Cash and Bank Transactions, Including Petty Cash
The cash book
The cash book records cash and bank transactions and is both a book of original entry and a ledger account. It usually has a cash column and a bank column, with receipts on the debit side and payments on the credit side. The bank column is a copy of the firm's records; the bank statement is the bank's record. Differences are explained by a bank reconciliation statement.
Bank reconciliation
Adjust the cash book for items the firm has not recorded: bank charges, interest, standing orders, direct debits and dishonoured cheques. Then reconcile using items on the statement but not in the cash book: unpresented cheques and uncredited deposits. Updated cash book balance ± these items = bank statement balance.
Petty cash
The imprest system keeps a fixed float. Vouchers support every payment, and the float is restored by a cheque for the amount spent. The petty cash book is analysed into expense columns.
Traps to watch
Do not put bank charges in the reconciliation statement - they belong in the cash book first. Remember unpresented cheques reduce the statement balance when starting from the cash book. Also, petty cash payments are always supported by vouchers, and the reimbursement equals the total spent, not the float.
Rule of thumb
"Cash book first, then reconcile." Adjust the cash book, then add uncredited deposits and deduct unpresented cheques to reach the statement balance.
Worked example
Cash book balance $500. Unpresented cheques $80, uncredited deposits $120. Expected statement balance = 500 + 120 − 80 = $540.