Analysing Bank Reconciliation Differences

Accounting for Internal Control

Skill: Analyse

Stimulus

Question

(a) Analyse each item in the table: state whether it must be adjusted in the CASH BOOK or only recorded in the BANK RECONCILIATION STATEMENT, and explain the cause of the difference.

(b) Determine the adjusted cash book balance and show that it equals the balance per the bank reconciliation statement.

(c) The insurance standing order, bank charges and dividend were only detected late because the bank statement is rarely checked. Analyse the EFFECT of this control weakness on the business's cash control and on preparing its cash budget.

Thinking steps

1. Identify the starting point: cash book RM4,850 differs from bank statement RM6,220 (a RM1,370 gap). Differences come from (i) transactions the bank has recorded but the business has not, or (ii) timing differences: items the business has recorded but the bank has not yet processed.
2. Classify each item. Items 3, 4 and 5 (standing order, bank charges, dividend) already appear on the bank statement but not in the cash book, so ADJUST THE CASH BOOK.
3. Item 1 (unpresented cheque) and item 2 (uncredited banking) are timing differences only (already in the cash book but not yet processed by the bank), so they go in the BANK RECONCILIATION STATEMENT only.
4. Adjust the cash book: RM4,850 − RM420 (insurance) − RM50 (bank charges) + RM300 (dividend) = RM4,680.
5. Prepare the reconciliation: bank statement balance RM6,220 + RM460 (uncredited) − RM2,000 (unpresented cheque) = RM4,680. Both balances match, so the records are verified.
6. Analyse the effect: timing differences self-correct, but the standing order, charges and dividend are automatic transactions that were missed. Late detection means the cash balance was misreported and control is weak.

Model answer

(a) Classification and cause:

• Item 1 (Unpresented cheque RM2,000): RECONCILIATION STATEMENT only (deduct from bank balance). Cause: timing difference; the business has credited the cash book but the payee has not cashed the cheque.

• Item 2 (Uncredited banking RM460): RECONCILIATION STATEMENT only (add to bank balance). Cause: timing difference; the money was banked late and the bank has not processed it yet.

• Item 3 (Insurance standing order RM420): ADJUST CASH BOOK (credit). Cause: the bank has paid it but the business has not recorded it.

• Item 4 (Bank charges RM50): ADJUST CASH BOOK (credit). Cause: deducted by the bank but not yet recorded.

• Item 5 (Dividend RM300): ADJUST CASH BOOK (debit). Cause: collected by the bank on the business's behalf but not yet recorded.

(b) Adjusted cash book balance = RM4,850 − RM420 − RM50 + RM300 = RM4,680.

Bank reconciliation statement: RM6,220 + RM460 − RM2,000 = RM4,680. Both balances agree (RM4,680), so the records are accurate.

(c) Effect of the control weakness (bank statement rarely checked):

• Cash control: automatic transactions (standing order, charges, dividend) escape the records, so the cash book balance does not reflect real cash. Errors or fraud (e.g. forged cheques or unauthorised charges) are not caught early, reducing the ability to detect fraud.

• Cash budget: a wrong opening cash balance makes the estimated inflows/outflows and closing balance in the cash budget inaccurate. The business may plan wrongly, assuming a surplus when cash is actually short, leading to a cash shortage or poor spending decisions.

Recommendation: check and reconcile the bank statement monthly so records stay current and internal control is strong.