, no provision of this outstanding rent had been made in the income statement for the period.

iv) On 31 December 2016, a customer known as Mr. Abuusu had paid GH¢2,340,000 into UTE bank account through a standing order to his bankers in full settlement of a debit balance of GH¢2,400,000 in UTE sale ledger, but no entry had been made in the books.

v) On 30 December 2016, a cheque for GH¢480,000 was received from a customer in settlement of sales invoice for the same amount. The cheques were lodged into UTE bank account. Both sale of goods and the cheque were entered in UTE’s books. However, on 31 December 2016, the customer returned the goods and also instructed her bankers not to pay the cheque (This instruction was carried out the same day) but no entries in respect of these latter developments have been made in UTE’s books. The cost of these goods amounting to GH¢320,000 were not actually included in the closing inventories.

vi) A cheque for GH¢840,000 from an insurance company in settlement of claim for fire damage to inventory had been paid into the bank and credited by the bank on 21 December 2016, but an estimated amount of GH¢800,000 had been entered in UTE’s income statement.

Required:
a) Prepare a statement on 31 December 2016, indicating clearly the cash book balance. (5 marks)

b) Prepare the bank reconciliation statement for UTE. (5 marks)

c) Prepare a statement of corrected net profit of UTE on 31 December 2016. (5 marks)

d) Explain TWO reasons for carrying out bank reconciliation. (2 marks)

e) Explain why the bank statement is usually taken as being more accurate than the details that appear in the company’s own records. (2 marks)

f) Indicate how the bank balance will be reported in UTE’s final accounts. (1 mark)

d) Reasons for carrying out bank reconciliation:

  1. Accuracy Check: To confirm the accuracy of entries in the cash book and bank statement.
  2. Error Detection: To uncover any errors or discrepancies between the company’s records and the bank’s records.

(2 marks)

e) Accuracy of Bank Statement:

The bank statement is considered more accurate as it is prepared by the bank, which is an independent entity and less prone to internal errors or manipulation compared to the company’s internal records.

(2 marks)

f) Reporting Bank Balance in Final Accounts:

The bank balance will be reported as a current asset if it is positive or as a current liability if it is negative in the statement of financial position.

(1 mark)

 

  • 20 Marks

FA – May 2016 – L1 – Q3 – Bank reconciliations

Prepare an adjusted cash book, a bank reconciliation statement, and discuss the benefits of reconciling cash book and bank statement balances.

The following is a summary from the cash book of BW Ltd for July 2015:

Description GH¢
Opening balance 1,530
Receipts 23,104
Payments (23,005)
Closing balance 1,629

On investigation, it was discovered that:
i) Bank charges of GH¢15 shown on the bank statement have not been entered in the cash book.
ii) A cheque drawn for GH¢110 to pay a supplier has been entered in the cash book as a receipt.
iii) A cheque from a customer for GH¢120, which was banked (and included above in receipts), has been returned by the bank, but this has not been adjusted in the company’s books.
iv) An error of transposition which occurred in the opening balance of the cash book should have been recorded as GH¢1,350.
v) Cheques totaling GH¢264 have been sent by post to suppliers but were not presented to the company’s bank until August 2015.
vi) The last page of a bank account paying-in book shows a deposit of GH¢1,040 which was not credited to the account by the bank until 1st August 2015.
vii) The company’s bank statement at 31st July 2015 shows a balance of GH¢318.

Required:
a) Demonstrate any adjustments needed to the company’s accounting records. (8 marks)
b) Prepare a Bank Reconciliation Statement as at 31st July 2015. (6 marks)
c) Explain THREE benefits to BW Ltd of reconciling its cash book and bank statement balances. (6 marks)

a) Adjusted Cash Book

b) Bank Reconciliation Statement as at 31st July 2015

Description GH¢
Balance as per bank statement 318
Add: Banking not yet credited (GH¢1,040) 1,040
Less: Cheques drawn but not yet presented (264)
Balance as per cash book (adjusted) 1,094

c) Benefits of Reconciling Cash Book and Bank Statement Balances

  1. Error Detection and Correction: Reconciliation helps identify discrepancies such as errors in recording transactions in the cash book or the bank statement. It allows for timely correction of these errors, ensuring accurate financial reporting.
  2. Fraud Prevention: Regular reconciliation acts as a deterrent against fraudulent activities. Since the bank statement is an independent record prepared by the bank, discrepancies can highlight unauthorized transactions or misappropriations.
  3. Cash Management: Reconciliation provides a clear picture of the company’s cash position, helping in effective cash management. It ensures that all transactions are accounted for, enabling better financial planning and decision-making.
  • 20 Marks

FA – Nov 2015 – L1 – Q1 – Bank reconciliations

Discuss depreciation, useful life of fixed assets, factors causing depreciation, and prepare various accounts including adjusted cash book and bank reconciliation statement.

(a) Explain the following Terms:
i. Depreciation.
ii. Useful Life of a Fixed Assets. (4 marks)

(b) There are four (4) factors/causes that contribute to depreciation of a Fixed Asset. List these factors or causes. (2 marks)

(c) Atta Moses is a trader who prepares account to 31st December each year. The following transactions with regard to Assets have taken place:
i. 3rd January, 2010 purchased one Office Equipment (Laptop) for GH¢2,000.
ii. 5th July, 2011 purchased Plant and Machinery costing GH¢50,000.
iii. 1st December, 2011 purchased Plant and Machinery for GH¢20,000
iv. 15th December, 2012 bought Office Equipment (Printer) for GH¢1,000.

Mr. Atta maintains its Fixed Assets at cost and depreciates its Asset at a constant rate of 20% using the straight-line method of providing for depreciation for all Assets. Assets purchased attract full depreciation charge in the year of purchase, whilst any asset disposed of attracts no depreciation charge.

You are required to prepare the following:
i. Plant and machinery Account.
ii. Office Equipment Account.
iii. Provision for Depreciation Account. (6 marks)

(d) The following information was extracted from the records of Mama Constance, a Petty Trader as at 31st December, 2014. Balance as per Bank Statement as at 31st December, 2014 was GH¢10,000 credit. Cash Book balance was GH¢40,000 credit in the Bank Account column. The following had been reflected in the Bank Statement but not in the Cash Book:
i. Bank loan interest GH¢ 2,000
ii. Bank Charges GH¢ 6,000
iii. Dividends from Investment GH¢ 10,000
iv. Interest from Treasury Bill GH¢ 4,000

In addition, a cheque of GH¢ 20,000 issued to Madam Peace was dishonoured because of insufficient funds. A cheque of GH¢25,000 from Stephen has not been credited. A cheque of GH¢49,000 issued to Samuel remained unpresented.

You are required to prepare:
i. An adjusted Cash Book. (2 marks)
ii. Bank Reconciliation Statement as at 31st December, 2014. (6 marks)

(a)
i. Depreciation is the allocation of the Depreciable amount of an asset over its estimated useful life. This allocated amount is charged against the income statement/Profit and Loss Account.

ii. The useful Life of an Asset is either the period over which a depreciable asset is expected to be used. OR the number of production/similar units expected to be obtained from the Asset by the enterprise/company.

(b)

  • Physical deterioration/Expected physical wear and tear.
  • Obsolescence/Economic factors.
  • Depletion (Natural resources such as mines)
  • Legal limit/Time factor.

(c)
i. Office Equipment Account

GHS GHS
03/01/10 Bank 2,000.00
31/12/10 Balance c/d 2,000.00
01/01/11 Balance b/d 2,000.00
31/12/11 Balance c/d 2,000.00
1/01/12 Balance b/d 2,000.00
15/08/12 Bank 1,000.00
31/12/12 Balance c/d 3,000.00
Total 3,000.00

ii. Plant and Machinery Account

GHS GHS
05/07/11 Bank 50,000.00
01/12/11 Bank 20,000.00
31/12/11 Balance c/d 70,000.00
01/01/12 Balance b/d 70,000.00
31/12/12 Balance c/d 70,000.00
Total 70,000.00

iii. Depreciation Account

GHS GHS
31/12/10 Bank 400.00
31/12/10 P&L (Office Equipment) 400.00
01/01/11 Balance b/d 400.00
31/12/11 P&L (Office Equipment) 400.00
31/12/11 P&L (Plant & Mach.) 14,000.00
01/01/12 Balance b/d 14,800.00
31/12/12 P&L (Office Equip.) 600.00
31/12/12 P&L (Plant & Mach.) 14,000.00
Total 29,400.00

(d)
i. Adjusted Cash Book

GHS GHS
Dividends 10,000.00
T-Bills Interest 4,000.00
Dishonoured Cheque (Peace) 20,000.00
Bank Charges 6,000.00
Balance b/d 40,000.00
Balance c/f 14,000.00
Total 48,000.00

ii. Bank Reconciliation Statement as at 31st December, 2014

Details GHS
Balance as per Adjusted Cash Book (14,000.00)
Add: Unpresented cheques 49,000.00
35,000.00
Less: Uncredited cheques 25,000.00
Balance as per Bank Statement 10,000.00

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