There may be cheques that were issued to suppliers but not yet deposited by suppliers. The bank statement would not reflect the withdrawal but the general ledger would show the accounts payable as paid through a decrease in cash.

Example

ABC Clothing has a general ledger cash balance of 1,000,000 RWF. The bank statement reflects a balance of 1,200,000 RWF.

Upon comparison of the general ledger and the bank statement, the accountant notices that the cheque mailed to Kitenge Fabric Company for 200,000 RWF was not yet deposited by Kitenge Fabric Company.

Qs: What is an unpresented or outstanding cheque?

Do we need to record a journal entry?

Qs: Why do we adjust the bank as opposed to the ledger?

-We need to adjust the bank because this has already been recorded in the ledger, through our normal cash disbursements process

Qs: Do we need a journal entry?

-No we do not, the journal entry has already been recorded

Qs: What would happen if we adjusted the ledger?

-If we adjusted the ledger, we would overstate our cash. Even though the supplier has not received the cash yet, it is no longer an asset for us.

We do not need to record a journal entry because the general ledger reflects the appropriate balance. 

The cash no longer represents an asset:

1.Entity does not control the cash any longer

2.No longer any economic benefit

3.The writing of the cheque occurred in the past

Qs: What are the three criteria for an asset?

1. Controlled by the entity – we no longer control the cash
2. Resulting from past events
3. Has future economic benefits (can be converted to cash) – there is no future benefit, as its already been provided to another company