5.7 On 2 April 1993 Mostar Motors Ltd received their monthly bank statement which showed that there was a bank overdraft of £2,129. This balance was not in agreement with the balance shown in the bank column of the company’s cash book. The chief cashier carried out a reconciliation which revealed the following:

1 Bank charges for the quarter ended 31 March 1993 amounting to £48 had been omitted from the cash book.

2 A page in the cash book of debit entries had been understated by £600 and the incorrect total carried forward to the next page.

3 A dividend cheque received for £340 had been entered twice in the cash book.

4 The company’s agent in Southshore had paid into a local bank a sum of £1,550 but this was not shown on the bank statement.

5 A standing order of £110 to a trade association had been duly paid by the bank but there was no entry in the cash book.

6 Cheques totalling £4,920 had been delivered to suppliers on 30 March 1993 but none of these had as yet been presented to the bank.

7 A cheque for £154 had been received from a customer on 25 March 1993 but had been entered in the cash book at £145.

8 A hire–purchase agreement for equipment had been entered into by the company. This required £120 to be paid every month for two years. The first payment was due on 20 January 1993. These amounts were correctly entered by the company but the bank had inadvertently debited another company.

9 The bank statement revealed a credit transfer receivable for £291 but after inquiries it was discovered that this related to another company.

10 The bank statement recorded that a cheque for £185 paid into the bank had been subsequently dishonoured. The company was unaware of this.

After taking appropriate action to update the cash book, the bank reconciliation statement was prepared.

(a) A corrected cash book and bank reconciliation statement as at 31 March 1993.

(32 marks)

(b) Explain why it is necessary to prepare bank reconciliation statements.

(12 marks)

(AEB, A-level paper 1, June 1993)