Fundamentals of ABM2 (Lesson 1)

ACCOUNTING FOR CASH IN BANK

Introduction
Cash needs to be handled properly because it is the most susceptible to fraud and embezzlement. Proper
accounting procedures should be installed in order to minimize, if not totally eliminate, mishandling of cash.
Cash is a medium of exchange when selling or purchasing goods. However, it is not advisable to be
carrying a big amount of cash anywhere. Likewise, it is not practical and safe to be keeping all the cash in the
business place. Because of this, cash is deposited in the bank.
At the end of the month, the bank furnishes the company a bank statement. This shows the deposits
made, checks issued by the depositor and by the bank, bank charges made and other transactions affecting the
depositor’s account. Ideally, the bank statement should be in agreement with the company’s record.

Discussion
What is a bank statement?
A bank statement is a monthly report released by the bank to the account holder of the checking account.
This starts with the balance of the previous month with transactions listed in chronological order showing the
running balance after each transaction to finally arrive at the ending balance for the month.

What is a bank account?

A bank account is a record of the bank’s client set up by the bank. Before opening a bank account, a client
must fill up an information sheet containing details about the client such as client’s name, address, contact
number, date of birth, occupation, family details (if any), etc.
A bank account permits the client to deposit and withdraw money from the bank.

TYPES OS BANK ACCOUNTS

1. Savings Account is money placed in a bank or other financial institution for safekeeping. This is
evidenced by a passbook issued by the bank with the account number.

2. Checking Account, otherwise known as current account, is money placed in a bank or financial
institution where the interest, if there is any is lower than that of savings a savings account. The
checking account carries the convenience of withdrawals through checks.

3. Time Deposit, otherwise called as certificate of deposit, the interest is fixed although higher. It has a
holding period and there is penalty if the fund is withdrawn prematurely of before maturity date.
TYPES OF BANK DOCUMENTS
1. Deposit Slip is a bank document used by a bank client or depositor if he/she wants to put money in the
bank for safekeeping. It shows the deposit date, the depositor’s name, the depositor’s account number,
and the amount of check, bills or coins to be deposited.

2. Withdrawal Slip is used by a bank client if he/she wants to withdraw or get cash from his/her bank
account. It shows the withdrawal date, client’s name, the client’s account number, and the amount to be
withdrawn.

3. Check is an instrument issued by a person in payment for goods and services acquired.
BANK RECONCILIATION
It is a scheduled prepared to bring the depositor’s cash balance and the related bank’s cash balance into
agreement. It shows the items causing the discrepancies between the balance per bank and the balance per book.
It is not a financial statement, but it is an effective accounting tool that reflects the different reconciling
items causing the two records not to have the same balances.
Bank reconciliation is usually prepared monthly based on the bank statement issued by the depository
bank.
There are three methods in preparing the bank reconciliation of a business as follows:
1. Unadjusted Bank to Book Balance Method
This method simply adjusts the unadjusted balance per bank in order to arrive at the unadjusted
balance per book. Hence, the cash balance computed is not the correct cash balance to be presented in
the balance sheet.

2. Unadjusted Book to Bank Balance Method

This method simply adjusts the unadjusted balance per book in order to arrive at the unadjusted
balance per bank. Hence, the cash balance computed is not the correct cash balance to be presented in
the balance sheet.

3. Adjusted Balance Method

This method adjusts both balances (bank balance and book balance) to the corrected cash balance
that will be presented in the balance sheet.

BANK RECONCILING ITEMS

1. Deposits in Transit – these are deposits already recorded in the company’s books thereby increasing the
cash balance but not yet recorded in the bank records.

2. Outstanding Checks – these are checks issued by the company but not yet paid by the bank.
3. Bank Errors – these are items erroneously recorded by the bank. (Example payment of ₱100,000 has
been recorded as ₱10,000).

BOOK RECONCILING ITEMS

1. Bank Credits – these are deposits made by the bank in the company’s account but not yet reflected in
the books or company’s records. Examples of bank credits are bank collections and proceeds of bank
loan.

2. Bank Debits – these are charges made by the bank against the company’s account but not yet reflected
in the company’s record. Examples of bank charges are charges for returned checks due to no sufficient
fund (NSF checks), and bank service charges such as for checkbook printing.

3. Book Errors – these are items erroneously recorded by the company. (For example, a deposit of
₱10,000 has been recorded as ₱1,000).