ICAEW AF · Chapter 5
Bank reconciliations MCQs with Answers
9 multiple-choice questions on Bank reconciliations for ICAEW AF Accounting Fundamentals. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
A business's bank statement shows a credit balance of £2,600. What does this mean from the business's point of view?
- A) The business has £2,600 in the bank, an asset
- B) The bank has made an error of £2,600
- C) The business has unpresented cheques of £2,600
- D) The business is overdrawn by £2,600, a liability
Show answer & explanation
Answer: A) The business has £2,600 in the bank, an asset
A bank statement is prepared from the bank's point of view. Money held for a customer is a liability of the bank, so it is shown as a credit balance on the statement. For the business, the same amount is an asset and appears as a debit balance in its cash book.
Question 2
When preparing a bank reconciliation, which of the following items requires an adjustment to the business's cash book rather than to the bank statement balance?
- A) Bank charges shown on the bank statement but not yet recorded by the business
- B) An amount wrongly debited to the business's account by the bank
- C) Cheques sent to suppliers that have not yet been presented for payment
- D) Cash paid into the bank on the last day of the month that does not yet appear on the statement
Show answer & explanation
Answer: A) Bank charges shown on the bank statement but not yet recorded by the business
Bank charges are genuine transactions that the business has not yet recorded, so they must be entered in the cash book. Unpresented cheques and outstanding lodgements are timing differences: the cash book is already correct, and they are adjusted on the bank statement side of the reconciliation. A bank error is corrected by the bank, so it is also shown as an adjustment to the statement balance.
Question 3
A business's bank statement shows a balance of £3,420 in its favour at the month end. Cheques of £1,870 paid to suppliers have not yet been presented, and lodgements of £960 have not yet been credited by the bank. The cash book needs no other adjustment. What is the correct cash book balance?
- A) £2,510 debit
- B) £6,250 debit
- C) £4,330 debit
- D) £2,510 credit
Show answer & explanation
Answer: A) £2,510 debit
Start with the bank statement balance of £3,420. Deduct unpresented cheques of £1,870, because the cash book has already recorded those payments, and add outstanding lodgements of £960, because the cash book already shows those receipts. £3,420 - £1,870 + £960 = £2,510, a debit (asset) balance in the cash book.
Question 4
The cash book of a business shows a debit balance of £5,180. On comparing it with the bank statement, the following are found: 1. Bank charges of £65 have not been entered in the cash book. 2. A direct debit of £240 has not been entered in the cash book. 3. A cheque from a customer for £330 has been dishonoured. 4. A credit transfer of £1,150 received from a customer has not been entered in the cash book. What is the corrected cash book balance?
- A) £3,395 debit
- B) £6,355 debit
- C) £5,695 debit
- D) £6,025 debit
Show answer & explanation
Answer: C) £5,695 debit
Corrected balance = £5,180 - bank charges £65 - direct debit £240 - dishonoured cheque £330 + credit transfer £1,150 = £5,695. The dishonoured cheque was originally recorded as a receipt, so it must be reversed by a credit (reduction) in the cash book. The credit transfer is money received that has not yet been recorded, so it increases the balance.
Question 5
After all necessary adjustments, a business's cash book shows a debit balance of £2,315. Unpresented cheques total £3,780 and lodgements not yet credited by the bank total £2,150. What balance is shown on the bank statement?
- A) £685 in favour of the business
- B) £3,945 overdrawn
- C) £8,245 in favour of the business
- D) £3,945 in favour of the business
Show answer & explanation
Answer: D) £3,945 in favour of the business
Working from the cash book to the bank statement reverses the usual reconciliation. Unpresented cheques have been deducted in the cash book but not yet by the bank, so the bank balance is higher by £3,780. Outstanding lodgements are in the cash book but not yet in the bank, so the bank balance is lower by £2,150. Bank statement = £2,315 + £3,780 - £2,150 = £3,945 in favour of the business.
Question 6
A cheque payment to a supplier for £472 was correctly shown on the bank statement but was recorded in the cash book as £427. What adjustment is needed?
- A) Credit the cash book with £45
- B) Deduct £45 from the bank statement balance in the reconciliation
- C) Debit the cash book with £45
- D) Add £45 to the bank statement balance in the reconciliation
Show answer & explanation
Answer: A) Credit the cash book with £45
The cash book shows a payment £45 lower than the amount actually paid (£472 - £427 = £45). The cash book is wrong, not the bank, so the cash book must be corrected by recording an additional payment of £45, which is a credit entry. The other side of the entry increases the debit to the supplier's account.
Question 7
A cheque received from a credit customer and banked last week has been returned by the bank marked 'refer to drawer'. What double entry should the business make?
- A) Debit Trade receivables, Credit Revenue
- B) Debit Trade receivables, Credit Cash at bank
- C) Debit Irrecoverable debts expense, Credit Cash at bank
- D) Debit Cash at bank, Credit Trade receivables
Show answer & explanation
Answer: B) Debit Trade receivables, Credit Cash at bank
When the cheque was banked, the business debited cash and credited the customer's account. The cheque has been dishonoured, so that entry must be reversed: the customer owes the money again (debit trade receivables) and the bank balance is lower (credit cash at bank). It is not yet an irrecoverable debt, because the customer may still pay.
Question 8
When reconciling its bank account, a business notices that the bank has debited its account with £300 for a cheque that was actually written by a different customer of the bank. How should this be dealt with?
- A) Deduct £300 from the bank statement balance in the reconciliation
- B) Debit the cash book with £300
- C) Add £300 to the bank statement balance in the reconciliation and ask the bank to correct the error
- D) Credit the cash book with £300
Show answer & explanation
Answer: C) Add £300 to the bank statement balance in the reconciliation and ask the bank to correct the error
The business's cash book is correct; the error has been made by the bank, which has wrongly reduced the business's balance by £300. The cash book is not adjusted. In the reconciliation, £300 is added back to the bank statement balance to arrive at the correct figure, and the bank is asked to reverse its entry.
Question 9
A business's bank statement at the year end shows an overdraft of £2,600. Unpresented cheques total £1,450 and outstanding lodgements total £3,900. Bank charges of £75 on the statement have not yet been recorded in the cash book. There are no other differences. What was the balance in the cash book BEFORE it was updated for the bank charges?
- A) £75 overdrawn
- B) £75 in hand (debit)
- C) £150 overdrawn
- D) £225 overdrawn
Show answer & explanation
Answer: A) £75 overdrawn
Correct cash book balance = bank statement (-£2,600) - unpresented cheques £1,450 + outstanding lodgements £3,900 = -£150, an overdraft of £150. That is the balance after bank charges of £75 have been deducted. Before recording them, the cash book showed -£150 + £75 = -£75, an overdraft of £75.