Question

George had completed his company financial statements for the year
ended 31st March, which showed a profit of £81,208, when he realised
that no bank reconciliation statement had been prepared at that date.

When checking the cash book against the bank statement and carrying
out other checks, he found the following:

1. A cheque for £1,000 had been entered in the cash book but had not
yet been presented at the bank.

2. Cheques from customers totalling £2,890 entered in the cash book at
31st March were credited by the bank on 1st April.

3. Bank charges of £320 appear in the bank statement on 30th March but
have not been recorded by George.

4. A cheque for £12,900 drawn by George to pay for a new item of plant
had been mistakenly entered in the cash book and plant account as
£2,900. Depreciation of £290 had been charged to the profit and loss
account for this plant.

5. A cheque for £980 form a credit customer paid in on 26th March was
dishonoured after 31st March and George decided that the debt would
have to been written off, as the customer was now untraceable.

6. A cheque for £2,400 in payment for some motor repairs had
mistakenly been entered in the cash book as a debit and posted to the
credit of motor vehicles cost account. Depreciation at 25% per annum
(straight line) is charged on motor vehicles, with a full years charge
on the balance at the end of each year.

7. The total of the payments side of the cash book had been
understated by £1,000. On further investigation it was found that the
debit side of the purchases account had also been understated by
£1,000

8. George had instructed his bank to credit the interest of £160 on
the deposit account maintained for surplus business funds to the
current account. This the bank had done on 28th March. George had made
an entry on the payment side of the cash book for this £160 and had
posted it to the debit of interest expense account.

9. George had mistakenly paid an account for £870 for repairs to his
house with a cheque drawn on the business account. The entry in the
cash book had been debit to repairs to premises account.

10. George had also mistakenly paid £540 due to Paul, a trade
supplier, to clear his account in the accounts payable ledger, using a
cheque drawn on George’s personal bank account. No entries have yet
been made for this transaction.

The cash book showed a debit balance of £4,890 before any correcting
entries had been made. The balance on the bank statement is to be
derived in your answer.

Required

(a) Prepare an adjusted cash book showing the revised balance which
should appear in George’s statement of financial positing at 31st
March.

(b) Prepare a bank reconciliation statement as at 31st March

(c) Draw up a statement for George showing the effect on his profit of
the adjustments necessary to correct the errors found.

(d) Prepare double entry journals to correct items (9) and (10).
Narratives required

Answer 1

Revised Cash Statement as on 31st March

PARTICULARS	AMOUNT	AMOUNT
Debit balane of cash book		4890
Add :-cash book understated	1000
Interest wrongly debitedto cash account	160
Cash A/c wrongly debited and payment made by cheque	870
cash Acount wronglycredited instead of bank	2900	4930
		9820
Less:-
Cheques from customers entered in the cash book	2890
Payment made tomotor repair wrongly debited	2400	5290
BAlance of cash book	4530

Bank Reconilation Account

A cheque had been entered in the cash book but had not yet been presented at the bank	1000
Cheques from customers entered in the cash book at 31st March were credited by the bank on 1st April.	2890
Amount harged for Plant	2400
Bank charges	320
Cheque issued for BAnk	10000
George had mistakenly paid an account for repairs to his house with a cheque drawn on the business account.	870
George had also mistakenly paid due to Paul, a trade supplier, to clear his account in the accounts payable ledger, using a cheque drawn on George’s personal bank account	540
Add
. A cheque form a credit customer paid in on 26th March was dishonoured after 31st March and George decided that the debt would have to been written off, as the customer was now untraceable.	980
BAlance as per bank

Effect on Profit & Loss Account

Balance of P & L A/c		81208
BAnk Charges	320
ExtraDepreciation	1000
Bad Debt	980
Motor VEhicle	2400	4700
Balanceof profit & loss account		76508

DoubleEntry of entry 9 & 10

Drawing Account Dr. 870

To Owner's Capital a/c 870

( Being house premises repaired)

Paul Dr 540

To Drwaing Account 540

(By paying the expenses of business from personal cash owner has introduced Additional Capital in the Business and so the capital will increase by the amount of personal cash payment.)