chapter 13

Question 1

bank reconciliation statement

Answer 1

a statement prepared periodically to ensure that the bank account in the business cash book matches the business bank account shown on the bank statement

Question 2

omitted items

Answer 2

payments and receipts made by the bank that have nor been recorded in the cash book

Question 3

standing order

Answer 3

an electronic payment where the payer gives instruction for his or her bank to pay a regular amount. the amount paid is always the same and takes place on a specific date

Question 4

direct debt

Answer 4

a regular electronic payment where the payer gives written permission (a direct debit mandate) for the person receiving the money to claim the money by presenting the ‘bill’. usually used where the timing of the payment or the amount is likely to vary

Question 5

timing differences

Answer 5

the delay between items recorded in the cash book and their appearance on the bank statement

Question 6

deposit

Answer 6

money paid into the bank account

Question 7

withdrawal

Answer 7

money being taken out of the bank account

Question 8

why is bank reconciliation statement used

Answer 8

it is used to reassure the business that the differences are not the result of errors committed by its accountants or the bank

Question 9

why may the cash book and the bank statement show different balances if it records a large number of transactions in its bank account

Answer 9

omitted items including standing orders and direct debts, bank charges, interest and electronic transfers
timing differences like a cheque has to find its way back to our bank before the money actually changes hands, and this can take days

Question 10

why is it likely that we will have recorded payments near to the end of the month that will appear on next month’s bank statements

Answer 10

at the end of the month, our bank does not yet know about that payments. our supplier will also find that his or her bank may not have recorded the receipt either and therefore his or her cash book will record money going into the bank account while the bank statement will not show it

Question 11

what do banks use instead of debit and credit

Answer 11

deposit and withdrawal

Question 12

what do bank use instead of overdraft (debit balance) and credit balance

Answer 12

they use O/D for debit balance and nothing for a credit balance

Question 13

structure of a bank statement

Answer 13

the deposit column is on the credit side and the withdrawal column is on the debit side

Question 14

steps of making a bank reconciliation statement

Answer 14

step 1-compare the entries in the cash book with the bank statements. tick items that appear in both the cash book and the bank statement. be sure to tick them in both places
step 2-enter in the cash book any items that remain unticked in the bank statement. then tick those in both places. then calculate the new cash book balance
step 3- prepare the reconciliation statement. begin with the final balance shown on the bank statement and adjust it for any items that remain unticked in the cash book. the result should equal the balance in the cash book

Question 15

what happens when the final balance in the cash book is a debit

Answer 15

it will appear under current assets, together with the cash in hand. this is headed ‘cash and cash equivalents’.

Question 16

what happens when the final balance in the cash book is a credit

Answer 16

it will appear under current liabilities as ‘bank overdraft’

Question 17

payments unpresented

Answer 17

payments of money from the bank account that have been recorded in the cash book but have not yet appeared on the bank statement

Question 18

receipts unpresented

Answer 18

deposits of money paid into the bank account that have been recorded in the cash book but have not yet appeared on the bank statement

Question 19

what to do when the cash book and the bank statement have different opening balances

Answer 19

Identify and tick off the items that are causing the opening difference. In practice, we should have last month’s bank reconciliation statement, but in the absence of this, we can use common sense to make some deductions.

Question 20

what causes the cash book and bank statement to have different opening balances

Answer 20

If the closing balances in one month are different in the cash book and on the bank statement, it follows that the opening balances at the start of the next month will be different.

Question 21

benefits of preparing a bank reconciliation statement: ensure the cash book is up to date

Answer 21

the unticked items on the bank statement are entered into the cash which ensures that the cash book is kept up-to-date and the correct balance is shown in the statement of financial position.

Question 22

benefits of preparing a bank reconciliation statement: ensures that all transactions involving the bank are recorded

Answer 22

if the other half of the entries are made, then other account balances will also be up-to-date and the trial balance will be accurate.

Question 23

benefits of preparing a bank reconciliation statement: helps to detect errors

Answer 23

if the bank reconciliation agrees, it can reassure the business that errors have not been committed-by the bank or the business. If the bank reconciliation does not balance, then it can identify where errors have been made or where items need to be investigated.

Question 24

verification

Answer 24

the process of establishing the truth, accuracy or validity of something.

Question 25

internal controls

Answer 25

the presence of systems or procedures that make it more difficult for people to make serious errors or commit fraud without it being detected.

Question 26

segregation of duties

Answer 26

the dividing up of tasks or an accounting function between two or more people in order to strengthen internal controls and reduce the risk of fraud or error. the increased chance of being discovered might discourage someone from committing fraud in the first place

Question 27

benefits of bank statements showing verification: assists management of cashflow

Answer 27

the business can avoid unintended overdrafts on the bank account- the cash book may highlight an overdraft before the bank becomes aware of it and the business may be able to pay money into the bank to avoid the overdraft. It can also highlight a surplus of cash at the bank that could be used to earn interest.

Question 28

benefits of bank statements showing verification: strengthens internal controls/helps to prevent fraud

Answer 28

the bank reconciliation might not be prepared by the same person who maintains the cash book, which would increase the possibility of any unusual activity being detected and reported.

Question 29

limitation of preparing a bank reconciliation: erroneously cancelling cheques

Answer 29

one might expect that a vast majority of cheques that have not cleared will be those that were issued late in the month and have not cleared. However, there may be earlier cheques that have still not cleared. While it is likely that the cheque has arrived safely and it is just the supplier taking time to pay it into the bank account, it could possibly have been lost or stolen. The accountant could ask the bank to cancel the cheque only to find that the supplier pays it in later and it doesn’t clear.

Question 30

what should an accountant do when trying to identify items that take time to clear

Answer 30

it does not mean that the accountant needs to use their judgement. in this case, the most sensible decision would be to contact the supplier to ensure that the cheque has arrived safely. if the cheque has not been received at all, then asking the bank to cancel it is appropriate

Question 31

how can one understand that there is money in the bank account

Answer 31

the cash book will have a debit balance and the bank statement will have a credit balance of the same value

Question 32

how can one understand that there is an overdraft

Answer 32

cash book will have a credit balance and the bank statement will have a debit balance of the same value

Question 33

dishonored cheque

Answer 33

a cheque that is not paid, usually because there is not enough money in the payer’s account to cover it

Question 34

what should be done when some deposits or cheque payments have not been recorded when preparing the financial statements

Answer 34

When preparing the financial statements for a business, you may discover some deposits or cheque payments have not been recorded in the books of account. You will therefore need to adjust the bank balance (cash and cash equivalents figure) in the trial balance.