Accounting for cash and Bank reconciliation 8/6/2017

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Introduction Introduction
Learning outcomes In accounting the term cash is
 Controls over cash used for Currency(notes), coins
 Describe the purpose of bank Cheques .money holders and
reconciliation
deposits in the bank
 Identify the main differences between the
cash book and the bank statement Cash is the most liquid asset
 Correct cash book errors or omissions which should be safe guarded
 Prepare bank reconciliation statements because it can be stolen easily
 Imprest system
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Controls over cash

1. All cash receipts to be deposited in the Bank Reconciliation
bank
2. Payments should be made by cheques  This is the process of
3. Cash on hand to be locked in the safe reconciling(agreeing) the balance
4. Double record of cash transactions. i.e of the business cash records
All cash transaction are recorded by the maintained by the business(cash
company in the cash book and by the
bank book) with the business cash
5.Reconciliation of company and bank records maintained by the
records by means of bank reconciliation
6.Maintanance of the imprest system
bank(bank statement)

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Compiled by Nsama Musawa Njebele 1

Accounting for cash and Bank reconciliation
Terms used
 Deposit slip: Document issued by the
bank when money is deposited in to
bank account
 Cheque : written instruction sighed by
the authorised signatory instructing the
bank to pay
 Bank statement: summary of business
cash transaction maintained by the
bank
06/08/2017 Accounting for cash and Bank reconciliation
Terms used
 Unpresented/outstanding Cheques: These are
cheques issued by the business for the
payments of goods and services but have not
been cashed to the bank by the suppliers. They
are recorded in the cash book but not showing
on the bank statement.
 Outstanding /uncleared lodgements :these
are cheques received by the business but not
yet cleared by the bank
06/08/2017 Accounting for cash and Bank reconciliation
Relationship between the
Cashbook and the Bank statement
 The business maintains the cash book
ledger for all the transactions with the
bank
 The bank maintains the ledger(bank
statement for all the transactions with
the business.
 The ledger maintained by the bank is
the opposite of the cash book.
06/08/2017 Accounting for cash and Bank reconciliation
Compiled by Nsama Musawa Njebele
8/6/2017
Terms used
 Dishonoured Cheque: A cheque received
from the customer by the business,
recorded in the cash book but at a later
stage, the customers’ bank fail to
honour the cheque for various reasons.
 Standing Order: These are instructions
given to the bank by the business to pay
regular amounts of money at a stated
date to individuals or other business
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Terms used
 Direct Debits: This is where a creditor
is given permission to obtain the
money directly from your bank account
as payments for things like electricity
bills, water bills, rates, insurance
premium and others.
 Direct Credit :This is where a customer
pays directly to our bank account
This is done by Electronic Funds
Transfer(EFT)
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Relationship between the
Cashbook and the Bank statement
 Receipts are Dr in the cashbook but
they are Cr in the bank ledger (to show a
liability of bank to the company just like
accounts payable)
 Payment are Cr in the cashbook but
they are Dr in the bank ledger (to show a
repayment of liability by bank to the
company just like accounts payable)
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Accounting for cash and Bank reconciliation 8/6/2017

Items that makes the Cashbook

and the bank statement to differ Timing differences
 These are items recorded in the cash book
but due to the bank clearing process have
not yet been reflected on bank statement.
Unrecorded Timing Errors E.g.
items differences 1. Outstanding /unpresented cheques
2. Outstanding /uncleared lodgment
Cash/ 3. Outstanding deposits
Cash bank bank
These are bank reconciliation adjustments
book ledger
The bank statement needs to be adjusted for
these items
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Timing differences Errors

1. Timing differences: The company and  These can be in the cash book or the bank
the bank may record a transaction at statement
different times  Errors in the cash book
The business may make a mistake in their
.e.g. A cheque payment is record in cashbook. The cash book balance will need
cash book immediately its despatched, to be adjusted.
but the bank only records it when its Errors in the bank statement
cleared. The Bank may make mistakes e.g.
Timing differences(adjustment made in transposing figures ,wrong transactions
bank ledger) adjustment made in bank ledger/cash book
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Items that makes the Cashbook

Unrecorded items and the bank statement to differ
 These are items which arise in the bank
statement before they are recorded in the
cashbook.eg  Unrecorded items: Some tractions
1. Interest are recorded by the bank but not
2. Bank Charges the company e.g. bank interest
3. Dishonoured cheques
4. Direct bank transfers
The cash book must be adjusted to reflect 1. Unrecorded items(adjustment
these items made in cashbook)
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Compiled by Nsama Musawa Njebele 3

Accounting for cash and Bank reconciliation 8/6/2017

Unrecorded items adjusting

Unrecorded items adjusting journals journals
1.Interest 4 Direct bank transfers
Dr cash book Direct debit(creditor paid electronically)
Cr interest income
Dr expense paid for
2.Bank Charges
Cr cash book
Dr bank charge expense
Cr cash book Direct credit(customer pays electronically)
3.Dishonoured cheques Dr cash book
Dr accounts receivable Cr accounts receivable
Cr cash book

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Updated cash book Bank reconciliation

 6 Steps
 Balance as per cash book X  1 Compare the cash book and the bank statement
 Less :bank charges (X) balance if there is a difference go to step 2
2Compare the deposits in the cashbook(on Dr side)
 Add :Interest X with the deposits on the bank statement(on the Cr
 Less dishonoured Chqs (X) side) to know the outstanding deposits
3. Compare the payments in the cashbook(on Cr side)
with the payments on the bank statement(on the Dr
 Add Direct credits X side) to know the outstanding Cheques
 Less Direct debits (x) 5.Check for unrecorded items on statement but not in
cash book
Adjust for any errors X(X)
4.Check for any other errors
correct cash book balance XXX 6.Bank reconciliation
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Items that makes the Cashbook

and the bank statement to differ
Bank reconciliation
 Balance as per bank statement X
 Less :outstanding Cheques (X)
Unrecorded Timing Errors
 Add :Outstanding deposits/ items differences
lodgements X
Cash/
Adjust for any errors X(X) Cash bank bank
correct cash book balance XXX book ledger

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Compiled by Nsama Musawa Njebele 4

Accounting for cash and Bank reconciliation 8/6/2017

Question Question
 On 31 December 2012, the balance in the cash
book of Lunsefya Hydro Power (LHP) Company  The following Cheques were issued but are not
was K68, 976. While the Bank statement had a yet paid by the bank
balance of K74, 638.3 on the same date. The
difference was as the result of the following  Chq no 235, K663
transactions.  Chq no 237, K69.60
 The firms records indicate that a K5, 277.60  Chq no 240, K1, 429.20
deposit dated December 30 and a K2, 860.80
deposit dated December 31did not appear on the  Chq no 251, K3, 457.80
bank Statement.  Chq no 252, K464.10
 A bank Charge of K27 and K480 of the NSF (Non  Chq no 254, K870.00
Sufficient Funds) Cheque received from a credit
customer have not yet been adjusted in the Firms
records.
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Question Question
 The bank collected money from a credit customer  Required
through electronic transfer on behalf of the firm
K3, 090.This amount has not been entered in the
 Prepare a bank reconciliation statement
firms Books. for LHP at 31 December 2012( 10marks)
 A Deposit of K4000 for ZESCO was wrongly  Record general Journal entries for above
credited to LHP by the bank
 A cheque of K705 received from cash customer
items to update the Firms records as a
was wrongly recorded in the books as K507 result of the bank reconciliation.( 5
 A cheque of K306 paid for stationery has been Marks)
cleared by the bank as 360
 The bank statement showed a bank interest of K
120 which has not been recorded by the firm

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6.Bank reconciliation
Solution Bank Cash book

 Bank statement  Balance as per cash

BL 74, 638.3 book 68, 976
Ad out deps - bank charge ( 27 )
5, 277.60 Les NSF (480)

2, 860.80
Less out chqs

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Compiled by Nsama Musawa Njebele 5

Accounting for cash and Bank reconciliation 8/6/2017

6.Bank reconciliation Journals

 Dr Cr
 Bank Charge
Bank Cash book  27
 Cash
Less out chqs
+electrnic transf K3, 090  27
 Chq no 235 663  A/c Receivable
 480
 Chq no 237 69.60 +Err understatent 198  Cash book
 480
Chq no 240 1, 429.20 + bank Interest 120  Cash book
3, 090
 Chq no 251 3, 457.80 71,877  A/c receivable
 3, 090
 Chq no 252 464.10  Cash book
 198
 Chq no 254 870.00  Sale
 -Error (4000)  198
 Cash book
 - Error 54  120
 Interest
 71,877  120

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Imprest system Imprest System

Main Cashier
 System which works as follows
1. The cashier gives the petty cashier who is a
junior member of staff a starting sum of
Rehimbesment Petty Cashier money known as the float or the imprest.
2. The petty cashier makes payments when a
properly authorised petty cash voucher is
PV documents submitted.

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ANALYTICAL PETTY CASH BOOK

Imprest System
3.The cashier checks the petty cash book at the end  This is a book where a number of cash
of the period and reimburses the petty cashier for transactions of very small value are
all the payments made. recorded. E.g
4After sometime the petty cash book is checked to
ensure that the total of the current petty cash
 postage, purchasing small amount of
vouchers held by the petty cashier and the amount stationary, bus or taxi fares, fuel and
of cash held agree with the original imprest cleaning expenses
amount.

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Compiled by Nsama Musawa Njebele 6

Accounting for cash and Bank reconciliation 8/6/2017

Example

Any questions
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Compiled by Nsama Musawa Njebele 7