Using a Bank Statement to Update the Cash Book (Cambridge International AS Accounting)

Use of a bank statement

Spec point — updating of cash books

What is the purpose of a bank statement?

• Banks issue bank statements to their customers at regular intervals

  • Customers can also request bank statements at any time
  • Online banking allows customers to view their statements at any time

• Bank statements are useful:

  • They can be used to check for errors in the ledger accounts
  • They can be used to compare the bank balance in the cash book with the actual bank balance

• Bank statements are written from the point of view of the bank

  • A debit entry on a bank statement indicates that money has left the account
  • A credit entry on a bank statement indicates that money has entered the account
  • A debit balance means the account is overdrawn
  • A credit balance means there is money in the bank account

Why might the balance on the bank statement differ from the balance in the cash book?

• There could be timing issues

  • Some transactions in the cash book might not yet appear on the bank statement
  • Amounts won’t appear on the bank statement until they have been cleared by the bank

• There could be bank transactions that have not yet been entered into the cash book

• There could be errors

  • Either in the cash book or on the bank statement

Which items might appear in the cash book but not on the bank statement?

• Cheques written by the business which have not yet been deposited by the person or business receiving the cheque

  • These are called unpresented cheques

    • Older exam papers refer to these as “cheques not yet presented”

  • These will appear on the bank statement when the person or business deposits the cheques

• Cheques deposited by the business which have not yet been cleared by the bank

  • These are called uncredited deposits

    • Older papers refer to these as “amounts not yet credited”

  • These will appear once the bank processes the cheques and the money is transferred

• There could be errors in the cash book

  • These are corrected by the business

Which items might appear on the bank statement but not in the cash book?

• Transactions involving bank transfers

  • Direct debits
  • Standing orders
  • Credit transfers
  • Dividends

• Amounts applied by the bank

  • Bank charges
  • Bank interest paid or received

• There could be cheques that the business deposited but that have been returned by the bank

  • These are called dishonoured cheques

  • A cheque could be dishonoured because:

    • It is not dated or signed
    • The amount written in words does not agree with the amount written as a number
    • The person or business who wrote the cheque does not have enough money in their bank to cover the payment

• There could be errors in the bank statement

  • The business needs to tell the bank and ask them to correct the errors

Updating the cash book

Spec point — updating of cash books

How do I use a bank statement to update the cash book?

• Identify any transactions that appear on the bank statement but do not appear in the cash book

• Enter these transactions into the cash book

  • Debit the cash book if the transaction increased the bank balance

  • Credit the cash book if the transaction decreased the bank balance

    • The entries should be opposite to how they appear on the bank statement

• Correct any errors in the cash book that are identified by the bank statement

• Calculate the updated balance for the bank account in the cash book

  • This still might not match the balance shown on the bank statement
  • A bank reconciliation statement is created to explain the difference

Worked Example Yana receives a bank statement on 31 January 2024. She identified the following items on the bank statement that have not been entered into the cash book.

	$
Cheque received from Kayleigh on 13 January dishonoured	180
Electricity payment by direct debit	145
Received payment from James, a credit customer, by credit transfer	550
Bank charges	81

Update the bank columns in the cash book below with these transactions. Balance the bank columns and bring down the balances on 1 February 2024.

Yana Cash Book (Bank columns)

Date	Details	$**	Date	Details	$
2024 Jan 1	Balance b/d	1 265	2024 Jan 3	Rent	700
Jan 7	Jasmine	450	Jan 24	Wages	850
Jan 13	Kayleigh	180	Jan 29	Insurance	200
Jan 28	Peter	945

Answer:

• Enter the dishonoured cheque onto the credit side
• Enter the payments for electricity and bank charges onto the credit side
• Enter the payment received from a customer onto the debit side

Yana Cash Book (Bank columns)

Date	Details	$	Date	Details	$
2024 Jan 1	Balance b/d	1 265	2024 Jan 3	Rent	700
Jan 7	Jasmine	450	Jan 24	Wages	850
Jan 13	Kayleigh	180	Jan 29	Insurance	200
Jan 28	Peter	945	Final answer: Jan 31	Final answer: Kayleigh	Final answer: 180
Final answer: Jan 31	Final answer: James	Final answer: 550	Final answer: Jan 31	Final answer: Electricity	Final answer: 145
			Final answer: Jan 31	Final answer: Bank charges	Final answer: 81
		Final answer:**	Final answer: Jan 31	Final answer: Balance c/d	Final answer: 1 234
		Final answer: 3 390			Final answer: 3 390
Final answer: Feb 1	Final answer: Balance b/d	Final answer: 1 234