Banking Activities and Records

Learning objectives

By the end of this chapter you should be able to:

• Explain the purpose and typical layout of a cash book and how it links to the bank ledger account.
• Record bank-statement items not yet in the cash book (for example, charges, interest, direct debits and standing orders) using correct double entry.
• Prepare a bank reconciliation statement, separating timing differences from bank errors.
• Calculate common banking charges and simple interest on loans and overdrafts.
• Operate an imprest petty cash system, reconcile vouchers to cash on hand, and determine the reimbursement required.

Overview & key concepts

Most businesses settle a large proportion of transactions through their bank account. Even where internal records are maintained carefully, the bank statement balance will often differ from the cash book bank balance at a month end. This is normal and usually arises for two reasons:

• Statement-only items: the bank processes items the business has not yet recorded (for example, charges, interest, direct debits and standing orders).
• Timing differences: the business has recorded items that have not yet cleared through the bank (for example, unpresented cheques).

To keep bank records accurate and explain differences clearly, two steps are used:

1. Update the cash bookfor statement-only items and any cash book errors.
2. Prepare a bank reconciliationto explain the remaining difference between the updated cash book and the bank statement.

Currency note: $ is used for illustration. The accounting treatment is the same regardless of currency.

The cash book

Purpose and layout

A cash book is a prime entry record for receipts and payments. Many cash books include separate columns for:

• Cash(notes/coins), and
• Bank(current account).

This chapter focuses on the bank column, which tracks movements on the business’s bank account and supports the bank ledger balance.

Debits, credits and the bank balance

From the business’s perspective:

• If the bank account isin credit, it is anasset.
  • Debitthe bank column for money received (asset increases).
  • Creditthe bank column for money paid out (asset decreases).
• If the bank account isoverdrawn, it represents aliability.
  • The bank balance may be acreditbalance in the ledger/cash book, and care is needed with signs when reconciling.

The bank statement is prepared from the bank’s perspective, so “credit” and “debit” labels on the statement do not determine the cash book entry. Always post based on the business’s accounting records.

Updating the cash book from the bank statement

Before preparing the bank reconciliation, the cash book should be updated for items that appear on the bank statement but have not been recorded in the cash book. Common examples include:

• bank charges and fees
• interest credited or debited
• direct debits
• standing orders
• direct credits (for example, customer payments paid straight into the bank)

Each update must follow double entry. For example:

• Bank charges:Dr Bank charges expense / Cr Bank
• Interest received:Dr Bank / Cr Interest income
• Direct debit for utilities:Dr Utilities expense / Cr Bank

Correcting cash book errors

If the cash book contains errors (for example, a payment entered twice, an amount recorded incorrectly, or a transaction posted to the wrong side), correct the cash book before reconciliation. The reconciliation should then contain only legitimate reconciling items (timing differences and bank errors).

Bank reconciliation statements

A bank reconciliation statement explains the difference between:

• thebank statement balance, and
• theupdated cash book bank balance.

The reconciliation should normally include:

Timing differences

• Outstanding lodgements: recorded in the cash book but not yet credited by the bank.
• Unpresented cheques: recorded in the cash book but not yet debited by the bank.

Bank errors

These are mistakes made by the bank (for example, a deposit entered at the wrong amount). Bank errors are shown in the reconciliation and should be raised with the bank. They are not posted into the cash book unless the business also recorded the amount incorrectly.

Simple proforma (typical layout)

• Bank statement balance (per statement)
• ± Bank errors
• = Adjusted statement balance
• ± Timing differences (outstanding lodgements / unpresented cheques)
• = Balance per updated cash book

Either starting point is acceptable (bank statement to cash book, or cash book to bank statement), provided signs are applied consistently.

Common banking calculations

Simple interest

Interest = Principal × Annual rate × Time (in years)

Fixed fees

Where a fixed fee applies (for example, an overdraft charge), it is added to the interest to determine the total cost for the period.

Imprest petty cash

Imprest petty cash (control account approach)

Under an imprest system, the business keeps petty cash at a fixed authorised level (the float). Day-to-day small payments are supported by petty cash vouchers.

A clear way to account for imprest is to treat petty cash as its own asset control account:

• Establish the float:
  • Dr Petty cash
  • Cr Bank
• Record spending from petty cash (based on vouchers):
  • Dr Expense (by type)
  • Cr Petty cash
• Reimburse the float (top back up):
  • Dr Petty cash
  • Cr Bank

At any point:

Cash counted + vouchers awaiting reimbursement = imprest float

Any difference is investigated as a shortage/overage.

Worked example

Narrative scenario

ABC Enterprises records bank movements in a cash book. At the start of the month:

• Cash book bank balance:$10,000 (debit)
• Bank statement balance:$10,000 (debit)
• Assume there areno prior reconciling items.

During the month, the following occurred (assume all business-initiated receipts and payments were entered promptly in the cash book unless stated otherwise):

1. Cash takings of $400were paid into the bank and recorded in the cash book. The bank statement shows this depositincorrectly as $40.
2. A customer paid$2,500directly into the bankin settlement of a receivable(not yet recorded in the cash book).
3. A supplier was paid$1,200by bank transfer (recorded in the cash book).
4. Bank charges of$50were deducted by the bank (not yet recorded in the cash book).
5. The bank credited interest received of$30(not yet recorded in the cash book).
6. A cheque for$500was issued to a supplier and recorded in the cash book; it has not yet been presented.
7. A customer cheque for$300, previously banked and recorded as a receipt, was returned unpaid (dishonoured).
8. A utility bill of$150was paid by direct debit (not yet recorded in the cash book).
9. A standing order of$100was paid for subscriptions (not yet recorded in the cash book).
10. A cheque payment of$200recorded earlier in the month was cancelled before presentation(so it will never clear the bank), therefore reverse the cash book entry.
11. The petty cash float is$500. Vouchers total$450for the month. The float is replenished back to$500.

Required

• Update the cash book for the transactions listed.
• Prepare a bank reconciliation statement.
• Calculate the interest on a loan of$5,000at5% per annumfor one year.
• Determine overdraft interest and fees for an overdraft of$1,000at10% per annumplus a fixed fee of$20.
• Reconcile the petty cash fund and identify any discrepancies.

Solution

(A) Cash book: post items not yet recorded, and correct cash book errors

Step 1: Start from the cash book balance before updates

Cash book bank balance at start of month ........................................ 10,000 Dr

Business-initiated items already recorded in the cash book during the month:

• Cash takings banked ..............................................................+400
• Supplier paid by bank transfer ............................................−1,200
• Cheque issued to supplier (unpresented) .............................−500
• Cheque cancelled (reverse: it will never clear the bank) ......+200

Cash book balance before statement-only updates .................. 8,900 Dr

Step 2: Update for statement-only items (from the bank statement)

• Customer direct payment received (settlement of a receivable):
  • Dr Bank 2,500 / Cr Trade receivables 2,500 ............................+2,500
• Bank charges:
  • Dr Bank charges expense 50 / Cr Bank 50 ................................−50
• Interest credited:
  • Dr Bank 30 / Cr Interest income 30 ..........................................+30
• Dishonoured customer cheque (assume the receipt had previously been included in bank receipts and recorded; the bank now returns it unpaid):
  • Dr Trade receivables 300 / Cr Bank 300 ..................................−300
• Utilities paid by direct debit:
  • Dr Utilities expense 150 / Cr Bank 150 ......................................−150
• Standing order for subscriptions:
  • Dr Subscription expense 100 / Cr Bank 100 ..............................−100

Updated cash book bank balance .............................................. 10,830 Dr

(B) Bank reconciliation statement

Reconciling items remaining after updating the cash book:

• Unpresented cheque: $500 (timing difference)
• Bank error: deposit of $400 recorded as $40 (statement understated by $360)

Quick statement movement check (to show the statement balance figure):

• Opening statement balance ...........................................10,000 Dr
• Deposit shown by bank (incorrectly) ................................+40
• Customer direct payment .................................................+2,500
• Interest credited ................................................................+30
• Supplier payment (transfer) ............................................(1,200)
• Direct debit (utilities) ........................................................(150)
• Standing order (subscriptions) .......................................(100)
• Bank charges .....................................................................(50)
• Dishonoured cheque (bank reverses receipt) .................(300)
• Closing statement balance .............................................10,970 Dr

Bank reconciliation statement (statement to cash book):

• Bank statement balance (per statement) ......................10,970 Dr
• Add: Bank error – deposit understated ($400 − $40) ....360
• Subtotal ............................................................................11,330 Dr
• Less: Unpresented cheque ...............................................(500)
• Balance per updated cash book ......................................10,830 Dr

(C) Loan interest

Interest = 5,000 × 5% × 1 year = $250

(D) Overdraft interest and fees

• Interest = 1,000 × 10% × 1 year =$100
• Add fixed fee =$20
• Total overdraft cost =$120

(E) Petty cash reconciliation (imprest)

Imprest float ................................................................................. $500
Less vouchers .............................................................................. (450)
Expected cash in hand .................................................................. $50

If the actual cash counted is $50, there is no discrepancy.

Reimbursement required to restore the float: $450

Control-account entries:

Record expenses (from vouchers):

• Dr Expense accounts (by type) 450
• Cr Petty cash 450

Reimburse the float:

• Dr Petty cash 450
• Cr Bank 450

Interpretation of the results

The cash book update records bank-processed items that were missing from the accounting records and corrects any cash book errors. The reconciliation then explains the remaining difference between the bank statement and the updated cash book as timing differences (such as the unpresented cheque) and bank errors (such as the misstated deposit). The imprest petty cash reconciliation confirms that voucher-controlled spending matches the expected cash balance and that reimbursement restores the float.

Common pitfalls and misunderstandings

• Using bank statement labels to post the cash book.Post from the business perspective and apply signs carefully, especially if overdrawn.
• Including statement-only items in the reconciliation.Charges, interest, direct debits and standing orders usually require cash book entries first.
• Treating cancelled cheques as timing differences.If a cheque will never be presented, reverse it in the cash book rather than leaving it as reconciling.
• Dishonoured cheques posted incorrectly.A dishonour reverses the earlier receipt and reinstates the receivable.
• Imprest confusion.Petty cash reduces as vouchers are approved and increases when the float is reimbursed.

Summary and further reading

Reliable bank records depend on updating the cash book for bank-processed items and preparing a reconciliation to explain timing differences and bank errors. Understanding these routines supports accurate reporting of the bank balance and strengthens control over cash movements. The imprest petty cash system provides similar control over small payments by linking reimbursements to authorised vouchers.

For broader context, review materials on internal controls over cash, receivables/payables processing, and the accounting treatment of interest and bank charges in reputable introductory financial accounting texts.

FAQ

What is the main purpose of the cash book?
It records cash and bank receipts and payments and supports the bank ledger balance, providing a reliable record of bank movements.

Why update the cash book before reconciling?
Because statement-only items must be posted into the accounting records first. The reconciliation should then contain only timing differences and bank errors.

Can a bank reconciliation start from either balance?
Yes. Either starting point is acceptable if the layout is consistent and signs are applied correctly.

How should a dishonoured cheque be treated?
Assuming the receipt was recorded when the cheque was banked, the bank’s dishonour reverses that receipt: receivables increase and the bank balance decreases.

What does imprest mean in petty cash?
It means the petty cash float is kept at a fixed amount. Vouchers explain spending, and reimbursement restores petty cash back to the authorised float.

Summary (Recap)

• If the bank account is in credit it is an asset; if overdrawn it is a liability and the cash book balance may be credit.
• Update the cash book first for statement-only items and any cash book errors.
• Reconcile the updated cash book to the bank statement using timing differences and bank errors.
• Simple interest is principal × rate × time; fixed fees are added separately.
• Imprest petty cash uses a control account: establish the float, credit petty cash for voucher spending, then replenish to the fixed level.

Glossary

Cash book
A bookkeeping record used to capture receipts and payments. The bank column tracks movements on the business’s bank account from the business perspective.

Bank reconciliation
A statement that explains the difference between the bank statement balance and the updated cash book bank balance by listing timing differences and bank errors.

Imprest petty cash
A system where a fixed petty cash float is maintained and replenished by the amount supported by vouchers.

Petty cash (control account)
An asset account used to record petty cash movements: credited when petty cash is spent (supported by vouchers) and debited when replenished.

Outstanding lodgements
Deposits recorded in the cash book that have not yet been credited by the bank at the reconciliation date.

Unpresented cheques
Cheques issued and recorded by the business that have not yet been processed by the bank at the reconciliation date.

Bank errors
Mistakes made by the bank, such as incorrect entries or omissions, highlighted in the reconciliation and corrected by the bank.

Dishonoured cheque
A customer cheque that is returned unpaid by the bank, reversing the earlier bank receipt and reinstating the receivable.

Direct debit
A payment collected directly from the bank account under prior authorisation, commonly used for recurring bills.

Standing order
A recurring payment instruction for a fixed amount paid at regular intervals.

Bank charges
Fees deducted by the bank for account services or facilities.

Interest income
Income credited by the bank on interest-bearing balances, recorded as income in the accounts.