List and explain four reasons for disagreement between the cash book and bank statement

Syllabus E4b)

Identify the main reasons for differences between the cash book and the bank statement.

The main reasons for differences between the cash book and the bank statement

The balance on the cash account (which should be the same as the balance in the cash book) is compared to the balance on the bank statements at a given date. 

However, these two balances may not agree. 

There are various reasons

1. Time lag between writing a cheque and the payment appearing on the bank statement (unpresented cheques)

2. Time lag between depositing amounts into the bank account and these appearing on the bank statement (unrecorded lodgements)

3. Direct debits and standing orders are not yet recorded in the cash account (or cash book)

4. Bank charges not recorded in the cash account (or cash book)

5. Errors, such as transposition errors, or casting errors in the cash account (or cash book)

6. Errors made by the bank on the bank statement

Differences between the cash book and the bank statement

Therefore, differences between the cash book and the bank statement arise for 3 reasons

• Errors – usually in the cash book

• Omissions – such as bank charges, standing orders and direct debits not posted in the cash book

• Timing differences – such as unpresented cheques and unrecorded lodgements

Always remember

In our cash book, 
A debit bank balance indicates an asset

but

In the bank statement,
A debit balance indicates a bank overdraft (we owe money to the bank – an asset for the bank)

In our cash book,

A credit bank balance indicates a liability (overdraft)

but

In the bank statement,

A credit balance indicates a positive balance (the bank owes us money)

1. (a) What is a Bank Reconciliation Statement? Explain the causes of disagreement in the balances shown by the Cash Book and Pass Book. (10)

Solution:

BANK RECONCILIATION STATEMENT

Generally, all the transactions made through Cash or by cheques are not recorded at the same time in the Cash Book and the Pass Book regularly because some transactions are recorded in the Cash Book first and recorded in the Pass Book after some days.

On the other hand, Some transactions are recorded in the Pass Block first and later in the Cash Book. Here lies the problem for a trader or the business. So, on a particular date, both the books do not show an equal balance. Those transactions which appear on any one of the books only are the main causes of differences/discrepancies or disagreements.

A statement is prepared to reconcile those differences/disagreements with the cash book or the pass book balance on a particular date, known as a bank reconciliation statement. For preparing a Bank Reconciliation Statement with the help of the balance of a particular book, the disagreements are to be considered as follows:

Suppose the balance of a Cash Book is given and for a particular disagreement or mistake if the said balance is—

(a) less than the Pass Book balance, then the difference is to be added to the Cash Book balance and

(b) Similarly, if the said balance is greater than the Pass Book balance, the difference must be deducted from the Cash Book balance. Hence, all the disagreements are to be considered, as stated above.

By preparing the bank reconciliation statement, it is generally confirmed that there are no other undetected causes of differences, because when this statement is prepared by taking one of the book’s balances as the basis, then the result which will come out after the adjustment of the disagreements would be the other book’s balance. But suppose the resultant balance is not tallying with the original balance of the said book. In that case, it indicates that still there are some undetected causes Of difference or disagreements or mistakes which are to be found. Here lies the importance of preparing the bank reconciliation statement.

Some causes of differences between a cashbook balance and a passbook balance are:

1. Cheque deposited but not credited by the bank
2. Cheque issued but not cashed
3. Bank charges and interest are not accounted for in the cash book
4. Direct collections made by the bank on behalf of customers
5. Clerical errors in recording cash book or passbook transactions

(b) Why do you maintain the bill book separately? State the transactions recorded in Bill Receivable and Bills Payable journals. (10)

2. (a) What is a suspense account? Why is it opened, and how is it closed? Explain. (10)

(b) Why is provision for doubtful debts created? How is it shown in the Balance sheet? Explain (10)

3. How would a not-for-profit organization deal with the following items. (4X5)

• (a) Outstanding Subscriptions,
• (b) Donation,
• (c) Tournament Fund,
• (d) Legacy,
• (e) Life Membership Fees

4. (a) What is a joint venture? Explain various methods of recording the joint venture transaction. Give entries in each case. (10)

Meaning of Joint Venture

Joint ventures are legal agreements between two or more entities in which the parties jointly own, operate and/or control the assets of a business. Typically, joint ventures involve two or more parties that enter into a formal agreement and divide the responsibilities, risks, rewards, costs and profits of the business. For example, the partners can be individuals, families, corporations or other entities.

Joint ventures can occur with a single partner or multiple partners and may operate in numerous industries, such as business, manufacturing, real estate, technology, media, marketing, law, education, or any other field where partnerships or joint ventures exist.

Joint ventures can help to resolve competitive issues in various industries. For example, if two companies dominate the market, a joint venture may increase both companies’ reach and sales. As a result, it can provide opportunities for the joint venture partners to gain new clients and sell new products to their customers.

(b) Differentiate between : (10)

• (i) General Commission and Del Creder Commission
• (ii) Normal Loss and Abnormal Loss

5. “Incomplete records system is unscientific, incomplete, inaccurate and unsystematic”. Explain (20)

The incomplete record system, also known as the single entry system, is not a typical practice like the dual aspect-based double-entry system. The double entry system is based on the scientific dual aspect notion, which enables the scientific localisation of any inaccuracy caused by emission, omission, or clerical error. If there is a mistake in the double-entry system, the trial balance will not be balanced.

Single-entry accounting does not adhere to any set principles or norms when it comes to documenting financial transactions, hence it is an unscientific and unsystematic approach.

However, the use of a single entry system or an incomplete record system does not offer any distinct benefits. These records are kept by accounting novices or small business owners who are not compelled by law to keep books of account.

Considering the above differences between the incomplete record system and the double-entry system, we can identify the following limitations:

• This method is unfinished and unscientific.
• Automatic account checks and reconciliations are not feasible.
• It is not possible to identify the exact surplus or deficiency of revenue over expenditure for non-trading businesses and the exact profit or loss for commercial enterprises.
  Due to the improper maintenance of asset and liability records, the true financial status may not be known.
• The system is unreliable; banks and tax officials, among others, have little faith in it.
  Because these aspects are not documented, it is easier to conduct fraud.
• Comparing the trading performance and financial positions of different time periods does not yield business-progressive results.