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Good afternoon, Sir.
Sir, I have a question on testing existence of the bank and cash balances.
For example, A company has an unpresented cheque at the year-end, but they have recorded it in the bank ledger account as per the accrual basis of accounting. Later, after the year-end they have received the money by presenting it to the bank, therefore, my question is whether the cash has been existed at the year-end date or not; does it confirms existence since the money was not received prior to the year-end but the management have already recorded it as cash balance in the statement of financial position at the year-end?
In a bank reconciliation – an unpresented cheque is a cheque payment that has been sent to a supplier, but which the supplier has not yet presented to the bank for payment.
As far as the audited entity is concerned, the supplier is paid when the cheque is raised (Dr Trade payable/Cr Bank).
An upresented cheque is a timing difference on the reconcilation. Assuming the supplier pays the cheque into their bank account relatively quickly (why wouldn’t they?), it will not appear on the next month’s reconcilation.
For the receipt of a cheque from a customer, this will be recorded when received (Dr Bank/Cr Trade receivable). All receipts other than bank transfers (cash/cheques/money orders etc) will be need to be paid into (“lodged”) with the bank. If the audited entity has lodged money with a bank, but it is not yet shown on the bank statement at a month end (because recording by the bank is not instantaneous), the timing difference on the bank reconciliation is called “outstanding lodgement”.
Outstanding lodgements represent money that has been recorded in the books as received. As long a cheque “clears” the bank after the year end (i.e. it doesn’t “bounce”), it represents cash that exists.
If a cheque bounces/is dishonoured, it means the customer still owes the debt, so the receipt would be reversed (Dr Trade receivable/Cr Bank) – however, AA doesn’t examine accounting for cheques in this level of detail (because they are not used globally as a payment mechanism – but there is only one AA exam).
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