Lesson 11: Cash on Hand and Cash at Bank

Question 1

What is Cash used for?

Answer 1

Cash is used to make payments for assets, services, or liabilities.

Question 2

What are the possible reasons for dishonoured cheques?

Answer 2

-Amount in numbers is different from the amount written in words
-The date written on the cheque is more than 3 months from the date it is presented for payment.
-The payer’s account balance is insufficient to cover the cheque amount

Question 3

Note:
Cheques have a validity period of 3 months after which they will be considered as state/expired and the bank will not pay such cheques

Question 4

Why would firm’s records and bank’s records disagree?

Answer 4

-Difference in timing in the recording of transactions by the firm and by the bank

-Items on the bank statement that have not been entered in the cash book (Bank charges, direct debits, etc.)

-Errors in the records kept by the firm or bank

Question 5

What is a bank reconciliation statement?

Answer 5

A bank reconciliation statement is a statement made out by a business to show that the bank’s records and its own cash records agree even though the figures may be different

Question 6

What are the uses of the Bank Reconciliation Statement?

Answer 6

 Ensures that the difference in the cash at bank balance and bank statement balance is only due to timing.

 It reveals the correct amount of cash in the bank and ensures that the correct balance is shown in the balance sheet.

 The bank reconciliation will highlight any discrepancies between the bank’s and the firm’s records of cash transactions. This allows errors to be detected and corrected.

 If the reconciliation is prepared by somebody other than the cashier (segregation of duties), the risk of fraud or embezzlement of funds is reduced as investigation can be carried out on the long outstanding items.

Question 7

What are the reasons for the Difference in the Cash at Bank account and the Bank Statement?

Answer 7

a) Items appearing in the cash at bank account but not in the bank statement
i. Outstanding deposits
ii. Outstanding/Unpresented cheques

b) Items appearing in the bank statement but not in the cash at bank account
i. Debit Items (from the POV of the bank)
-Payments made directly by the bank on behalf of the firm
-Service charges levied by the bank
-Dishonoured cheques
ii. Credit Items (from the POV of the bank)
-Interest paid by the bank
-Interest/dividend collected by the bank on behalf of the firm
-Amount paid by debtors directly into the account through electronic or telegraphic transfers (TT) etc.