Key Concepts
When the cash at bank account is updated with items from the bank statement, some adjustments affect expenses or income — and therefore profit.
| Adjustment | Effect on profit |
|---|---|
| Bank charges added to cash at bank account | Profit decreases |
| Bank interest expense added to cash at bank account | Profit decreases |
| Bank interest income added to cash at bank account | Profit increases |
| Direct payment (e.g. insurance expense, rent expense) added to cash at bank account | Profit decreases |
| Direct deposit of new income (e.g. commission income) added to cash at bank account | Profit increases |
| Credit transfer that settles a trade receivable added to cash at bank account | No effect — the sale's income was already recorded |
| Dishonoured cheque added to cash at bank account | No effect on its own — it restores a trade receivable (the sale's income was already recorded). Profit increases only if a discount allowed on the original receipt is also withdrawn. |
| Correction of error — expense overstated | Profit increases |
| Correction of error — expense understated | Profit decreases |
Bank reconciliation adjustments (deposits in transit and cheques not yet presented) do not affect profit — they are timing differences only.
Only new income or new expenses affect profit: bank charges and bank interest expense (decrease); bank interest income and other new income (increase); direct payments of expenses (decrease).
Items that only move money already recorded do not affect profit — these are credit transfers that settle a trade receivable and dishonoured cheques (the income was recorded when the original sale was made). Timing differences (deposits in transit, cheques not yet presented) go in the bank reconciliation statement and do not affect profit either.
Saying deposits in transit affect profit. They are timing differences only — the receipt has already been recorded in the cash at bank account; the bank has simply not processed it yet.
Thinking a dishonoured cheque reduces profit. When a credit customer's cheque is dishonoured, the trade receivable is simply restored — the sale's income was already recorded, so on its own the dishonour does not affect profit. (The one exception is when a discount allowed on the original receipt is withdrawn: that reduces expenses and slightly increases profit — it never reduces it.)
Thinking bank charges only reduce cash, not profit. Bank charges are an expense — when added to the cash at bank account in the update step, they also reduce profit. The same applies to bank interest expense and direct payments for expenses (e.g. insurance paid by standing order).