These represent cheques that have been issued by an entity to a customer or another third party but which have not presented to the bank by the reconciliation date. Entity records the payment in its cash book as soon as the cheque is issued to the person but the bank records the transaction when it receives the cheque. This causes a timing difference in the recording of the payment.
As the bank would not have recorded the unpresented cheques, the balance appearing in bank statement would be higher than the cash book balance which is why the amount of outstanding cheques is added to the cash book balance in the bank reconciliation.
Example
ABC & Co. purchases goods worth $2000 and writes a cheque of the same amount in favor of the supplier on 28 December 2010. Following accounting entry was recorded by the entity on that date:
|
Debit |
Purchases |
$2,000 |
|
Credit |
Bank |
$2,000 |
The supplier however does not present the cheque until 3 Janaury 2011. Therefore, $2000 of unpresented cheques should appear in the bank reconciliation on 31 December 2010 because the bank had not accounted for the transaction by that date even though ABC & Co. had recorded the payment in its cash book on the date of payment.
Quiz
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Question
Which of the following correctly describe how unpresented cheques must be reconciled in the Bank Reconciliation Statement?
Balance as per Bank Statement + Unpresented Cheques = Balance as per Cash Book
Incorrect.
As the banks do not deduct the amount of unpresented cheques by the reconciliation date, balance as per bank statement is higher than the Cash Book balance which is already reduced by the amount of payments in respect of those cheques. Therefore, unpresented cheques must be deducted from the balance as per Bank Statement when reconciling it with Cash Book.
Balance as per Bank Statement - Unpresented Cheques = Balance as per Cash Book
Correct.
As the banks do not deduct the amount of unpresented cheques by the reconciliation date, balance as per bank statement is higher than the Cash Book balance which is already reduced by the amount of payments in respect of those cheques. Therefore, unpresented cheques must be deducted from the balance as per Bank Statement when reconciling it with Cash Book.
Balance as per Cash Book + Unpresented Cheques = Balance as per Bank Statement
Correct.
As the Cash Book balance is already reduced by the amount of unpresented cheques, balance as per Cash Book is lower than the Bank Statement balance as the latter excludes payments in respect of unpresented cheques at the reconciliation date. Therefore, unpresented cheques must be added to the balance as per Cash Book when reconciling it with the Bank Statement.
Balance as per Cash Book - Unpresented Cheques = Balance as per Bank Statement
Incorrect.
As the Cash Book balance is already reduced by the amount of unpresented cheques, balance as per Cash Book is lower than the Bank Statement balance as the latter excludes payments in respect of unpresented cheques at the reconciliation date. Therefore, unpresented cheques must be added to the balance as per Cash Book when reconciling it with the Bank Statement.