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Notes to teachers
1 2 3
Start with Chapter 4 of Frank Woods Introduction to Accounting and briefly explain to students the basic principles of recording in the cash book. It is necessary to show a (real or simulated) bank statement to students as most of them would probably have no idea of what one looks like. Most students have difficulty understanding why a debit bank balance appearing in the cash book represents a positive balance while a debit bank balance appearing in the bank statement represents a negative (overdraft) balance. Teachers must clarify a bank deposit from the perspectives of the business and the bank (whether it is treated as an asset or a liability). Most students have the misconception that a bank reconciliation statement is used to make corrections in the cash book and/or the bank statement. Teachers must clarify that the bank reconciliation statement is simply used to show the difference between the bank balances of the cash book and the bank statement. By so doing, a bank reconciliation statement can help spot errors in the cash book or the bank statement. Most students have difficulty understanding why unpresented cheques and uncredited cheques are added to and deducted from the cash book balance, respectively, in arriving at the bank statement balance. Teachers should tell them the purpose is to reconcile both balances. The calculation would be reversed if it starts with the bank statement balance and ends with the cash book balance. The treatment of bank errors is the most difficult task. Teachers should spend more time demonstrating how they should be shown on the bank reconciliation statement and explaining the general principle behind this. In public examinations, this topic is usually combined with other topics in a long question, most probably the correction of errors, which will be taught in Chapter 6.
Q1 Q2
A bank overdraft occurs when a firm withdraws more money than it has in its bank account. As a result, the balance at the bank will become negative. A standing order is an instruction given by a bank customer to his bank to pay a fixed sum of money from his account to a named beneficiary (payee) at regular intervals. Example: A fixed amount of money is automatically transferred out of ones bank account to pay property management fees on a fixed date each month. A direct debit is an authority given by the customer to a named payee to claim payments from the customers bank account and an instruction to his bank to allow the payments to go through. It does not specify the payment amount or the payment date.
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Example: Money is automatically transferred out of ones bank account to pay electricity charges, but the amount and the date of each transfer is not fixed. Generally, a standing order is used when the bank customer needs to pay a fixed amount at regular intervals. When payments are made at irregular intervals or are of variable amounts, a direct debit would be used instead. The reason may be one of the following: The drawer does not have enough money in the current account for the payment. There is no signature on the cheque, or the signature does not match the record at the bank. The amount in words differs from the amount in figures. The cheque is not dated. The cheque is a stale cheque (i.e., exceeding six months after the date of issue). The cheque is a post-dated cheque. This means that the date on the cheque has not yet been reached. The drawers account has been closed. Alterations to the cheque have not been countersigned by the drawer. (Any two of the above) A bank reconciliation statement is prepared at the end of a period in order to show the reasons for the difference between the bank balances of the cash book and the bank statement. Yes. A bank reconciliation statement shows the reasons for the difference between the bank balances of the cash book and the bank statement. The reasons may be errors and omissions made in the cash book or the bank statement. So the preparation of a bank reconciliation statement can help to detect and correct errors.
D Yuen Bank Reconciliation Statement as at 30 November 2009
Overdraft balance as per cash book Add Unpresented cheque Credit transfer Less Uncredited cheque Standing order Bank charges Overdraft balance as per bank statement $ 630 1,240 1,060 770 490 $ (3,780) 1,870 (1,910)
Q3 Q4 Q5
Q6
(2,320) (4,230)
Q7
(a)
Balance as per bank statement Add Bank lodgement not yet entered on bank statement Bank error Service fee overcharged Less Unpresented cheque Adjusted balance as per cash book
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(b)
Balance as per cash book Add Unpresented cheque Creditor Stale cheque Opening balance understated Direct credit Less Bank lodgement not yet entered on bank statement Bank error Service fee overcharged Debtor Dishonoured cheque Payment understated Loan interest Electricity Direct debit Balance as per bank statement
57,000 213,500
(51,700) 161,800
A2 A4
When a firm keeps money in the bank, it is the same as the firm lending money to the bank. Therefore, the firms positive bank balance is treated as a liability by the bank and not an asset. Adjusting entries in the drawers cash book: Dr Cash book (bank column) Cr Creditors account
ASSESSMENT
Short Questions
1
(a)
2009 Jun 30 " 30 Balance b/d RS Ltd Credit transfer
Cash Book
$ 2,833 90 2,923 2009 Jun 30 " 30 " 30 Union Credit Standing order Bank charges Balance c/d $ 44 70 2,809 2,923
(b)
Corrected balance as per cash book Add Unpresented cheque Less Uncredited cheque Balance as per bank statement
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(a)
2008 Dec 31 " 31 K Sung Direct credit Balance c/d
Cash Book
$ 180 4,007 4,187 2008 Dec 31 " 31 " 31 Balance b/d Mercantile Ltd Standing order Bank charges $ 3,922 200 65 4,187
(b)
Corrected overdraft balance as per cash book Add Unpresented cheque Less Uncredited cheque Overdraft balance as per bank statement
3X
(a)
2009 Mar 31 " 31 K Tong Direct credit Balance c/d
Cash Book
$ 57 5,300 5,357 2009 Mar 31 " 31 " 31 Balance b/d BKS Ltd Direct debit Bank charges $ 5,280 49 28 5,357
(b)
Overdraft as per corrected cash book Add Unpresented cheque Less Uncredited cheque Overdraft as per bank statement
4X
(a)
2009 May 31 " 31 Balance b/d Dividend revenue
Cash Book
$ 141,030 16,280 157,310 2009 May 31 " 31 " 31 C Yeung Returned cheque Bank charges Balance c/d $ 4,800 820 151,690 157,310
(b)
Adjusted balance as per cash book Add Unpresented cheques ($2,790 + $16,270) Less Uncredited deposit Balance as per bank statement
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(a)
2009 Dec 31 " 31 " 31 " 31 Balance b/d Dividend revenue (ii) HK Finance Ltd Refund (iv) Transfer from savings a/c (v)
Cash Book
$ 4,500 720 780 4,200 10,200 2009 Dec 31 " 31 " 31 " 31 Insurance Standing order (i) Bank charges (iii) C Ho Dishonoured cheque (vi) Balance c/d $ 600 90 210 9,300 10,200
(b)
Corrected balance as per cash book Add Unpresented cheques ($750 + $870) Less Uncredited cheque Balance as per bank statement
Application Problems
6
(a)
2010 Apr 30 " 30 " 30 " 30 Balance b/d Cheque wrongly recorded on credit side ($6,200 2) (iv) Credit transfer (v) Dividend revenue (vii)
Cash Book
$ 53,000 12,400 5,800 1,190 72,390 2010 Apr 30 " 30 " 30 " 30 Bank charges (i) Rent Standing order (ii) Debtor Dishonoured cheque (iii) Balance c/d $ 150 20,000 3,560 48,680 72,390
(b)
Corrected balance as per cash book Add Loan interest undercharged Unpresented cheque Balance as per bank statement
(vi) (viii)
or
Balance as per bank statement Less Loan interest undercharged Unpresented cheque Corrected balance as per cash book
(vi) (viii)
7X
(c) See text, Section 4.5 of Frank Woods Introduction to Accounting. (a)
2009 Oct 31 " 31 " 31 Balance b/d Dividends received (iv) Rates refund ($5,500 2) (v)
Cash Book
$ 76,230 930 11,000 88,160 2009 Oct 31 " 31 " 31 " 31 $ Debtor Dishonoured cheque (vi) 2,720 Insurance (vii) 8,250 Discounts allowed (viii) 30 Balance c/d 77,160 88,160
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(b)
Adjusted balance as per cash book Add Unpresented cheque Less Uncredited deposits Bank error ($10,000 2) Balance as per bank statement
(c) The reason could be: (i) The creditor had not deposited the cheque into his bank account. (ii) The cheque had been deposited but had not yet been processed by the bank by the end of the period. (a)
2010 Mar 31 " 31 " 31 " 31 Balance b/d Paul Lee Incorrect amount entered (ii) Peter Pang Credit transfer (v) Sales receipts omitted (viii)
Cash Book
$ 93,596 1,080 3,256 2,504 100,436 2010 Mar 31 " 31 " 31 " 31 $ Bank interest charges (iii) 184 Rates Autopay (iv) 2,688 David Ho Dishonoured cheque (vi) 2,080 Balance c/d 95,484 100,436
(b)
Balance as per bank statement Add Uncredited cheque Less Unpresented cheques Corrected balance as per cash book
(vii) (i)
(c) In Hong Kong, when a cheque is deposited into the bank, it takes at least one full working day for the cheque to clear. As the cheque was deposited on 31 March 2010, it would only be cashed in early April 2010. Thus, it did not appear on the bank statement for the month ended 31 March 2010. (a)
2010 Dec 31 " 31 " 31 " 31 " 31 Balance b/d Dividend revenue (ii) Mr Sin (v) Thomas Wong (v) Cheque received from Mr Ma previously recorded on the credit side ($3,360 2) (viii)
9X
Cash Book
$ 137,900 1,365 3,210 2,530 2010 Dec 31 " 31 " 31 " 31 Trade subscription (iii) Interest expenses (iv) Mr Wo Dishonoured cheque (vi) Balance c/d $ 11,060 210 1,246 139,209
6,720 151,725
151,725
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(b)
Corrected balance as per cash book Add Unpresented cheques: Mr Ma Mr Man Less Overdraft interest wrongly charged Balance as per bank statement or
10
(a)
2010 May 7 " 10 " 29 " 31 Sales Capital AB Ltd Dividend revenue (ii)
Cash Book
$ 1,630 10,000 555 280 12,465 2010 May 1 " 4 " 18 " 30 " 31 " 31 " 31 " 31 Balance b/d Van D Ming Ltd Wages Bank charges (i) Insurance Standing order (iv) Sales Dishonoured cheque (v) Balance c/d $ 3,340 5,000 237 470 110 920 75 2,313 12,465
(b)
Adjusted balance as per cash book Add Unpresented cheque Less Uncredited cheque Balance as per bank statement
(vi) (iii)
11X (a) No. A bank reconciliation statement is prepared to explain the difference between the bank balances
of the cash book and the bank statement. (b) (i)
2009 Mar 31
Cash Book
$ 2009 Balance c/d 24,275 Mar 31 found in the bank reconciliation ( " 31 statement) " 31 " 31 " 31 24,275 Balance b/f (balancing figure) Creditor ($5,280 + $5,016) (iii) Chung Hwa Ltd Dishonoured cheque (v) Overdraft interest (vi) Electricity (vii) $ 5,894 10,296 2,484 862 4,739 24,275
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(ii)
Adjusted bank balance as per cash book (balancing figure) Add Personal cheque wrongly deposited into bank Unpresented cheques Less Lodgement not yet entered on bank statement Overdraft balance as per bank statement
(iii) The bank balance to be shown in the balance sheet as at 31 March 2009 would be $24,275 (overdraft). (a)
2009 Feb 28 " 28 Balance b/d Jasper Ltd Credit transfer
12
Cash Book
$ 2,716 1,375 4,091 2009 Feb 28 " 28 " 28 " 28 " 28 Bank charges Government rates Direct debit Jacob Co Dishonoured cheque Trade subscriptions Standing order Balance c/d $ 562 231 350 375 2,573 4,091
(b)
Balance as per bank statement Add Uncredited item Less Unpresented cheques: Telephone (No. 4149) Wages (No. 4152) Corrected balance as per cash book
(856) 2,573
(c)
Jacob Co
2009 Feb 1 " 28 Balance b/d Bank Dishonoured cheque $ 719 350 1,069 2009 Feb 24 " 28 Bank Balance c/d $ 350 719 1,069
13X (i) Bank receipts and payments should be recorded in the cash book on the dates that they are made.
This is the time when the corresponding liability is settled. For example, a cheque payment should be recorded when the cheque is drawn and not when it is presented to the bank. Making entries on the basis of the bank statement could miss some cheques that have been drawn but have not been presented during the period.
(ii) These items are usually debited or credited automatically to the bank account without prior notification. The account holder can only ascertain these items upon receiving the bank statement. (iii) Actually, these cheques or deposits were recorded in the cash book when they were drawn or made. Adjustments for such items are just for the purpose of explaining the difference between the bank balances of the cash book and the bank statement. (iv) As explained in part (i), bank receipts and payments should be recorded in the cash book when they are made. So the bank balance shown in the balance sheet should be the adjusted balance of the cash book. 57
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Cash Book
$ 225,000 800 6,600 232,400 2006 Mar 31 " 31 " 31 " 31 $ Dishonoured cheque (iii) 6,800 Payment to supplier ($2,750 2) (iv) 5,500 Standing order Rent (viii) 34,000 Balance c/f 186,100 232,400
(b)
Balance as per corrected cash book Add Unpresented cheque Less Overdraft interest wrongly debited Uncredited cheque Balance as per bank statement
(c) (i) To discover any errors or irregularities, and (ii) To detect any missing transactions in the cash book.
15X (a)
2006 Dec 31 " 31 Balance b/d Trade debtors (vii)
Cash Book
$ 186,400 3,900 190,300 2006 Dec 31 " 31 " 31 " 31 " 31 Trade debtors (i) Overdraft interest (ii) Trade debtors (iv) Insurance (vi) Balance c/d $ 7,800 2,660 19,000 6,000 154,840 190,300
(b)
Balance as per corrected cash book Add Unpresented cheques Bank errors Less Uncredited deposit Balance as per bank statement
58
(c) A bank reconciliation statement provides: (i) verification of firms records with aspects not yet known by the bank such as uncredited deposits and unpresented cheques. (ii) verification of the amounts recorded as received and paid. (iii) a check on the time differences between when a deposit is recorded as received (or paid) and when it is banked (or withdrawn from bank). (iv) an update of the firms records with aspects not yet known by the firm, that is, direct deposits such as interest received, direct withdrawals such as bank fees and dishonoured cheques. (v) a check for errors in either the firms records or the banks records (as reported in the bank statement). (Any one point)
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16
(a)
2007 Mar 31 " 31 " 31 Balance b/d Dishonoured cheque (vi) Credit side overstated (viii)
Cash Book
$ 235,930 5,100 15,600 256,630 2007 Mar 31 " 31 " 31 " 31 $ Salary (iii) 33,870 Machinery ($17,000 $10,700) (iv) 6,300 Bank charge (vi) 100 Balance c/d 216,360 256,630
(b)
Balance as per corrected cash book Add Unpresented cheques: Cheque drawn by Mr Chan Cheque paid to Mr Luk Less Uncredited deposit Overdraft interest wrong charged Balance as per bank statement
11,970
(3,400) 224,930
(c) A bank reconciliation statement provides: (i) verification of firms records with aspects not yet known by the bank such as uncredited deposits and unpresented cheques. (ii) verification of the amounts recorded as received and paid. (iii) a check on the time differences between when a deposit is recorded as received (or paid) and when it is banked (or withdrawn from bank). (iv) an update of the firms records with aspects not yet known by the firm, that is, direct deposits such as interest received, direct withdrawals such as bank fees and dishonoured cheques. (v) a check for errors in either the firms records or the banks records (as reported in the bank statement). (Any two points)
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