business studies chapter 5

For free distribution140

5. Cash book as a Prime

Entry book

Following themes are discussed in this chapter

5.1 Recording of cash transactions

5.2 Single column cash book and two (double) column cash book

5.3 Bank reconciliation statement

For free distribution 141

Let us record the transactions properly in the

cash book

Sandamali is a fruit seller who has studied in commerce stream. One day she

met Mr. Weliarawa who is her friend and an accountant. The dialogue between

Sandamali and Weliarawa is given bellow.

Sandamali :- Good morning, after a long time, what are the latest news?.

Weliarawa :- Very good, and you?

Sandamali :- Now there is a good demand for fresh fruits. I decided to start

a small business and to maintain it. So your help may be very

important to me.

Weliarawa :- Yes.Certainly. It is needed to keep records of all transactions

when doing a business. That is very important.

Sandamali (- It is difficult to do all transactions in cash but have to do credit

transactions also.

Weliarawa (- Whenever the transactions are on credit or in cash it is needed to

use the documents such as invoices, receipts etc. It is easy to

keep accounting records since those documents give us

information of transactions.

Sandamali (- If I have to do transactions with cheques?

Weliarawa (- It’s a good idea. You can start a current account and then you

will be given a cheque book. So you can issue cheques when

making payments and you can deposit the received cheques

drawn in favour of you. If you are a reliable customer you can

enjoy many advantages from the bank.

Sandamali (- I can record the transactions in cash and cheques in a cash

book, but I will have to spend an extra time for that.


Weliarawa (- Don’t think so. You can record cash transactions in your cash

book correctly. Bank is also issuing a bank statement.

Sandamali (- It is not clear to me. Can you please explain it further?

Weliarawa (- Good, I will explain.

As you are recording the transactions in the cash book, done in

cash and cheques, the bank also keeps the records of them in

your current account.

Bank sends a bank statement about the transactions done by

you with the bank. After receiving that bank statement you can

compare the transactions in the bank column of the cash book

with it and check the accuracy of accounting.

You can prepare a bank reconciliation statement to verify the

accuracy of the balances in the cash book and in the bank

statement.

Sandamali (- Your advice will be very useful to me. Thank you very much

Mr.Weliarawa.

After reading the above dialoue you will be able to understand the necessity of

recording the business transactions. So let us learn more about the recording of

transactions in a cash book.


_ Source documents _ Prime books

_ Cash book _ Ledger notes

_ Cash balance and bank balance _ Dishonoured cheques

_ Commission _ Direct remittance

_ Standing ordres _ Bank charges

_ Unrealised cheques _ Unpresented cheques

_ Bank statements _ Adjusted cash balance

_ Bank reconciliation statement

Introduction

Source documents are originating with the occurrence of transactions. Prime books

are the books in which the first entries of transactions are recorded according to the

source documents. Cash book is also a prime book which has a specific importance.

Cash book is used to record all the cash transactions of a business using the source

documents. Cash book can be disigned to suit the transactions of the firm.

The bank sends a report to the firm about the transactions done with the bank and it is

known as the bank statement. After receiving the bank statement the firm can check it

with the bank column in the cash book to ensure the accuracy and if there is a

disagreement, in the balances can identify the reasons for it.

This chapter introduces the following terms


Sandamali’s Business Sandamali’s Business

Give me 20kg of

mango I will pay

you within one

week.

Figure 5.2 Figure 5.1

5.1 Recording of cash transactions

There are various types of businesses such as production, distributing and

service providing. Although they differ in nature, the transations are happening

regularly. Exchanging of resources among various parties and economic incidents are

known as transations.

Business transations can be divided into two main / basic parts

If the receiving and paying of money is done at the point of transaction it is called cash

transactions.

Example :- • Sales 20kg of plantain at Rs.50 each

If the paying and receiving of money is not done immediatly, and paid later it is called

credit transactions.

Example :- • Sales to Kosala - 20kg of mango at Rs.50 per kg.

See the pictures below.

Business Transactions

Cash Transactions Credit Transactions


Figure 5.1 The firm has done a selling for Rs.1000 The money is paid immediately. So

it is a cash transaction.

Figure 5.2 The firm has sold 20kg of mango to Kosala and it was sold on credit.

Money is not paid when the Transaction is taking place. So it is a credit transaction

and it needs the buyer’s name. Settlement of credit transactions by cash should be

recorded in the cash book.

Cash book and its functions recorded

Cash book is used to record the actual receipts of cash and payments by cash

according to the dates.

Cash book has two functions.

They are-

functioning as a prime book

functioning as a ledger account

Business Transactions are recorded in prime books before they are entered in ledger

accounts. Recording of transactions in prime books is done on the basis of source

documents. Source documents are the documents in which the financial values,

conditions and other information of transactions are recorded.

As the cash book is used for the original entry of cash transactions, it is becoming a

prime book. Receipts and payment vouchers are widely used source documents for

cash receipts and cash payments. Receipts are used when receiving money, and pay-

ment vouchers are used when paying money.The information in these documents such

as date, description, number and the amount are recorded in the relevant columns of

the cash book and they are recorded according to the dates.

Now let’s examine how the cash book functions as a ledger.

Ledger account is used to record the dual impact of a transaction according to the

principle of double entry. The receipts and payments in money are recorded in the

cash book according to the double entry principle for assets. According to this

principle double entries are done.

Hence- Increase of assets as debit and

Decrease of assets as credit are recorded in the cash book

So - Increase of cash- Debit the cash book

Decrease of cash- credit the cash book


Since the cash receipts are debited to the cash book, the other entries relevant to them

are credited to the relevant ledger accounts. So cash payments are credited to the

cash book and relevant other entries are debited to the ledger accounts. So the cash

book is recorded in the double entry system and it is functioning as a ledger account

also.

Advantages of maintaining a cash book

To know the amount of money received during the period

To know the amount of money spent during the period

To know the cash balance at the end of the last day of the period

Receipts and payments can be presented separately

Provide a guidance to have a better control over cash which is a limited

resource

To make decisions about monetary matters

A firm receives money in various ways

Example :-

• Investment made by the owner when starting the business

• Additional capital invested by the owner

• Income such as, sales, rent received, investment income

• Bank loans, mortgage loans etc

• Selling of assets like motor vehicles, furniture, and machinery

• Money received from debtors

• Donations

A firm has an inflow of money which also results an outflow of money:

Example :-

• Cash drawings by the owner

• Expenses such as salaries, insurance premiums and transport expenses

• Paying of loans and interest. eg. bank loans, mortgage loans

• Buying of assets. eg. motor vehicles, furniture, machinery by paying money

• Paying to creditors


Activity 01

1. Write five examples each of cash transactions and credit transactions in a

business in the first week of January 20xx.

2. If the cash balance of that business for the date 20xx.01.01 is Rs 250,000

calculate the cash balance after the transactions given by you, in (1) above.

3. Present in a table how the above transactions influence to increase and decrease

the cash balance.

4. Why is it important to keep records of financial transactions in a business?

Explain.

5. i. Name the prime book which is used to record the cash receipts and cash

payments.

ii. Name the double entry principle used to record the cash receipts and cash

payments in the cash book.

5.2 Single column and double column cash book

Cash book is prepared according to the nature of the cash receivables and

cash payments in a business. Nature of the cash received and cash payments means

whether the transactions are done in notes and coins (cash) or by cheques. Columns

of a cash book should be drawn according to the nature of the transactions.

Some businesses are using cheques in their transactions apart from

notes and coins. Therefore it is needed to open a current account in a commercial

bank. The transactions with cheques are common today.

There are two types of transactions.

By coins and notes

By cheques

Single column cash book

A single column cash book is the book in which the transactions of coins and notes

are recorded by a business which uses only notes and coins for transactions.


A model of a single column cash book

The written evidences of cash receipts and cash payments are the source documents

of a cash book.

When receiving cash - Receipts

When paying cash - Paying vouchers

Receipt

Receipt is a document signed and issued by an authorised person of a firm certifying

the money received. It is known as a cash memo also.Receipt is issued in two copies

as the original copy and the duplicate or sometimes more than two copies with the

same serial number. The original copy is issued to the customer and the duplicate is

remaining in the book. The information in the duplicate is used to record in the cash

book.

Example of a receipt is shown below.

Receipt

No ( 20545 Sandamali Enterprise"

Buddha Jayanthi Mawatha"

Naotunna.

T.P' 0145336281

Date '''''''''''''''''''''

Received with thanks cash/cheque the sum of Rs....................supplied

to ...............................numbered ..........................invoice.

Rs.'''''''''''''''' signature

Rs.

Debit Credit

Amount Date Receipt

No.Description

Amount Vou.

No.

Date Description L.F.

Rs.

CASH BOOK

L.F.


Sadamali Enterprise

Budha Jayanthi Mawatha

Naotunna.

Rs' '''''''''''''''''''''''''''' Date '''''''''''''''''''''''''''''Paid ruppees'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''to

Description'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''

Invoice No ( '''''''''''''''''' Bill No ( ''''''''''''''''' Receipt No ( ''''''''''''''''''

Voucher Number'''''''''''''''''''''''''''''Cheque number''''''''''''''''''''''''''''''

Amount''''''''''''''''''''''''

Date of payment''''''''''''''''''''''''''''''

Authorised''''''''''''''''''''''''''''''

Account''''''''''''''''''''''''''''''

Rs.

Payment voucher

Payment voucher is used by the firms when making payments as a source

document. Basic information is written in the voucher when paying in cash or by cheques.

Firms use vouchers when making payments such as salary, cash purchases or paying

to creditors. The information on these vouchers is used to record in the cash book.

This source document is important to prove the payment and can use as a

written evidence.

Check the following voucher.

Recording transactions in the cash book

Let’s discuss the recording of cash transactions in a cash book and calculating

the cash balance.

01. Sandamali started a fresh fruit stall investing Rs. 30,000 on 01.01.20xx

The business has received a sum of Rs. 30,000 and it is an asset of cash

for the business.

Rs. 30000 is Sandamali’s capital.

According to the accounting rule of increase of asset is debit.

The Rs.30,000 is debited to the cash book.


02. 02.01 Borrowing of Rs.25,000 from the bank. (Receipt No-001)

Cash increased by Rs. 25,000 in the business as a result of the loan.

Arises a liability of Rs. 25,000. Since it should be paid to the bank

Rs. 25,000 is debited to the cash book because increase of an asset-debit

03. 04.01 Purchased furniture for Rs. 4,500 (voucher No-001)

Asset of cash is decreasing by Rs. 4,500

Arises an asset of furniture of Rs. 4,500

Decreasing of cash by Rs. 4,500 is credited to the cash book.

04. 05.01 Purchase goods (fruits) for Rs. 20,000. (voucher No-002)

The asset - cash decreases by Rs. 20,000

Arises an asset(stock) by Rs. 20,000

Decreasing of cash by Rs. 20,000 is credited to the cash book

05. 05.01 Carriage inwards expenses Rs. 500 for purchased fruits (voucher

No-003)

Outflow of Rs500 from the firm decreases the asset of cash by Rs. 500

Arises the carriage inwards expenses of Rs. 500

Decreases the asset of cash by Rs. 500 and credited to the cash book

06. 06.01 Received Rs. 3,500 by selling of fruits. (Receipt No-002)

Cash increased by Rs. 3,500 since the firm is receiving Rs 3,500

Arises income of Rs. 3,500

Increases the asset of money by Rs. 3,500 and debited to the cash book

07. 07.01 Selling of fruits to Kosala worth Rs. 4,000

There was no exchange of money when the transaction happened this is a

credit transaction. The cash will be received later. The asset debtors arise

through credit sales. Here, Kosala is the debtor. Value of the credit sales

are not recorded in the cash book

08. 10.01 paid Rs. 2,000 as a part of the bank loan.

Decreases cash by Rs. 2,000

Decreases the bank loan by Rs. 2,000

Decrease the asset of, cash by Rs.2,000 and credited to cash book


09. 12.01 Credit purchase of fruits from the firm “Mihiri Fruits Enterprise” for

Rs.8,000

Fruits were bought to pay later. No money is exchanged since it was a

credit purchase

Payable amount is a liability. This liability is called “creditors.” The creditor

is the firm of “Mihiri”

The credit sales are not recorded in the cash book

10. 13.01 Received Rs. 2,500 from Kosala. (receipt No-003)

Increases the asset of money by Rs. 2,500

Decreases the asset - debtors by Rs. 2,500

Since the asset of cash is increasing by Rs.2,500, it is debited to the cash

book

11. 14.01 paid Rs.3,000 to the firm - “Mihiri (creditor) (voucher no-005)

The asset of cash decreases by Rs.3,000 because of the payment to a

creditor

Liability of creditors decreases by Rs.3,000

Since the asset of cash is decreased by Rs.3,000 it is credited to the cash

book

12. 15.01 Sandamali, the owner, has drawn Rs. 500 for her personal use

(voucher no- 006)

The firm is having a seperate existence from the owner. Since the owner

has drawn Rs. 500 for her personal use, her equity is decreasing from

Rs. 500

The asset of cash is decreasing by Rs. 500 and it is credited to the cash

book. In accounting the withdrawals by the owner is known as drawings.

Recording of above transactions in a cash book, balancing off it and finding the

balance is shown below.


The cash book has been balanced assuming that the accounting period of the above

firm is from 01.01.20xx - to 15.01.20xx The cash balance as at 16.01.20xx isRs. 30,500.

Ledger notes

Business transactions have a dual impact. This dual impact is recorded in ledger

accounts as debit and credit. Since the cash book is also a ledger account, cash

receipts are debited and cash payments are credited to it. The credit entry relevant to

the debit entry of the cash book should be recorded in the other ledger account and to

the debit entry to the credit entry of the cash book should be recorded in the other

ledger account. Other ledger accounts of the single column cash book are shown

below.

Cash book L'P 01

Date Description L.F.amount

Rs.

vou.

no.Date Descriptionamount

20xx

01'01capital 30"000

20xx

04'01 001 Furniture 03 4"500

06'01

13'01

25"000

3"500

2"500

05'01

05'01

10'01

14'01

002

003

004

005

Purchases

Carriage inward

Bank loan

Mihiri fruits

04

05

02

08

20"000

500

2000

3000

001

002

003

15'01 006 Drawings 09 500

15'01 Balance c/d 30"500

61"000

16'01 Balance b/f

61"000

30"500

01

02

06

07

Bank loan

Sales

Kosala

CreditDebit

Rece.

No.L.F.

L.P 01

Date Description Date Description

cash L. 01 30"000

L.F. L.F.Amount Amount

Capital AccountDebit Credit

Rs. Rs

01'01


L.P 02

Date Description Date DescriptionL.

F.L.

F.

Amount Amount

Bank Loan AccountDebit Credit

Rs. Rs

02.01 Cash 01 25,00010.01 Cash 01 2,000


F.L.

F.

Amount Amount

Furniture AccountDebit Credit

Rs. Rs.

04.01 Cash 01 4,500

L.P 03

L.P 04


F.L.

F.

Amount Amount

Purchases AccountDebit Credit

Rs. Rs.

05.01 Cash

12.01 Mihiri fruits

01 20,000

08 8,000

L.P 05


F.L.

F.

Amount Amount

Carriage Inwards AccountDebit Credit

Rs. Rs.

05'01 Cash 500


14'01

L.P 08


F.L.

F.

Amount Amount

Mihiri fruitsDebit Credit

Rs. Rs

Cash 01 3,000 12'01 Purchases A/c 04 8,000

L.P 07


F.L.

F.

Amount Amount

Debit Credit

Rs. Rs

Kosala

07.01 13'01Sales Cash 06 4,000 01 2,500

L.P 06


F.L.

F.

Amount Amount

Sales AccountDebit Credit

Rs. Rs

06.01

07.01

Cash

Kosala

01

07

3,500

4,000

L.P 09


F.L.

F.

Amount Amount

Drawings AccountDebit Credit

Rs. Rs

15'01 Cash 01 500


Following details are obtained from the File of payment vouchers.

Activity 02

Roshani started a buying and selling business of garments on 20xx. 01.01 after

withdrawing of her fixed deposit of Rs.250,000 She spent Rs.2500 to buy books of

receipts and vouchers etc.

The following factors were revealed from the receipt book.

Sale of 15 shirts at Rs.650 each

Received Rs.3000 from Kosala

Sales of 20 children’s wear at Rs. 400 each


Sale of 20 sarees at Rs.800 each


Sale of 15 trousers at Rs.1200 each


Sale of 20 shirts at Rs.700 each

Date Receipt No Description

05 -01

08 -01

12 -01

16 -01

18 -01

25 -01

28 -01

29 -01

30 -01

001

002

003

004

005

006

007

008

009

Purchase of furniture Rs.8000

Purchase of 50 shirts at Rs.400 each

Carriage inwards expensess Rs.600

Paid rent Rs.2000

Purchase of 60 children’s wear at Rs.225 each

Paid Nilushan Rs.12000

Paid employees' salary Rs.3000

Purchase of 40 trousers at Rs.750 each

Carriage inwards expenses Rs.600


Paid employees' salary Rs.3000

Purchase of 60 sarees at Rs.480 each

Paid rent Rs.2000


Date

01 - 0 1

02 -01

02 -01

06 -01

09 -01

13 -01

20 -01

22 -01

23 -01

24 -01

25 -01

28 -01

30 -01

31 -01

500

501

502

503

504

505

506

507

508

509

510

511

512

513

Payment

voucher No Description


You are required to

A- Name the source documents relevant to cash receipts and cash payments.

B- Identify the cash receipts and cash payments of the Roshani Traders and record

in the cash book.

C- Balance off the cash book as at 31.01.20xx and calculate the cash balance.

D- Post the entries which were recorded in the cash book to the ledger.

E- Name the sources of cash receipts and cash payments other than given in this

question separately.

Double /Two column cash book

The cash book becomes a two column cash book when a bank column is added in

addition to the cash column. The transactions related to the current account are

recorded in this bank column.

The recording of the bank column is done on some source documents. Such source

documents are given below.

Cash deposit form / slip

Cash deposit form is used to deposit cash in the current account. This form consists of

two copies and the duplicate is given to the account holder,(firm) which can be used as

a source document.

Examine the cash deposit form given below.

Source DocumentEvent

Cash deposit

Cheque deposit

Issuing cheque

Dishonouring of cheque

Recording of other bank transactions

which are not recorded in the cash

book.

Cash deposit form (slip)

Cheque deposit form (slip)

Counterfoil

Cheque return notification or the bank

statement

Bank statement


Cheque deposit form /slip

Cheque deposit form is used to deposit the cheques received by the firm. It consists of

two copies and the duplicate is given to the account holder (firm) so it can be used as

a source document to record the cash book.

Examine the cheque deposit form given below.

Sometimes a single form is used for both purposes of cheque depositing and cash

depositing,It has two copies. Copy given back to the depositor has to be used as the

source document when recording in the cash book.


Cheque counterfoil

Counterfoil is the small portion in the left side of a cheque which is used to

write the necessary information about the issued cheque. This counterfoil is a source

document to make records in the cash book. First part of the following cheque is the

counterfoil and the second part is the cheque. Counterfoil is used as a source

document when recording the cash book.

Examine the cheque given below.

Cheque return notification

When a bank refuses the payment of a cheque or deposit of a cheque in a

bank these cheques are called dishonored cheques. Dishonoured cheques should be

sent back to the customer who deposited it. But now the cheque return notification is

sent instead of returning the dishonoured cheque. It is a substitute document to the

dishonoured cheque which is having the details about the dishonoured cheque. Then

the firm can submit it to the drawer, and can obtain a new cheque or cash.

Examine the following sample of cheque return notification.

Part 01 Part 02

Sahan Abenayaka.

Rs.

Sahan Abenayaka.

Fifty thousand only

Maheesha Sadamali

For purchasind

goods in January.


Bank statement

A bank statement is a report

which is sent by the bank, stating

all the details of the transactions

done by the business (the owner

of the current account) during the

particular period of time.

The document is used as

a source to check the details

entered in the bank column of the

cash book and to enter the

details which have not been

entered in the cash book.

Ms. Mahisha Sadamali

Buddha Jayanthi Rd

Naotunna.

0034 02 39016

Naoyunna Branch

01-03-08 Balance b/d 16000

03-03-08 Cash deposit 13000 29000

08-03-08 cheque payment AB 06 7000 22000

14-03-08 cheque deposit 218 8700 30700

20-03-08 cheque payment AB 07 12400 18300

22-03-08 standing orders (rent) 14000 4300

25-03-08debtors remmittone 8400 12700

28-03-08 cheque deposit 425 6000 18700

30-03-08 dividends 4900 23600

30-03-08 cheque book charges 800 22800

31-03-08 bank charges 1200 21600

Cr.Dr.


Collect the following documents with the help of two of your friends and observe

them.

× Cash and cheque deposit forms of various banks

× Cheques issued by various banks

× Bank statements issued by various banks

Recording of transactions in two column cash book

Now you have studied the source documents that are necessary to record the two

column cash book. Now let us discuss the information needed to make entries in the

two column cash book.

Deposits

The main financial instruments that can be credited to a current account are

cash

cheques

When depositing cash to a current account, the amount of cash in the hand is

decreasing and the amount of money in the bank is increasing. So it is debited to the

bank column. Since the cash in hand is decreasing, it is credited to the cash column.

The entries are kept according to the principle of double entry for assets since

the cash column and bank column belong to the assets accounts. When the both debit

and credit entries are in the same cash book the word contra should be written in the

ledger folio

columns.

Recording of cheque receiving when the firm receives a chque should be debited

to the cash book and credited to the relevant account. Then this cheque is deposited

in the bank it should be debited to the bank column and credited to the cash column.

It is a contra entry.

Activity 03


Issuing cheques

When cheques are issued the cash balance in the current account is decreasing. It

courses the decrease of an asset. So it is credited to the bank column and debited to

the other relevant account.

Dishonoring of cheque

This refers to the cheque which is refused for the payment by the bank. It may happen

in the circumstances like the following.

Insufficient money in the account

Signature differs with the specimen signature

If the cheque is written incorrectly

Both the deposited cheques and issued cheques may get dishonoured. When the

deposited cheques are dishonoured it is informed to the firm by a cheque return

notification.

The amount of the deposited cheque has been debited to the bank column in the cash

book. However as the cheque is dishonoured the money in the current account was

not increased. So the debited amount to the bank column should be removed and the

person who gave the cheque should be made a debtor again, a temporary account

should be opened by the name of dishonoured cheques.

There are two steps for it.

Step one – When the dishonoured cheques is replaced the Dishonoured

cheque account has to be debited and the bank column should

be credited.

Step two – When the dishonoured cheques is sent to the debtor or informed

to him,debtors account should be debited and the dishonoured

cheque account should be credited

The cheques issued by the business also can be dishonoured. Then the customer will

return it to the business.The entry made prior to dishonouring will be then removed.

Then bank column should be debited and the other relevant account will be credited.


Withdrawal of money from the bank for the use of the business

Sometimes the firms withdraw money from the bank for business purposes. Then the

cash at hand is increasing and balance in the current account is decreasing. So it is

debited to the cash column and credited to the bank column. That is a contra entry.

Encashment of cheques

Outsiders (individuals and institutions) submit cheques to firms to encash them.

Businesses encash these cheques on commission or with no commission.

Contra entries

When the cash book contains both the credit and the debit entries on a particular

transaction those items are known as contra entries. Such situations of contra entries

appear in the following ways.

When cash is deposited in the bank

When depositing the received cheques

When withdrawing money for the use of the business

Balancing off the double column cash book

The balance at the end of the accounting period is found by balancing off the double

column cash book.

The cash balance is a debit balance and it is an asset.

Bank column balance may be a debit balance or a credit balance.

Debit balance means that the balance in the current account is positive. It is

an asset to a business.

Credit balance means that the balance in the current account is negative. So

the firm owes the bank. That is due to the drawing of cheques than the

existing balance in the current account. It is known as a bank overdraft and

it is a liability of the firm.

Following example shows the recording of a double column cash book and balancing

off at the end of the accounting period finding the balances.


Example :-

• The cash balance of Madawa’s business as at 01.02.20xx is Rs.42,000.

The transactions in February are as follows.

Opened a current account with Rs.30,000

Cash sales Rs. 9,000

Purchased goods issuing a cheque of Rs. 12,000

Paid rent Rs.2,000

Issued a cheque of Rs.3,000 for salary

Dishonoured the salary cheque

Paid cash for dishonoured salary cheque

Received a cheque for sales Rs.8,000

Deposited the cheque of Rs.8,000

Received a cheque of Rs.5,000 from Kosala

Deposited the received cheque

Withdrew cash by a cheque of Rs.7,000 for the use of

the business

dishonoured the cheque received from Kosala

Issued a cheque of Rs.2,000 for rent

Received cash from Kosala for the dishonoured cheque

Deposited Rs.6,000 in the bank

Encashing a cheque to Raheem Rs.3000

Deposited Raheem's cheque in the bank

Date Cheque No. Description

03 - 02

05 - 02

08 - 02

10 - 02

12 - 02

13 - 02

14 - 02

15 - 02

16 - 02

17 - 02

18 - 02

20 - 02

21 - 02

24 - 02

25 - 02

26 - 02

27 - 02

28 - 02

-

-

AB 01

AB 02

AB 03

AB 03

-

SP 24

SP 24

MT 19

MT 19

AB 04

MT 19

AB 05

-

-

CD 45

CD 45


Activity 04

01. When are the following source documents originating?

i. Receipt

ii. Payment voucher

iii. Counterfoil

iv. Cash deposit form

v. Cheque deposit form

vi. Bank statement

Cash BookDebit Credit

Bank

purchasesAB 01

DateRe

No.DescriptionL.

F.Cash Date Description

L.

F.Bank

20xx01.02

03.02

05.02

13.02

15.02

16.02

17.02

18.02

20.02

25.02

26.02

27.02

28.02

42"000

9000

+

20xx

03.02

08.02

10.02

12.02

14.02

16.02

18.02

20.02

21.02

24.02

26.02

27.02

28.02

28.02

Bank Cash

30000con

Rs.Rs. RsRs.

Vo

N.

Cash

sales

salary

con

con

con

con

con

8000

5000

12000

Rent

sales(cheque)

2000AB 01

Balance b/d

Cash

Kosala(che.)

5000Cash

Bank 7000

Kosala 5000

Cash 6000

Raheem(che.) 3000

Cash CD 45 3000

3000salary AB 03

Salary 3000

Bank con 8000

Bank con 5,000

Cash AB 04 con 7,000

Dishonoured

ch..(Kosala)5,000

Rent AB 05 2,000

Bank con 6,000

Raheem 3,000

Balance c/d

Bank CD 45 con 3,000

21,000 24,000

21,000 24,000Balance b/d01.03

79,000 55,000 79,000 55,000

30000

3000

8000


Activity 05

Following balances are from the “Anuhas business” as at 01.01.20xxCash balance 38,000

bank balance(debit) 15,000

Debtors 20,000

Creditors 18,000

Bank loan 30,000

Transactions in January are given below.

03.01.20xx Cash purchases - paid by cash 16,000, paid by cheque 14,000

05 Received from debtors - in cash 4,000,by cheque 3,000

07 Deposited the cheque

10 Paid creditors - by cash 5,000, by cheque 4,000

12 Dishonoured the cheque received from debtors

15 Informed the debtor about the dishonoured cheque

18 Received cash from the debtor for the dishonoured cheque

20 Issued a cheque of Rs.2,000 to pay a part of a bank loan

22 Cheque of Rs.4,000 was dishonoured which was issued to

creditors

23 Paid cash to creditors for the dishonoured cheque

24 Received a cheque of Rs. 5,000. by debtors

25 Encash a cheque of Rs. 4000 to Sanjaya

27 Deposited Rs.2,000 with the received cheque

28 Purchase of goods for Rs.15,000 and issued a cheque

30 Withdrew Rs.5,000 from the bank for the use of business

You are required to :

i. Prepare the cash book for the month of January

ii. Balance off the cash book as at 31.01.20xx and calculate the balances

iii. Post the cash book entries to the ledger

iv. Write down your ideas about the following items

a. Credit balance in the bank column

b. Contra entries in the cash book


Businesses record their transactions in the bank column of the cash book and balance

it off for the last day of the month and calculate the balance. The bank also sends a

report to the business stating the transactions for that period of time. That is the bank

statement.

There may be a difference between the balance of bank statement and the

balance of the bank column in the cash book. It is necessary to find out the reasons

for this difference. After finding out of those reasons the bank balance in the cash book

should be corrected preparing the bank reconciliation statement. The aim of the

preparing the bank reconciliation statement is to ensure the accuracy of the balances.

Bank column of the cash book and the bank statement should be compared

when revealing the reasons for the difference in the balances. The transactions are

recorded in the cash book according to the principle of double entry for assets. But

the bank has recorded the transactions in the current account according to the

principle of liabilities, because the cash and the cheques deposited by the customers

are a liability of the bank. So,

The items debited to the cash book are credited to the current account by

the bank

The items credited to the cash book are debited to the current account by

the bank

5.3. Bank reconciliation statement

Sandamali’s Business

The bank balance of my cash book

is Rs. 19,800 at the end of the month,

but bank statement shows it is as

Rs.21,600.Am I wrong?.


Steps of preparing the bank reconciliation statement

Step 01 Examine whether the closing balance in the cash book is equal to the

closing balance in the bank statement.

Step 02 If the balances differ, then compare the debit column of the cash book

with the credit column of the bank statement to find out the reasons for

the difference and the credit column of the cash book with the debit

column of the bank statement.

Step 03 Adjust the bank balance in the cash book, by making necessary entries

selecting the reasons which are not entered in the cash book, by

preparing the adjusted cash book.

Step 04 Draw up the bank reconciliation statement using the corrected Bank

balance in the cash book.

Reasons for the difference of the balances

Following reasons may make the differences in bank balances.

Unpresented cheques

Some cheques issued by the firm may not have presented to the bank by the

receivers.Since values of those cheques are entered in the cash book the bank bal-

ance in the cash book is less than the balance in the bank statement.

Cheques not realised

The value of the cheques deposited by the firm to the current account may not be

added to it, since they were not realised and it needs time to add to the account. They

are called unrealised or uncleared. Due to this, the bank balance in the cash book

shows a higher value than the balance in the bank statement.

a

Errors

The errors may be caused by the firm or the bank when doing calculations and

recording receipts and payments.Then the bank balance in the cash book may differ.


Bank charges

Bank charges are the deductions from the current account such as service

charges, cheque book charges and postage.They are entered in the bank statement

but not in the bank column, and therefore the bank balance in the cash book shows

higher value.

Standing orders

A firm can instruct its bank to pay a stated amount of money on regularly

stated dates to persons or firms. Mostly they are similar amounts. Bank loan

installments, leasing installments, insurance premiums are some examples. These

payments are not recorded in the bank column of the cash book so its balance shows

a higher value.

Direct remittances

Direct receipts to the current account from other parties are direct

remittances. Dividends, received interest, received rent and debtor's remittance are

some of them and mostly they are sent as cheques or bank drafts. Since they are not

recorded in the bank column of the cash book, the bank balance of the cash book

shows a less amount.

Correcting the bank balance of the cash book

Direct remittances should be added to the bank balance in the cash book

when correcting them. That means they should be debited to the cash book. Standing

orders and bank charges should be subtracted and should be credited to the cash

book. Then the bank balance of the cash book will change.

Unpresented cheques and unrealised cheques are not entered to the cash book when

correcting it because they are already recorded in the cash book.

When preparing the bank reconciliation statement using the corrected bank balance in

the cash book,

Unpresented cheques should be added.Since these cheques are not paid

the bank retains more money than shown in the cash book.

Cheques not realised should be deducted. The reason is that the bank has

not yet added those cheques to the current account of the business and

therefore, the money available in the current account is of lower value.

After adjusting the above you will be getting the bank balance as of the bank

statement.


Following is a working example of how the bank reconciliation statement is prepared

based on the information given in the bank column of the cash book of the business

and the bank statement.

Example :- • Bank column of the cash book for the month of March 20xx,of

Sandamalis Business is given below .

Cash book

Date Description Bank

Rs.

Bank

Rs. DescriptionDate

01 -03

06 -03

08 -03

20 -03

29 -03

01 -04

Balance b / d

Cash deposit

Cheque deposit

CD -218

Cheque deposit

PR - 425

Cheque deposit=

MP - 517

SP - 420

Balance b / d

16"000

13"000

8700

6000

9500

60800

19800

05 -03

12 -03

16 -03

23 -03

31 -03

Issued cheque

AB -06

AB -07

AB -08

AB -09

Balance c/d

7000

12"400

15"400

6200

19"800

60800

7600

DebitCredit


Bank statement sent by the bank to the Sadamali's Business of March 20xx, is given

below.

Bank balance of the cash book should be corrected by selecting the reasons for the

differences which are only relevant to the cash book.

A corrected bank balance of the cash book is given below.

Ms. Mahisha Sandamali,

Buddha Jayanthi Rd,

Naotunna.

0034 02 39016

Naotunna Branch

01-03-xx Balance b/d 16000

03-03-xx Cash deposit 13000 29000

08-03-xx Cheque payment AB 06 7000 22000

14-03-xx Cheque deposit 218 8700 30700

20-03-xx Cheque payment AB 07 12400 18300

22-03-xx Standing orders (rent) 14000 4300

25-03-xxDebtors remittane 8400 12700

28-03-xx Cheque deposit 425 6000 18700

30-03-xx Dividends 4900 23600

30-03-xx Cheque book charges 800 22800

31-03-xx Bank charges 1200 21600

Cash book (Adjusted)

Bank Bank

Balance b/d

debtors remittance

dividends

Balance b/d

Bank loan (standing order)

Cheque book charges

Bank charges

Balance c/d

19"800

8"400

4"900

33"100

17"100

14"000

800

1"200

17"100

33"100

Rs. Rs.


Then bank reconciliation statement should be prepared by using the corrected bank

balance in the cash book and get the same balance as in the bank statement. It is given

below,

Sandamali's Business

Bank reconciliation statement for month of March 20xx

Activity 06

Mr. Shivaraja made his business activities easier by opening a current account

depositing Rs.60,000. He has made his payments by cheques and cash. He used to

deposit cheques and cash from time to time in the bank and instructed the bank to pay

the installments of the bank loan.

The credit or positive balance in the bank statement of January as at 31.01.20xx was

different from the bank balance in the cash book, as revealed in the bank statement.

You are required to,

i. Think of the transactions that could have appeared in the bank column of

the cash book and write the source documents of them.

ii . Write down some items different to each other that could have gone into

the credit column of the bank statement.

Balance as per cash book 17"100

add - Cheques not presented to the bank

AB -08 15"400

AB -09 6"200 21"600

38"700

Less - Cheques not realised

MP -517 7"600

SP -420 9"500 17"100

Balance as per the bank statement 21"600

Rs. Rs.Description


iii. Write some different items that could have entered in the debit column

of the bank statement.

iv . If the bank balance of the cash book should be corrected, what makes

the increase of the balance or decrease of the balance? Mention the

reasons.

Activity 07

The bank balance of the cash book of Saman's business in February 20xx is Rs.18,500

and it differs from the balance of the bank statement. Later, following reasons were

found for the difference.

i. Cheques deposited in February, but not realised.

Cheque of Rs. 2,000 from Tharanga

Cheque of Rs. 4,000 from Wishva

ii. Issued cheques in February but not presented to the bank.

Cheque No. 185320 Rs. 2,500

Cheque No. 185322 Rs. 6,000

iii . Dividends from Rajan Co.Rs.4,500 was credited to the bank account

but not recorded in the cash book.

You are required to

i. Correct the bank balance in the cash book for February of 20xx

ii. Find the bank balance as per bank statement as at 29.02.20xx by

preparing the bank reconciliation statement.

business studies chapter 5

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