Topic 10

  • A cash budget is a financial planning tool used to help a business plan for its future cash needs by estimating expected revenue and expenses over a specific period.

  • A bank reconciliation is a process used to ensure the accuracy of financial records by comparing a business's internal records with its bank statement.


A cash budget is used to assist a business in planning for its future cash needs by estimating expected revenue and estimated expected expenses over a specific period.  A bank reconciliation, however, ensures the accuracy of financial records by comparing the businesses internal records with the bank statement. 


Q: What is a cash budget?
A cash budget is a financial planning tool that estimates a business's expected cash receipts (inflows) and cash payments (outflows) over a specific period, in order to forecast the business's cash position at the end of that period. It focuses specifically on cash flow rather than overall profitability.

Q: Why are cash budgets important?
Cash budgets are important because they help businesses avoid insolvency, plan for major expenses, manage how much credit to extend to customers, identify periods when cash may be low, support loan applications, and make informed decisions about asset purchases. Without a cash budget, a business may be surprised by cash shortfalls that could lead to an inability to pay suppliers, staff, or other critical obligations.

Q: How are cash budgets created?
Cash budgets are created in three steps: (1) determine the time period the budget will cover; (2) decide on the desired ending cash position; (3) forecast all expected cash receipts and cash payments for the period. Forecasts are based on past business performance, known obligations, growth targets, and seasonal trends.

Q: What items are included in a cash budget?
Cash receipts include: cash sales (e.g. $15,000 in retail sales this month), collections of accounts receivable (e.g. $8,000 collected from customers who bought on credit last month), and other income (e.g. $200 bank interest). Cash payments include: inventory/raw materials (e.g. $7,000 for stock), wages (e.g. $5,200 for staff), marketing (e.g. $500 for social media ads), selling expenses (e.g. $1,500 for travel), administrative expenses (e.g. $500 for utilities and rent), plant and equipment (e.g. $3,000 for machinery servicing), and other payments (e.g. $600 for one-off costs).

Q: Solve for A through G in the cash budget below.

Given information:

  • June inventory = 20% more than May amount ($7,000 × 1.20 = $8,400)

  • June plant and equipment = $2,000

Workings:

A — Total Cash Receipts (June):
Cash sales + Accounts receivable = $17,000 + $6,500 = $23,500

B — Inventory (June):
$7,000 × 1.20 = $8,400

C — Plant and equipment (June):
Given = $2,000

D — Total Cash Payments (May):
$7,000 + $5,200 + $3,000 = $15,200

E — Total Cash Payments (June):
$8,400 + $6,000 + $2,000 = $16,400

F — Cash surplus/(deficit) (June):
Total Cash Receipts − Total Cash Payments = $23,500 − $16,400 = $7,100

G — Ending Cash Balance (June):
Cash surplus + Beginning cash balance = $7,100 + $17,800 = $24,900

Completed Cash Budget:

Item

May

June

Beginning cash balance

$10,000

$17,800

Cash Receipts:



Cash sales

$15,000

$17,000

Accounts receivable

$8,000

$6,500

Total Cash Receipts

$23,000

A = $23,500

Cash Payments:



Inventory

$7,000

B = $8,400

Wages

$5,200

$6,000

Plant and equipment

$3,000

C = $2,000

Total Cash Payments

D = $15,200

E = $16,400

Cash surplus/(deficit)

$7,800

F = $7,100

Ending cash balance

$17,800

G = $24,900

Bank Reconciliations

Definition: A bank reconciliation (or "bank rec") is the process used to ensure that a business's internal financial records match the transactions shown on its bank statement. It is a key part of maintaining accurate accounting records and sound financial management.

While theoretically the two should always match, discrepancies are common — caused by timing delays, data entry errors, or transactions that appear in one set of records but not the other.

Why Are Bank Reconciliations Important?

Bank reconciliations serve two purposes:

  1. To verify the accuracy of the business's own financial records

  2. To confirm that the bank's records are also accurate

Regular bank reconciliations ensure the business has a clear and accurate view of its cash position, support informed financial decision-making, prevent errors from going unnoticed, reduce the risk of fraud, and are required before end-of-year financial reporting. Without regular reconciliations, errors accumulate and make it very difficult to prepare accurate financial statements.

What Causes Discrepancies?

A discrepancy occurs when a transaction appears in one set of records but not the other, or appears in both but with different amounts. Common causes include:

  • Timing delays — a payment made to a supplier hasn't yet cleared the bank; an EFTPOS transfer appears in the business records before the bank processes it

  • Unrecorded transactions — a bank fee appears on the statement but hasn't been entered in the business's accounting system

  • Duplicate payments or receipts — a transaction recorded twice in one set of records

  • Incorrect amounts — data entry errors such as an extra zero or misplaced decimal point

  • International payments — processing delays due to currency conversion and overseas transfer times

  • Payments to incorrect accounts — funds transferred to or from the wrong account

  • Fraud or unauthorised transactions — suspicious transactions appearing on the bank statement but not in business records

How to Prepare a Bank Reconciliation (Bank Section)

The bank reconciliation statement has two sections: the Bank section (adjustments to the bank's records) and the Book section (adjustments to the business's own records). This unit focuses only on the Bank section.

Steps:

  1. Identify outstanding items (transactions not on the bank statement) — categorised as either outstanding deposits or outstanding withdrawals

  2. Start with the bank statement balance as at the reconciliation date

  3. Add any outstanding deposits (amounts the business recorded but the bank hasn't processed yet)

  4. Deduct any outstanding withdrawals (amounts the business paid out but the bank hasn't processed yet)

  5. Calculate subtotals

  6. State the adjusted bank balance

Format:

Company Name
Bank Reconciliation Statement
For the month ending [date]

Beginning Bank Balance as at [date]          $XXX.XX

Add: Outstanding Deposits
  [date] Description                 $XX.XX   $XX.XX

                                              $XXX.XX

Less: Outstanding Withdrawals
  [date] Description                 $XX.XX
  [date] Description                 $XX.XX   $XX.XX

Adjusted Bank Balance                         $XXX.XX

Worked Example — Company A (from topic notes):

Bank statement balance 31 December: $24,594.72

  • Outstanding deposit (cash deposit not yet processed): +$400

  • Outstanding withdrawal (overseas payment to BCD Ltd not yet processed): -$320

  • Outstanding withdrawal (ATO duplicate refund to be reversed): -$500

Company A
Bank Reconciliation Statement
For the month ending 31 December 20XX

Beginning Bank Balance as at 31 Dec 20XX              $24,594.72

Add: Outstanding Deposits
  31/12  Pending deposit                    $400          $400.00
                                                       $24,994.72

Less: Outstanding Withdrawals
  31/12  Pending overseas payment – BCD Ltd $320
  30/12  Rectifying duplicate refund – ATO  $500          $820.00

Adjusted Bank Balance                                  $24,174.72

ANSWERED QUESTIONS — Bank Reconciliations

Q: What is a bank reconciliation?
A bank reconciliation is the process of comparing a business's internal financial records with its bank statement to ensure they agree. Where discrepancies exist, the reconciliation identifies and explains them so that both sets of records are accurate and up to date.

Q: Why are bank reconciliations important?
Bank reconciliations are important because they verify the accuracy of both the business's own records and the bank's records, ensure the business has a reliable view of its true cash position, help detect errors and fraud early, and are a mandatory step before preparing end-of-year financial statements. Without regular reconciliations, errors can accumulate and become very difficult to unwind.

Q: Prepare a bank reconciliation for Chris's Furniture House — 30 April 20XX.

Information:

  • Bank statement balance 30 April: $12,542

  • Outstanding deposit: $8,225 (weekly cash deposit stored at Chris' house, not yet banked)

  • Outstanding withdrawal: $2,967 (electronic transfer to BNN Ltd, not yet on bank statement)

Workings:

  • Add outstanding deposit: $12,542 + $8,225 = $20,767

  • Deduct outstanding withdrawal: $20,767 − $2,967 = $17,800

Chris's Furniture House
Bank Reconciliation Statement
For the month ending 30 April 20XX

Beginning Bank Balance as at 30 April 20XX                $12,542.00

Add: Outstanding Deposits
  4/04  Weekly cash deposit (held at premises) $8,225       $8,225.00
                                                           $20,767.00

Less: Outstanding Withdrawals
  30/04  Electronic transfer – BNN Ltd         $2,967       $2,967.00

Adjusted Bank Balance                                      $17,800.00

Adjusted bank balance as of 30 April = $17,800.00

Q: Prepare a bank reconciliation for The Cheese Emporium — 31 December 20XX.

Information:

  • Bank statement balance 31 December: $4,331.89

  • Bank erroneously deposited $4,000 (two deposits of $2,000) when only $2,000 was intended. The reversal of the extra $2,000 is pending → outstanding withdrawal of $2,000

  • Electronic transfer to Petit Brie Ltd for $1,500 not yet on bank statement → outstanding withdrawal of $1,500

  • Weekly deposit of $1,247.20 left in safe, not banked → outstanding deposit of $1,247.20

Workings:

  • Add outstanding deposit: $4,331.89 + $1,247.20 = $5,579.09

  • Deduct outstanding withdrawals: $5,579.09 − $2,000 − $1,500 = $2,079.09

The Cheese Emporium
Bank Reconciliation Statement
For the month ending 31 December 20XX

Beginning Bank Balance as at 31 December 20XX             $4,331.89

Add: Outstanding Deposits
  31/12  Weekly deposit (held in safe, not banked) $1,247.20  $1,247.20
                                                            $5,579.09

Less: Outstanding Withdrawals
  31/12  Reversal of duplicate ATO deposit – Bank error  $2,000.00
  30/12  Electronic transfer – Petit Brie Ltd            $1,500.00   $3,500.00

Adjusted Bank Balance                                       $2,079.09

Adjusted bank balance as of 31 December = $2,079.09