Bank Reconciliation and Control

What is an accounting system?

A system that identifies, analyses, calculates and records transactions to form financial accounts and records

Why do businesses keep records?

To operative effectively, raise finance, arrange credit terms, establish profit levels, monitor income flow and comply with statutory requirements.

What are source documents?

Original records of transactions, such as invoices, receipts, bank statements, credit notes and goods received notes.

Give 5 examples of source documents

Bank statements, till rolls, debit notes, credit notes and cheque stubs

What are books of prime entry?

Initial records of day to day transactions e.g. sales daybook, purchase daybook, cashbook , petty cashbook and journal

Why maintain books of primary entry?

To record transactions in an orderly manner, reduce postings to the double entry system and act as a control

What is the sales daybook?

A book of prime entry recording all credit sales, showing date, invoice number , customer, net amount, VAT, gross amount.

What is the purchase daybook?

A book of prime entry recording all credit purchases, showing date, supplier, net amount, VAT, and gross amount

What is the cashbook ?

A book of prime entry recording cash receipts and payments, often with analysis columns for different types of income and expenses

What is the petty cash book?

A hook for recording small cash payments

What double entry is required for posting sales daybook totals?

Debit: debtors ledger control (gross)

Credit: sales control (net)

Credit VAT control (VAT amount)

What double entry is required for posting purchase daybook totals?

Debit: purchase control (net)

Debit: VAT control (VAT amount)

Credit: creditors ledger control (gross)

What double entry is required for cash receipts?

Debit: cash control

Credit: debtors ledger control / income accounts (rent)

What double entry is required for cash payments?

Debit: expense accounts / credit ledger control

Credit: cash control

What is the purpose of bank reconciliation?

To reconcile the bank statement balance with business records and establish the true bank balance for the financial accounts.

Why night bank statements differ from the cash book?

Timing differences, uncleared lodgements, unpresented checks, bank charges, interest, direct debits, dishonoured cheques

What are unpresented cheques?

Payments record in the cash book but not yet cleared by the bank

What are uncleared lodgements?

Receipts recorded in the cashbook but not yet cleared in the bank

How do you treat bank charges not recorded in the cashbook??

Debit: bank charges expense

Credit: bank

How do you treat dishonoured cheques?

Reverse the receipt:

Debit: trade debtors

Credit : bank

What is the format of a bank reconciliation statement?

Start with bank statement balance and add the uncleared lodgements and deduct unpresented cheques to arrive at the reconciled balance.

What is a control account?

A summary account in the nominal ledger that contains totals of transactions from individual ledgers to reduce postings and act as a check.

Why use control accounts?

To verify accuracy, reduce errors, and reconstruct missing figures when records are incomplete.

What does a debtor ledger control account include?

Debits: opening balance and credit sales

Credits: receipts, discounts allowed, returns and bad debts

What does a creditor ledger control account include?

Credit: opening balance, credit purchases

Debit: payments, discounts received and returns

What does a VAT control account include?

VAT on purchases and sales, payments to HMRC, refunds, adjustments for returns and bad debts.

What is a contra entry?

An adjustment when a business is both a debtor and a creditor to the same trader, offsetting amounts owed and due.

How do you record a contra entry?

Debit: creditors ledger control

Credit: debtors ledger control

What is the purpose of a cash control account?

To establish cash receipts and payments and check whether they have been properly recorded

What does a cash control account include?

Opening cash, receipts, withdrawals, deposits, drawings , closing cash

What does a balancing figure in a cash control account indicate?

Missing or incorrectly recorded transactions

What is a nominal ledger?

The main ledger forming part of the double entry system, including all control accounts

What is a subsidiary ledger?

Individual ledgers for debtors and creditors, not part of the double entry system