Cash, Bank, and Petty Cash Control

Learning objectives

• Record receipts and payments through the bank using a cash book and ledger accounts to produce reliable financial records.
• Interpret common bank statement items and post them correctly so that books reflect all bank movements.
• Operate an imprest petty cash system and analyse petty cash spending to control small, routine payments.
• Prepare a simple bank reconciliation, identifying timing differences and errors so that internal records agree to external evidence.
• Evaluate practical controls that reduce cash losses and recording mistakes.

Overview & key concepts

This chapter focuses on control and double-entry for cash, bank and petty cash. It is designed to help you post transactions accurately, explain differences between records, and apply practical controls. It does not aim to cover detailed financial statement disclosure requirements.

Cash and bank balances are highly liquid and easy to misuse, so they demand careful recording and strong internal checks. Good cash control achieves two outcomes:

1. Completeness– all receipts and payments are recorded.
2. Accuracy– amounts are recorded correctly and classified appropriately.

Because the bank processes transactions at different times from the business’s internal recording, differences between the cash book and the bank statement are common. A bank reconciliation explains those differences and highlights errors or omissions.

Cash book

A cash book (bank column) records all money received into, and paid out of, the bank account. In many systems it is both:

• abook of first entryfor bank transactions, and
• thebank ledger accountitself (because it maintains the running bank balance).

Debit and credit rules in the cash book (bank)

• Receipts (money in):Debit bank(bank balance increases).
• Payments (money out):Credit bank(bank balance decreases).

These entries follow the normal rules for an asset account (bank is an asset of the business).

Cash book and the accounting equation

When you record a bank transaction, you always affect at least two elements:

• Receipt from a customer:bank (asset) increases and trade receivables (asset) decrease.
• Payment to a supplier:bank (asset) decreases and trade payables (liability) decrease.
• Payment of an expense:bank (asset) decreases and equity decreases through the expense.

Bank overdrafts

A bank account can move into overdraft, meaning the cash book shows a credit balance on the bank account. In many exam scenarios, an overdraft is presented as a liability rather than an asset. Where questions present multiple bank accounts, do not assume they can be netted off unless the scenario indicates this is permitted or intended.

Bank ledger account

The bank ledger account shows the organisation’s own record of the bank balance and the double entries that create it. Where a separate ledger account is kept, the postings mirror the cash book:

• payments reduce the bank asset (credit bank), and
• receipts increase the bank asset (debit bank).

In many questions, “cash book (bank)” and “bank account in the ledger” are treated as the same record.

Bank statement

The bank statement is the bank’s record of movements on the account. It is external evidence and is used to check completeness and accuracy.

Why bank statement debits/credits can look “reversed”

The statement is prepared from the bank’s perspective, so the labels “debit” and “credit” may not match the business’s debit/credit logic for an asset.

Exam tip: ignore the bank’s “debit/credit” labels—focus on whether the account balance went up or down.

Common bank statement items and how to post them

Direct debit and standing order

• Direct debit:the supplier collects amounts (often variable) with prior authorisation.
• Standing order:a fixed amount paid on set dates by instruction to the bank.

Posting (typical operating expense):

• Debit relevant expense (or payable, if applicable)
• Credit bank

Bank charges

Bank charges are operating costs of maintaining the account.

Posting:

• Debit bank charges expense
• Credit bank

Interest

• Interest received:Debit bank, Credit finance income.
• Interest paid/overdraft interest:Debit finance cost, Credit bank.

Dishonoured cheque (returned unpaid)

If a customer’s cheque (or other receipt) is later rejected by the bank, the earlier receipt is no longer valid. The customer still owes the money.

Posting:

• Debit trade receivables
• Credit bank

This is not an expense. It is a reversal of the receipt and a reinstatement of the receivable.

Outstanding lodgement(s) and unpresented cheque(s)

These are timing differences that commonly appear in reconciliations:

• Outstanding lodgement(s):money paid in and recorded by the business, but not yet shown on the bank statement.
• Unpresented cheque(s):cheque(s) issued and recorded by the business, but not yet cleared by the bank.

They do not require journal entries (unless the business has made an error). They are reconciliation adjustments only.

Petty cash and the imprest system

Petty cash is a small float kept to pay minor items where using the bank is inefficient (small stationery, local travel, refreshments).

Imprest control

Under the imprest system, petty cash is restored to a fixed float. Vouchers support each payment, and the top-up equals the total of approved vouchers since the last reimbursement.

Imprest control check (what should always be true)
At any point, the agreed float should be fully explained by:
cash left in the tin + authorised vouchers awaiting reimbursement = agreed imprest float.
When the float is topped up, the reimbursement should equal the total of approved vouchers since the last top-up.

Typical postings

1. Set up the float (withdraw from bank):
   • Debit petty cash
   • Credit bank
2. Reimburse the petty cash (top up):
   • Debit expense accounts (analysed from vouchers)
   • Credit bank

Period-end accounting point (important)

As a day-to-day shortcut, some systems only post the expenses when the float is reimbursed. However, at the reporting date the books must reflect what has actually been spent.

If vouchers have been paid out but the reimbursement has not yet happened by the reporting date, then the accounts should show:

• lower petty cash physically held, and
• the expenses incurred to date.

This can be achieved by either:

• crediting the petty cash account for payments made (so the petty cash balance equals cash remaining), or
• recording a control balance such as a “petty cash reimbursement due” payable until the float is restored.

Core theory and frameworks

Recording bank transactions

A consistent approach reduces errors:

1. Collect source documents (customer remittances, supplier invoices, bank notifications).
2. Decide whether each item is areceiptorpayment.
3. Post to the cash book (bank column) using debit/credit rules.
4. Post the other side to the correct ledger account (receivable, payable, expense, income).

Posting statement-only items

Some transactions appear on the statement before they appear in the cash book (for example, bank charges, direct debits, interest, dishonoured items). These must be entered into the cash book so that the internal bank balance includes them.

Preparing a simple bank reconciliation

A bank reconciliation is prepared after updating the cash book for statement-only items.

Bank reconciliation layouts (and how to choose the signs)

You can start from either record (cash book or bank statement). The key is to adjust for timing items based on which record already includes them.

If you start with the adjusted cash book and reconcile to the bank statement:

• Subtract outstanding lodgement(s)(recorded in the cash book but not yet on the statement). These make the cash bookhigherthan the statement at the date.
• Add unpresented cheque(s)(recorded in the cash book but not yet cleared on the statement). These make the cash booklowerthan the statement at the date.

If you start with the bank statement and reconcile to the adjusted cash book, the signs reverse.

Keep timing differences separate from:

• items you must post to the books (charges, interest, direct debits, dishonoured items), and
• genuine errors.

Evaluating practical cash controls

Strong controls typically include:

• segregation of duties (receiving cash, recording cash, and reconciling should be performed by different people)
• numbered documentation (cheques, receipts, petty cash vouchers)
• authorisation limits for payments and bank transfers
• prompt banking of takings; restricted access to cash
• regular independent bank reconciliations
• monitoring unusual items (unidentified receipts, returned payments, unexpected charges)
• imprest petty cash with voucher support and periodic surprise counts

Worked example

Narrative scenario

A small retail business operates with a cash book and a bank account. At the beginning of February, the cash book shows a debit balance of £5,000. During the month, the business records receipts from customers totalling £3,200 and payments to suppliers totalling £2,500. The bank statement for February shows a closing balance of £5,120.

The £3,200 receipts include a customer cheque for £200 that was initially recorded as received but was later dishonoured by the bank.

Additional transactions include:

• A customer payment of £600 recorded in the cash book but not yet on the bank statement (outstanding lodgement).
• A cheque for £400 issued to a supplier but not yet cleared by the bank (unpresented cheque).
• Bank charges of £30 appear on the statement but were not recorded in the cash book.
• A direct debit for utilities of £150 appears on the statement but was not recorded in the cash book.
• The £200 customer cheque mentioned above was dishonoured by the bank.

Required

1. Update the cash book for statement-only items.
2. Prepare a bank reconciliation to identify timing differences.
3. Correct the dishonoured cheque entry.
4. Evaluate the impact on the financial statements.

Solution

1) Update the cash book for statement-only items

Record items that appear on the bank statement but are missing from the cash book:

(a) Bank charges

• Debit Bank charges expense £30
• Credit Bank £30

(b) Utilities paid by direct debit

• Debit Utilities expense £150
• Credit Bank £150

(c) Dishonoured cheque (customer still owes the money)

• Debit Trade receivables £200
• Credit Bank £200

Cash book balance before statement-only items:
Opening balance £5,000

• receipts £3,200
• − payments £2,500
• = £5,700

Cash book balance after statement-only items:
£5,700 − £30 − £150 − £200 = £5,320

So the adjusted cash book (bank) balance is £5,320 (debit).

2) Bank reconciliation (timing differences only)

Start with the adjusted cash book and adjust for timing items to reach the bank statement balance:

Adjusted cash book balance (debit) .................................. £5,320
Less: Outstanding lodgement .................................................. (£600)
Add: Unpresented cheque ...................................................... £400
Expected bank statement balance .......................................... £5,120

Bank statement closing balance given ..................................... £5,120

3) Correct the dishonoured cheque entry

The dishonoured cheque correction is:

• Debit Trade receivables £200
• Credit Bank £200

This has already been included in the updated cash book above. The key point is that a dishonoured receipt reinstates the receivable; it is not an expense.

4) Evaluate the impact on the financial statements

Based on the information processed in the books:

Statement of financial position effects

• Bank (asset):reduced by £380 in total from statement-only items
  • £30 bank charges
  • £150 utilities
  • £200 dishonoured cheque
• Trade receivables (asset):increased by £200 (customer still owes the amount)
• Net change in assets from these items:bank down £380, receivables up £200 → net assets down£180

Profit or loss effects

• Expenses increased by £180
  • bank charges £30
  • utilities £150
• The dishonoured cheque doesnotaffect profit (it reclassifies assets from bank to receivables).

Timing differences (outstanding lodgements and unpresented cheques) do not change profit and are not posted as journals; they explain why the statement and the cash book differ at the date.

Common pitfalls and misunderstandings

• Not updating the cash book for statement-only items.Charges, direct debits, interest, and returned items must be posted to the books.
• Treating a dishonoured cheque as an expense.It is a reversal of a receipt and reinstates the customer receivable.
• Posting timing differences as journals.Outstanding lodgements and unpresented cheques are reconciliation items, not ledger entries.
• Getting the reconciliation signs the wrong way round.
  • Starting from the adjusted cash book to reach the statement:subtract outstanding lodgements,add unpresented cheques.
  • Starting from the statement to reach the adjusted cash book: the signs reverse.
• Ignoring an unreconciled balance.Any remaining difference indicates an error or omission that must be investigated before relying on the bank figure.
• Confusing bank statement labels with bookkeeping logic.Focus on whether the bank balance increased or decreased, not on the statement’s “debit/credit” wording.
• Weak petty cash cut-off.If vouchers have been paid but the float has not yet been reimbursed at the reporting date, the accounts must still reflect the expense incurred and the reduced petty cash held.
• Poor petty cash documentation.Without vouchers and approvals, petty cash is difficult to control and easy to misuse.

Summary and further reading

Reliable bank and petty cash records depend on disciplined posting and strong controls. A cash book provides the internal record of receipts and payments, while the bank statement provides external evidence. Regular reconciliations identify timing differences and expose errors or omissions. Petty cash should be controlled through an imprest float supported by vouchers, analysis of spend, and appropriate period-end cut-off.

Further study should focus on double-entry accuracy, reconciliation sign logic, overdraft presentation, and internal control features that prevent loss and reduce errors.

FAQ

What is the purpose of a bank reconciliation?

A bank reconciliation matches the organisation’s bank records to the bank statement by separating timing differences from errors or missing entries. It strengthens accuracy, supports internal control, and helps detect irregular transactions early.

How should a dishonoured cheque be recorded?

Reverse the receipt by reinstating the customer balance:

• Debit trade receivables
• Credit bank

A dishonoured cheque is not an expense; it means the customer still owes the money.

What is the imprest system for petty cash?

An imprest system keeps petty cash at a fixed float. Vouchers support each payment, and the float is periodically topped up by exactly the amount spent (the total of approved vouchers). At any time, cash remaining plus authorised vouchers should explain the imprest amount.

Why must statement-only items be posted to the cash book?

Items such as bank charges, direct debits, interest, and returned payments affect the bank balance even if the business did not initiate them directly. Posting them ensures the internal bank balance is complete and makes the reconciliation meaningful.

What are common timing differences in bank reconciliations?

• outstanding lodgement(s) (recorded by the business, not yet on the statement)
• unpresented cheque(s) (recorded by the business, not yet cleared by the bank)

These differences explain timing, not bookkeeping errors.

How do practical controls reduce cash discrepancies?

Controls such as segregation of duties, authorisation limits, secure handling of cash, numbered documentation, regular independent reconciliations, and imprest petty cash all reduce the risk of theft, error, and unauthorised payments.

What happens if the bank account is overdrawn?

An overdraft means the bank balance is negative and the cash book bank account shows a credit balance. In many exam scenarios, an overdraft is presented as a liability rather than an asset.

Summary (Recap)

This chapter covered the recording and control of bank and petty cash transactions. It explained how the cash book captures receipts and payments, how to post statement-only items such as charges and direct debits, and how to deal with dishonoured receipts. It also set out the imprest system for petty cash, including period-end cut-off, and demonstrated a bank reconciliation that identifies timing differences and highlights unresolved errors. Strong controls and regular reconciliations underpin accurate records and reduce the risk of cash loss.

Glossary

Cash book (bank column)
A record of all money received into and paid out of the bank account, maintained with a running balance and used as the internal basis for bank reconciliation.

Bank ledger account
The double-entry account that records the business’s bank balance and related postings. In many systems it is effectively the same record as the cash book (bank).

Bank statement
An external record issued by the bank showing transactions processed on the account during a period.

Outstanding lodgement
A deposit recorded by the business that has not yet appeared on the bank statement by the reconciliation date.

Unpresented cheque
A cheque issued and recorded by the business that has not yet cleared through the bank by the reconciliation date.

Direct debit
A bank payment method where an authorised supplier collects amounts from the account (often varying).

Standing order
A bank instruction to pay a fixed amount at regular intervals to a specified recipient.

Bank charges
Fees charged by the bank for operating the account or processing transactions, recorded as an expense in the books.

Dishonoured cheque
A receipt that is later rejected and removed by the bank (returned unpaid). The business reverses the receipt and reinstates the customer receivable.

Bank overdraft
A negative bank balance where the cash book bank account shows a credit balance; commonly presented as a liability in many exam scenarios.

Petty cash
A small amount of cash held to pay minor expenses where bank payment is impractical.

Imprest system
A petty cash control method where the float is restored to a fixed amount and supported by vouchers for all payments.

Petty cash voucher
A document that supports a petty cash payment, typically stating the date, amount, purpose, and authorisation.