Bank side, book side, one true balance; entries for the book side only

Three controls a small business can actually run

Cash is the asset most easily lost, so a company controls it even when it has three employees. Separation of duties: the person who records cash does not handle it — the bookkeeper posts, someone else banks. Deposits intact: every receipt is deposited daily and in full; nothing is paid out of the till. All payments by cheque or EFT: so the bank keeps an independent record of every dollar out. The third control is what makes the bank reconciliation possible: two records of the same cash — the bank's and the company's — that should agree, and whose differences are either timing or somebody's error.

Worked example — Harrowgate at 30 November

The bank statement shows 27,415; the Cash ledger shows 26,110. Neither is the true balance. Each side is adjusted for the things the other side knows about.

Bank side — items the company has recorded that the bank has not yet, plus the bank's errors:

• Deposit in transit 4,850: banked on the 30th, on the December statement. Add.
• Outstanding cheques 6,120: written and recorded, not yet presented. Deduct.
• Bank error 310: the bank charged Harrowgate a cheque drawn by a different company. Add back — the bank will fix it.

$$27,415+4,850-6,120+310=26,455$$

Book side — items the bank has recorded that the company learns of only from the statement, plus the company's own errors:

• NSF cheque 1,250: a customer's cheque bounced; the bank took the deposit back. Deduct — and the customer owes Harrowgate again.
• Service charge 45. Deduct.
• Interest credited by the bank 30. Add.
• Note collected by the bank on Harrowgate's behalf: 2,000 principal plus 60 interest. Add 2,060.
• Book error: cheque 4417 to a supplier for 720 was recorded as 270 — 450 too little was deducted. Deduct 450.

$$26,110-1,250-45+30+2,060-450=26,455$$

Both sides reach 26,455 — the true cash balance, and the figure on the 30 November balance sheet. If they do not meet, something is missing or on the wrong side; the difference itself is the clue (a difference divisible by 9 is usually transposed digits).

Bank statement balance          27,415     Book balance                    26,110
Add deposit in transit           4,850     Add interest                        30
Add bank error                     310     Add note collected 2,000 + 60    2,060
Less outstanding cheques        (6,120)    Less NSF cheque                 (1,250)
                                           Less service charge                (45)
                                           Less cheque 4417 error            (450)
Adjusted bank balance           26,455     Adjusted book balance           26,455

Entries — book side only

The bank side needs no entry: the deposit and the cheques are already in the books; the bank will catch up, and the bank corrects its own error. Every book-side item, though, is something the books do not yet show, and each needs a journal entry to bring Cash to 26,455. Two entries do it — one for the additions, one for the deductions:

Nov 30  Cash                               2,090
            Notes Receivable                         2,000
            Interest Revenue                            90
        Note collected by the bank (60) and bank interest (30).

Nov 30  Accounts Receivable                1,250
        Bank Charges Expense                  45
        Accounts Payable                     450
            Cash                                     1,745
        NSF cheque, service charge, cheque 4417 recorded as 270.

The NSF cheque goes back to Accounts Receivable — the customer still owes the money; it is not a bad debt until the allowance process says so. The 450 goes to Accounts Payable, because the supplier was paid 720 and the books show only 270 of the debt cleared. After posting, Cash reads $26,110+2,090-1,745=26,455$.

Petty cash — awareness

A small cash float for stamps and taxis is the one exception to "all payments by cheque". It is a fixed amount, replenished by cheque against the receipts in the box, and the expenses are recorded when it is replenished. It never appears on a bank reconciliation, because it never passes through the bank.