Bookkeeping & Accounting All-in-One For Dummies (2015)

Book II

Bookkeeping Day to Day

Chapter 4

Doing Your Banking

In This Chapter

arrow Counting your business’s cash

arrow Finalising the cash books

arrow Reconciling your bank accounts

arrow Posting cash-related adjustments

All business owners – whether the business is a small family-owned shop or a major international conglomerate – periodically like to test how well their businesses are doing. They also want to make sure that the numbers in their accounting systems actually match what’s physically in their shops and offices. After they check out what’s in the books, these business owners can prepare financial reports to determine the business’s financial success or failure during the last month, quarter or year. This process of verifying the accuracy of your books is called checking the books.

The first step in checking the books involves counting the business’s cash and verifying that the cash numbers in your books match the actual cash on hand at a particular point in time. This chapter explains how you can test that the cash counts are accurate, finalise the cash books for the accounting period, reconcile the bank accounts and post any adjustments or corrections to the Nominal Ledger.

Checking the books: Why bother?

You’re probably thinking that checking the books sounds like a huge task that takes lots of time. And you’re right – but checking the books every now and then is essential to ensure that what’s recorded in your accounting system realistically measures what’s actually going on in your business.

Mistakes can be made with any accounting system and, unfortunately, any business can fall victim to theft or embezzlement. The only way to be sure that none of these problems exist in your business is to check the books periodically. Most businesses do this check every month.

Making Sure that the Closing Cash Is Right

Checking your books starts with counting your cash. Why start with cash? Because the accounting process starts with transactions, and transactions occur when cash changes hands to buy things you need to run the business or to sell your products or services. Before you can even begin to test whether the books are right, you need to know whether your books have captured what’s happened to your business’s cash and if the amount of cash shown in your books actually matches the amount of cash you have on hand.

In Book II, Chapter 2, we discuss how a business cashes up the money taken in by each cashier. That daily process gives a business good control of the point at which cash comes into the business from customers who buy the business’s products or services. The process also measures any cash refunds the business gives to customers who returned items.

Producing a snapshot in time

The points of sale and return aren’t the only times that cash comes into or goes out of the business. If your business sells products on credit (see Book II, Chapter 2), bookkeeping staff responsible for monitoring customer credit accounts collect some of the cash from customers at a later point in time. And when your business needs something, whether products to be sold or supplies for various departments, you must pay cash to suppliers and contractors. Sometimes cash is paid out on the spot, but often the bill is recorded in the Trade Creditors (Accounts Payable) account and paid at a later date. All these transactions involve the use of cash, so the amount of cash on hand in the business at any one time includes not only what’s in the cash registers, but also what’s on deposit in the business’s bank accounts. You need to know the balances of those accounts and test those balances to ensure that they’re accurate and match what’s in your business’s books. We talk more about how to do that in the section ‘Reconciling Bank Accounts’, later in this chapter.

So your snapshot in time includes not only the cash on hand in your cash registers, but also any cash you may have in the bank. Some departments may also have Petty Cash accounts, which you count as well. The total cash figure is what you show as an asset named ‘Cash’ in your business’s financial statement, the Balance Sheet. The Balance Sheet shows all that the business owns (its assets) and owes (its liabilities), as well as the capital the owners have in the business. (We talk more about the Balance Sheet and how you prepare one in Book IV, Chapter 2.)

remember The actual cash you have on hand is just one tiny piece of the cash moving through your business during the accounting period. Your cash books contain the full details of the cash that flowed into and out of the business.

Closing the cash books

If you use a computerised accounting system, you don’t have separate cash books: the money received into your business is recorded into the bank accounts. However, you can still check your cash received into the business by running various reports, such as Daybook reports, showing invoices paid on both the Customer and Supplier Ledgers. You can also run Aged Debtors reports to see who still owes you money, and also Aged Creditor reports to see how much money you owe to your suppliers. With Sage, you can run a month-end, which essentially automatically closes your cash books/bank for the period.

Reconciling Bank Accounts

Part of checking out the cash involves checking that what you have in your bank accounts actually matches what the bank thinks you have in those accounts. This process is called reconciling the accounts.

If you’ve done everything right, your accounting records match the bank’s records of how much cash you have in your accounts. The day you close your books probably isn’t the same date as the bank sends its statements, so do your best to balance the books internally without actually reconciling your bank account. Correcting any problems during the process minimises problems you may face reconciling the Cash accounts when that bank statement actually arrives.

You’ve probably reconciled your personal bank account at least a few times over the years, and the good news is that reconciling business accounts is a similar process. Table 4-1 shows one common format for reconciling your bank account:

Table 4-1 Bank Reconciliation

Transactions

Beginning Balance

Deposits

Disbursements

Ending Balance

Balance per bank statement

£

£

£

£

Deposits in transit (those not shown on statement)

 

£

 

£

Outstanding cheques (cheques that haven’t shown up yet)

   

(£)

(£)

Total

£

£

£

£

Balance per cash book or bank account (which should be the same)

     

£

Below we show you an example of a bank reconciliation:

You’ve just received your bank statement in the post. You find that your balance at the bank is £1,200 beginning balance, £4,000 in deposits, £4,300 in payments, and your ending balance is £900. You review the deposits and find that a deposit of £1,000 doesn’t show on the statement. You find that cheques totalling £600 have not yet cleared. The balance in your bank account is £1,300. Does your bank account reconcile to the balance on your bank statement?

Using the bank reconciliation chart, Table 4-2 shows the answer.

Table 4-2 An Example of a Bank Reconciliation

Transactions

Beginning Balance

Deposits

Payments

Ending Balance

Balance per bank statement

£1,200

£4,000

(£4,300)

£900

Deposits in transit (those not shown on statement)

 

£1,000

 

£1,000

Outstanding cheques (cheques that haven’t shown up yet)

   

(£600)

(£600)

Total

£1,200

£5,000

(£4,900)

£1,300

Balance per Cash book or Bank account (which should be the same)

     

£1,300

The bank statement and your bank account do reconcile.

remember After entering all the transactions into your accounts system, the books for the period you’re looking at may still be incomplete. Sometimes, adjustments or corrections must be made to the bank account before it can be reconciled. For example, monthly credit card fees and interest received from the bank may not yet be recorded in your bank account. There may also be standing orders and direct debits that come out of your bank account that need to be entered into your accounts system.

tip The best way to reconcile your bank account is to methodically enter all the cash you’ve received and cheques you’ve paid out using your source documents such as cheque books and paying-in books. Then, you need to work through a copy of your bank statements and see what else needs to be entered.

Looking at a practical way to reconcile your bank account

Following is the method we adopt when we reconcile bank accounts. Most people reconcile the bank account on a monthly basis, so the chances are you have a month’s worth of bank statements in front of you for this task.

Follow these steps:

1.     With your bank statements in front of you, place a tick against all the items already entered into your bookkeeping system, including all cheques and items paid in via paying-in books.

A number of items remain unticked.

2.     Now enter all the remaining entries into your system, ticking them once after you enter them.

These entries include all your electronic receipts and payments, such as direct debits and BACS payments. You should now have a tick placed against all the entries on your bank statement.

3.     Work through each transaction in your cash book and match them against the bank statement as a double-check.

For manual bookkeeping systems, you mark the Cashbook using a tick (or perhaps a B for bank statement). All items that are left on the Cashbook without a tick are items that have not appeared on the bank statement. These items are your un-presented cheques or outstanding lodgements (deposits in transit). You can now easily write up your bank reconciliation, as shown in Table 4-1.

tip When you tick each item in the Cashbook against the bank statement entry, also place a cross against the original tick on the bank statement. You can then see at a glance on the bank statement that all transactions have been entered and also checked against the Cashbook.

remember The same reconciliation process can be applied to credit card statements that the business receives. However, be sure that if you’re using a computerised reconciliation process you correctly enter the credit card balance as a negative figure, because this balance is money owed.

Considering credit card sales

If your business allows customers to buy your goods using a credit card, then you also need to reconcile the statements that you receive from the bank that handles your credit card sales.

You normally receive a statement listing

·        All your business’s transactions for the month

·        The total amount your business sold through credit card sales

·        The total fees charged to your account

If you find a difference between what the bank reports say you sold on credit cards and what the business’s books show regarding credit card sales, you need to play detective and find the reason for the difference. In most cases, the error involves the charging back of one or more sales because a customer disputes the charge. In this case, an adjustment must be made to cash received, to reflect that loss of sale, so that the bank statement and business books match up.

For example, suppose £200 in credit card sales were disputed. The original entry of the transaction in the books looks like this:

 

Debit

Credit

Sales

£200

 

Bank

 

£200

To reverse disputed credit sales recorded in June.

   

This entry reduces the total Sales account for the month as well as the amount of the Cash account. If the dispute is resolved and the money is later retrieved, you can then re-enter the sale when the cash is received.

You also record any fees related to credit card fees as a bank payment. For example, if credit card fees for the month of June total £200, the entry in the books looks like this:

 

Debit

Credit

Credit Card Fees

£200

 

Bank

 

£200

To post credit card fees for the month of June.

   

To post credit card fees for the month of June.

Tracking down errors

Ideally, your balance and the bank’s balance, adjusted by transactions not yet shown on the statement, match. If they don’t, you need to find out why.

·        If the bank balance is higher than your balance, check to ensure that all the deposits listed by the bank appear in the Cash account in your books. If you find that the bank lists a deposit that you don’t have, you need to do some detective work to work out what that deposit was for and add the detail to your accounting records. Also, check to make sure that all cheques you’ve issued have cleared. Your balance may be missing a cheque that should have been listed in outstanding cheques.

·        If the bank balance is lower than your balance, check to ensure that all cheques listed by the bank are recorded in your Cash account. You may have missed one or two cheques that were written but not properly recorded. You also may have missed a deposit that you’ve listed in your Cash account and thought the bank should already have shown as a deposit, but that isn’t yet on the statement. If you notice a missing deposit on the bank statement, make sure that you have your proof of deposit and check with the bank to ensure that the cash is in the account.

·        If all deposits and cheques are correct but you still see a difference, your only option is to check your maths and make sure that all cheques and deposits were entered correctly.

tip Sometimes, you have to decide whether rooting out every little difference is really worthwhile. When the amount is just a few pence, don’t waste your time trying to find the error; just adjust the balance in your books. But when the difference is a significant amount for your business, try to track it down. You never know exactly what accounts are impacted by an error or how that difference may impact your profit or loss.

Using a computerised system

If you use a computerised accounting system, reconciliation is much easier than if you keep your books manually. In Sage 50 Accounts, for example, when you start the reconciliation process, a screen pops up in which you can add the ending bank statement balance and any bank fees or interest earned. Figure 4-1 shows you that screen. In this example, £930 is the ending balance.

image

Figure 4-1: When you start the reconciliation process in Sage 50 Accounts, you indicate the bank’s ending balance and any bank service charges or interest earned on a particular account.

After you click OK, you get a screen that lists all cheques written since the last reconciliation as well as all deposits. Double-click on all the items listed in the top part of your Sage screen that are also shown on your bank statement, as in Figure 4-2. Ensure that the matched balance and the statement balance are the same and the difference is zero (see the bottom right corner of the Sage screen), and then click Reconcile.

image

Figure 4-2: To reconcile cheques using Sage 50 Accounts, double-click all the cheques and deposits that have cleared the account and click Reconcile.

If you enter a Statement Reference in your statement summary, as shown in Figure 4-1, Sage 50 Accounts automatically provides a Bank Reconciliation report, which it saves as a PDF file in the History archive. This report is shown in Figure 4-3. You can also run reports showing un-reconciled items at the month-end.

image

Figure 4-3: After reconciling your accounts, Sage 50 Accounts automatically provides a Bank Reconciliation report.

Have a Go

Your turn! Sharpen your pencil and test yourself on checking the books.

1.     Make a list of all the accounts in your business that you need to reconcile at the end of each accounting period. Remember to include all bank accounts and Petty Cash accounts, as well as any credit card accounts that have been used in the month. (We provide a general answer at the end of this chapter.)

2.     What’s the purpose of a Petty Cash account? List a few typical items that you might pay through petty cash.

3.     If you allow customers to pay by credit card, check your system to ensure that you understand how to account for monies received by the credit card company. Have you got a system in place to be able to identify which customers are paying you?

For example, the credit card company probably just deposits a lump sum from credit card payments into your bank account. You need to ensure that you’ve a method of identifying which customers have paid you via credit card, so that you may update your accounts.

If you don’t have procedures in place, write some now.

4.     When you get your credit card sales statement, you find a total of £225 was charged in fees and you find three chargebacks for customer disputes totalling £165. How do you record this information in your books?

5.     When you get your credit card sales statement, you find a total of £275 in chargebacks from customer disputes and £320 in fees. How do you record this information in your books?

6.     You’ve just received your bank statement in the post. You find your balance at the bank is £1,500 beginning balance, £6,000 in deposits, £6,500 in payments, and your ending balance is £1,000. You review the deposits and find that a deposit of £2,000 does not show on the statement. You find that cheques totalling £1,700 haven’t cleared yet. The balance in your bank account is £1,300. Does your bank account reconcile to the balance on your bank statement?

7.     You’ve just received your bank statement in the post. You find your balance at the bank is £1,800 beginning balance, £7,000 in deposits, £6,500 in payments, and your ending balance is £2,300. You review the deposits and find that a deposit of £1,000 does not show on the statement. You find that cheques totalling £2,500 haven’t cleared yet. The balance in your bank account is £1,200. Does your bank account reconcile to the balance on your bank statement?

8.     Suppose that you can’t reconcile your bank statement. As you review the cheques, you see one written for £2,500 that you haven’t recorded in your books. As you research the cheque, you find that it’s a payment made to Olive’s Office Supplies. How would you record that in the books?

9.     Suppose you can’t reconcile your bank statement and you find that a deposit of £5,300 isn’t recorded. As you research the deposit, you find that the sales receipts weren’t recorded for 15 May. How would you record that in the books?

Answering the Have a Go Questions

1.     The following accounts are normally reconciled:

·        Bank Current account

·        Bank Deposit account

·        Petty Cash account

·        Credit Card accounts

2.     Usually, small cash needs are handled using a petty cash fund. Often, an office manager handles this. You may want to send a memo to your staff to advise them of the typical items of expenditure that are expected to be paid through petty cash. Typical petty cash items include:

·        Tea, coffee, milk

·        Postage

·        Keys cut

·        Small stationery items

·        Sundry cleaning supplies

This list just offers a sample of the kinds of expenditure that may be posted through the Petty Cash account.

3.     Not all companies take payment via credit card from their customers. If yours does, take the time now to reflect on the procedures surrounding the credit card receipts. Can they be improved?

4.     The bookkeeping entry to show the credit card fee is as follows:

 

Debit

Credit

Credit Card Fee

£225

 

Bank

 

£225

 

Debit

Credit

Sales

£165

 

Bank

 

£165

6.     The bookkeeping entry for the disputed sales items is as follows:

The bookkeeping entry to show the credit card fee is as follows:

 

Debit

Credit

Credit Card Fee

£320

 

Cash

 

£320

The bookkeeping entry for the sales adjustment is as follows:

 

Debit

Credit

Sales

£275

 

Cash

 

£275

7.     The bank statement does reconcile to the cheque book. Here’s the proof:

Transactions

Beginning Balance

Deposits

Payments

Ending Balance

Balance per bank statement

£1,500

£6,000

(£6,500)

£1,000

Deposits in transit (those not shown on statement)

 

£2,000

 

£2,000

Outstanding cheques (cheques that haven’t shown up yet)

   

(£1,700)

(£1,700)

Total

£1,500

£8,000

(£8,200)

£1,300

Balance per Bank account or Cashbook (which should be the same)

     

£1,300

8.     The bank statement doesn’t reconcile to the bank account. A difference is shown of £400. You must review the bank account for possible errors. Here’s the proof:

Transactions

Beginning Balance

Deposits

Payments

Ending Balance

Balance per bank statement

£1,800

£7,000

(£6,500)

£2,300

Deposits in transit (those not shown on statement)

 

£1,000

 

£1,000

Outstanding cheques (cheques that haven’t shown up yet)

   

(£2,500)

(£2,500)

Total

£1,800

£8,000

(£9,000)

£800

Balance per Bank account or Cashbook (which should be the same)

     

£1,200

9.     In the situation where the bank reconciliation doesn’t balance, try the following:

·        Check that you’ve ticked off every item on the bank statement and matched off each entry to the Cashbook.

·        Ensure that you’ve entered the correct bank statement balance.

·        Check your maths on the reconciliation.

·        Check that you’ve entered all the items into your accounts system correctly.

Check all these things, and you’ll most likely have found the problem.

10.  You need to record the office supplies expense and you need to reflect the use of cash.

If using a computerised accounting system, you enter the invoice as a purchase invoice, to record the liability. Then you need to pay the invoice, using the bank account. The system does the double entry for you, as shown below:

The bookkeeping for the initial entry of the invoice is as follows:

 

Debit

Credit

Office Supplies Expenses

£2,500

 

Creditors Ledger

 

£2,500

You then need to process the payment, and the bookkeeping is as follows:

 

Debit

Credit

Creditors Ledger

£2500

 

Bank

 

£2500

11.  You need to record the missing sales as follows:

 

Debit

Credit

Bank

£5,300

 

Sales

 

£5,300