Two forms of cash: Cash in hand (physical cash on premises) and cash at bank (funds in the bank account) are separate current assets. A bank overdraft is a current liability.
Cash at bank account: Debits = receipts (money in); credits = payments (money out). A credit balance = bank overdraft.
Dishonoured cheques: A cheque that the bank rejects must be fully reversed — Dr Trade receivables, Cr Cash at bank, and Cr Discount allowed (if a discount was given).
Internal controls over cash: Four types — segregation of duties (separate handling from recording), custody of cash (secure storage, daily banking), authorisation (two-person approval, supporting documents), and bank reconciliation (regular comparison of cash at bank account and bank statement).
Bank reconciliation — two-stage process:
- Update the cash at bank account — start from the last balance in the cash at bank account; add bank-statement-only items (direct deposits/payments, bank charges, interest, dishonoured cheques), and correct any errors found in the account.
- Prepare the bank reconciliation statement — start from the bank statement balance; add deposits in transit; deduct cheques not yet presented → result = updated cash at bank balance.
Errors: Business errors are corrected in the updated cash at bank account. Bank errors, on the other hand, appear as reconciling items in the bank reconciliation statement until the bank corrects them.
Effect on profit: Items that introduce a new expense or new income when added to the cash at bank account affect profit: bank charges, bank interest expense, bank interest income, direct payments of expenses (e.g. insurance expense, rent expense), and direct deposits of income (e.g. commission income).
Dishonoured cheques and credit transfers that settle trade receivables do not affect profit — the income was already recorded when the original sale was made. Error corrections affect profit only if they involve an income or expense account. Timing differences (deposits in transit, cheques not yet presented) go in the bank reconciliation statement only and do not affect profit.