5.

Cash book as a Prime

Entry book

Following themes are discussed in this chapter

140

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

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

(-

Its 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.

(-

I can record the transactions in cash and cheques in a cash

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

Sandamali

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141

Weliarawa

(-

Dont 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.

142

For free distribution

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

_ Source documents

Prime books

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

Cash book

_ Bank reconciliation statement

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143

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

Business Transactions
Credit Transactions

Cash Transactions

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.
Sandamalis Business

Sandamalis Business

Give me 20kg of
mango I will pay
you within one
week.

Figure 5.1
144

Figure 5.2
For free distribution

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 buyers 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 payment 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 lets 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
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145

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 :

146

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
For free distribution

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.
ii.

Name the prime book which is used to record the cash receipts and cash
payments.
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.
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147

A model of a single column cash book

CASH BOOK

Debit
Date Receipt Description
No.

L.F. Amount Date

Rs.

Credit

Vou.
No.

Description

L.F. Amount

Rs.

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.''''''''''''''''
148

signature

For free distribution

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.
Sadamali Enterprise
Budha Jayanthi Mawatha
Naotunna.
Rs' ''''''''''''''''''''''''''''
Date '''''''''''''''''''''''''''''
Paid ruppees''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''
'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''
''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''to
Description''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''
'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''

Voucher Number
'''''''''''''''''''''''''''''
Cheque number
''''''''''''''''''''''''''''''
Amount'
Rs'''''''''''''''''''''''
.
Date of payment
''''''''''''''''''''''''''''''
Authorised
''''''''''''''''''''''''''''''
Account
''''''''''''''''''''''''''''''

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

Recording transactions in the cash book

Lets 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 Sandamalis capital.
According to the accounting rule of increase of asset is debit.
The Rs.30,000 is debited to the cash book.
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149

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

150

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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.

For free distribution

151

Cash book

L'P 01
Credit

Debit
Date

Rece.
No.

20xx

Description

L.F.

amount
Rs.

Date

vou.
no.

Description

L.F.

20xx

amount

capital

01

30"000 04'01 001

Furniture

03

4"500

Bank loan

02

25"000 05'01 002

Purchases

04

20"000

06'01 002

Sales

06

3"500 05'01 003

Carriage inward

05

500

13'01 003

Kosala

07

2"500 10'01

004

Bank loan

02

14'01

005

Mihiri fruits

08

15'01

006

Drawings

09

01'01
001

Balance b/f

500

61"000

61"000
16'01

3000

30"500

Balance c/d

15'01

2000

30"500

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 is
Rs. 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.
L.P 01
Capital Account
Debit
Credit
Date

152

Description

L.F. Amount
Rs.

Date

Description

01'01

cash

For free distribution

L.F.
L. 01

Amount
Rs

30"000

Debit
Date
10.01

Description
Cash

04.01

Description
Cash

05.01
12.01

Description
Cash
Mihiri fruits

05'01

Credit

Date

2,000 02.01

Description
Cash

L.
F.
01

L.
F.

Amount
Rs.

01

4,500

Date

L.
F.

Amount
Rs.

01

20,000
8,000

08

Date

Description

Cash

L.
F.

Amount
Rs.

Date

Amount
Rs
25,000

L.P 03

Credit
Description

L.
F.

Amount
Rs.

L.P 04

Credit
Description

L.
F.

Description

Amount
Rs.

L.P 05

Carriage Inwards Account

Debit
Date

01

Amount
Rs.

Purchases Account

Debit
Date

L.
F.

Furniture Account

Debit
Date

L.P 02

Bank Loan Account

Credit
L.
F.

Amount
Rs.

500

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153

Sales Account

L.P 06

Debit
Date

Credit
Description

L.
F.

Amount
Rs.

Date
06.01
07.01

07.01

Cash
Kosala

Amount
Rs
3,500

07

4,000

L.P 07

Kosala

Debit
Date

Description

L.
F.
01

Description
Sales

L.
F.
06

Amount
Rs.
4,000

Date
13'01

Credit
Description
Cash

L.
F.
01

Mihiri fruits

L.P 08

Debit
Date
14'01

Credit
Description
Cash

Description

15'01 Cash

154

L.
F.
01

Amount
Rs.
3,000

Date

Description

L.
F.

Amount
Rs

12'01

Purchases A/c

04

8,000

L.P 09

Drawings Account

Debit
Date

Amount
Rs
2,500

L.
F.
01

Amount
Rs.

Date

500

For free distribution

Credit
Description

L.
F.

Amount
Rs

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.
Date
05- 0 1
08- 0 1
12- 0 1
16- 0 1
18- 0 1
25- 0 1
28- 0 1
29- 0 1
30- 0 1

Receipt No
001
002
003
004
005
006
007
008
009

Description
Sale of 15 shirts at Rs.650 each
Received Rs.3000 from Kosala
Sales of 20 childrens wear at Rs. 400 each
Received Rs.5000 from Kosala
Sale of 20 sarees at Rs.800 each
Received Rs.4000 from Kosala
Sale of 15 trousers at Rs.1200 each
Received Rs.3000 from Kosala
Sale of 20 shirts at Rs.700 each

Following details are obtained from the File of payment vouchers.

Date
01-01
02- 0 1
02- 0 1
06- 0 1
09- 0 1
13- 0 1
20- 0 1
22- 0 1
23- 0 1
24- 0 1
25- 0 1
28- 0 1
30- 0 1
31- 0 1

Payment
voucher No
500
501
502
503
504
505
506
507
508
509
510
511
512
513

Description
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 childrens 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 Nilushan Rs.16000
Paid employees' salary Rs.3000
Purchase of 60 sarees at Rs.480 each
Paid rent Rs.2000
Paid Nilushan Rs.8000
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155

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.
Event

Source Document

Cash deposit

Cash deposit form (slip)

Cheque deposit

Cheque deposit form (slip)

Issuing cheque

Counterfoil

Dishonouring of cheque

Cheque return notification or the bank

statement

Recording of other bank transactions Bank statement

which are not recorded in the cash
book.

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.
156

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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.

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157

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.
Part 01
Sahan Abenayaka.
For purchasind
goods in January.

Part 02

Sahan Abenayaka.
Fifty thousand only

Maheesha Sadamali

Rs.

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.

158

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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.

Ms. Mahisha Sadamali

Buddha Jayanthi Rd
Naotunna.

Naoyunna Branch

0034 02 39016

Dr.

01-03-08 Balance b/d

16000

03-03-08 Cash deposit

13000

08-03-08 cheque payment AB 06

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.

Cr.

14-03-08 cheque deposit

7000

218

22000
8700

20-03-08 cheque payment AB 07

12400

22-03-08 standing orders (rent)

14000

29000

30700
18300
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

31-03-08 bank charges

For free distribution

800

22800

1200

21600

159

Activity 03
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.

160

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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.

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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.

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Example : The cash balance of Madawas business as at 01.02.20xx is Rs.42,000.

The transactions in February are as follows.

Date

Description

Cheque No.

03-02

Opened a current account with Rs.30,000

05-02

Cash sales Rs. 9,000

08-02

AB 01

Purchased goods issuing a cheque of Rs. 12,000

10-02

AB 02

Paid rent Rs.2,000

12-02

AB 03

Issued a cheque of Rs.3,000 for salary

13-02

AB 03

Dishonoured the salary cheque

14-02

Paid cash for dishonoured salary cheque

15-02

SP 24

Received a cheque for sales Rs.8,000

16-02

SP 24

Deposited the cheque of Rs.8,000

17-02

MT 19

Received a cheque of Rs.5,000 from Kosala

18-02

MT 19

Deposited the received cheque

20-02

AB 04

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

the business

21-02

MT 19

dishonoured the cheque received from Kosala

24-02

AB 05

Issued a cheque of Rs.2,000 for rent

25-02

Received cash from Kosala for the dishonoured cheque

26-02

Deposited Rs.6,000 in the bank

27-02

CD 45

Encashing a cheque to Raheem Rs.3000

28-02

CD 45

Deposited Raheem's cheque in the bank

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Cash Book

Debit
Date

Re
L. Cash Bank Date Vo
L.
Description F.
No. Description F. Rs. Rs.
N.

20xx
01.02

Balance b/d

03.02
05.02

Cash
sales

13.02

salary

15.02

sales(cheque)

16.02

Cash

17.02

Kosala(che.)

con

+ 8000

con

20.02

Bank

con

Cash

27.02

Raheem(che.)

28.02

Cash CD 45

10.02

Rent AB 01

2000

12.02

salary AB 03

3000

14.02

Salary

16.02

Bank

con

8000

18.02

Bank

con

5,000

20.02

Cash AB 04

con

21.02

Dishonoured
ch..(Kosala)

5,000

24.02

Rent AB 05

2,000

26.02

Bank

27.02

Raheem

28.02

Bank CD 45

28.02

Balance c/d

8000

5000
7000
5000

con

6000
3000
3000

Balance b/d

21,000 24,000

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
164

30000

purchases
AB 01

79,000 55,000
01.03

con

12000

3000

5000

Cash

26.02

Bank

08.02

3000

con

Kosala

30000
9000

18.02

25.02

20xx
03.02

42"000

Credit
Cash Bank
Rs. Rs

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con

7,000

6,000
3,000

con

3,000
21,000 24,000
79,000 55,000

Activity 05
Following balances are from the Anuhas business as at 01.01.20xx
Cash 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

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165

5.3. Bank reconciliation statement

Sandamalis 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?.

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
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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 balance 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.
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167

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.
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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

Debit

Date
01- 0 3
06- 0 3
08- 0 3
20- 0 3
29- 0 3

01- 0 4

Description
Balance b / d
Cash deposit
Cheque deposit
CD - 2 18
Cheque deposit
PR- 425
Cheque deposit=
MP- 517
SP- 420

Balance b / d

Bank
Rs.

Credit

Date

16"000 05- 0 3
13"000 12- 0 3
8700 16- 0 3
23- 0 3
6000 31- 0 3

Description
Issued cheque
AB - 0 6
AB - 0 7
AB - 0 8
AB - 0 9
Balance c/d

Bank
Rs.
7000
12"400
15"400
6200
19"800

7600
9500
60800
19800

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60800

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Bank statement sent by the bank to the Sadamali's Business of March 20xx, is given
below.
Ms. Mahisha Sandamali,
Buddha Jayanthi Rd,
Naotunna.

Naotunna Branch

0034 02 39016

01-03-xx Balance b/d

16000

03-03-xx Cash deposit

13000

08-03-xx Cheque payment AB 06

14-03-xx Cheque deposit

7000

22000

218

20-03-xx Cheque payment AB 07

8700
12400

22-03-xx Standing orders (rent)

29000

30700
18300

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

31-03-xx Bank charges

800

22800

1200

21600

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.

Cash book (Adjusted)

Balance b/d
debtors remittance
dividends

Balance b/d

170

Bank
Rs.
19"800
8"400
4"900

Bank loan (standing order)

Cheque book charges
Bank charges
Balance c/d

33"100
17"100

For free distribution

Bank
Rs.
14"000
800
1"200
17"100
33"100

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
Description

Rs.

Rs.

Balance as per cash book

add - Cheques not presented to the bank
AB - 0 8
AB - 0 9

17"100

15"400
6"200

Less - Cheques not realised

MP - 5 17
SP - 4 20
Balance as per the bank statement

7"600
9"500

21"600
38"700

17"100
21"600

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.
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171

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.

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