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The cash book and the bank reconciliation

A running balance of every payment in and out, backed by invoices and receipts, and a reconciliation that sorts every difference from the bank statement into timing, items to enter, and errors.

Paper packet. Every task here also exists on screen, where it is checked automatically; answers written on paper are not assessed by Nydus. When you are back at a device, enter your answers there.

1. What you will learn

You will keep a cash book to its running balance, match invoices against receipts, adjust a bank statement for timing, enter what the bank has done that the book does not show, and find the error left over.

2. What you already have

You know that cash is money that has moved, and that a sale invoiced is not yet cash. You have read a month's cash from a forecast and from a statement. This lesson is about where those figures come from: the record the owner keeps of every movement, and the check that keeps it true.

3. Words this lesson uses

4. Two records of one account

Corner Bean keeps a cash book: one line for every payment in or out, in date order, with the balance carried down after each.

Every line points at a document: a paying-in slip, the roaster's bill, the Town Hall's invoice, the lease. Those are the evidence; the cash book is the list.

The bank keeps its own record of the same account, the statement. At the end of the month the two should describe the same money, but on the day they rarely match, for three kinds of reason:

1. Timing. A payment Alexa has made is not yet on the statement, or money she paid in has not yet been credited. It will clear by itself.
2. Missing from the book. The bank has taken a charge or a card fee, or a customer has paid straight into the account, and the cash book does not yet show it. It is entered.
3. Errors. One record is simply wrong. It is found and corrected.

The reconciliation is the check that every difference is one of the three:

$$\text{statement} - \text{unpresented} + \text{uncredited} = \text{cash book, once corrected}$$

5. The method, step by step, and how to check it

Check off both records. Go down the bank statement and check off each line that matches a line in the cash book, and check off the cash-book line too. What is left unchecked on either side is the list of differences.

Unchecked on the statement. These are things the bank has done that the cash book does not show: charges, interest, card fees, automatic payments nobody wrote down, customers paying straight in. Each is entered in the cash book, with its document if there is one, and the corrected balance worked out.

Unchecked in the cash book. These are almost always timing: checks not yet cashed, card takings not yet settled, money paid in on the last day. They are not entered anywhere; they are listed on the reconciliation and adjusted onto the statement's balance.

Compare. The adjusted statement and the corrected cash book should now be the same figure. If they are, the balance is true and can be carried forward.

Check the reconciliation next month: every timing item listed this month should appear on next month's statement. One that does not — a check still uncashed after weeks, takings that never arrived — is no longer timing, and needs asking about.

6. Errors, and how they show themselves

When a difference is left after the timing items and the bank's own entries, one record is wrong. Three errors cover most of them.

Omission. A payment or receipt that never reached the cash book. The difference is exactly that amount, so look for a statement line of that size.

Double entry of one item. A payment written into the cash book twice. The difference is again exactly that amount.

Transposition. Two digits swapped: 540 written as 450, 84 as 48. The difference is always divisible by nine — 90 and 36 here — which is a quick test worth knowing. The quotient tells how far apart the two digits were: 90 ÷ 9 = 10 means neighboring digits one apart in the tens and hundreds, as in 540 and 450; 36 ÷ 9 = 4 means digits four apart in the units and tens, as in 84 and 48.

The wrong direction. A payment entered as a receipt, or the other way round, puts the book out by twice the amount. So when a difference is left, halve it and look for a line of that size too.

7. Invoices and receipts: the records behind the book

The cash book lists money; the documents prove it. For money coming in, each sale on credit starts with an invoice: a number, a date, who it is to, what was supplied, the amount and when it is due. The invoices sent and not yet paid are the list of money owed — the receivables the course began with — and a receipt in the cash book closes an invoice.

For money going out, each payment needs its supplier's bill or a register receipt, filed so that it can be found again from its cash-book line. Tax authorities in most countries expect a business to keep these records for several years, and the rules for how long are published by the tax authority itself; an owner looks them up rather than guesses.

A good habit is to number every invoice in sequence and write the number on the cash-book line when it is paid. Then the question who still owes us? is answered by the invoices with no cash-book line.

8. Card takings, fees and the net figure

Card payments are the commonest source of confusion between a small business's book and its statement, because the money arrives later and smaller than the sale. A customer taps a card for a 4.50 coffee on Saturday; the card-machine provider settles the day's takings a day or two later, often in one lump for several days, and takes its fee either from each settlement or in one charge at the month end.

There are two honest ways to record this, and the reconciliation only works if the owner picks one and keeps to it. Either enter the full takings as a receipt and the provider's fee as a separate payment — which keeps the fee visible as a cost, and is what most accountants prefer — or enter only what actually lands in the account. Mixing the two, gross one week and net the next, leaves differences the size of a few days' fees scattered through the month.

Takings settled after the month end are the classic timing item: the sales happened on the 30th and 31st, the cash book shows them, and the statement shows them on the 2nd of next month.

9. Petty cash

Many businesses also keep a small float of notes and coins for small purchases — milk from the corner shop, stamps, a taxi. It is a second, tiny cash book: a fixed float, a slip for every purchase, and a top-up from the bank equal to the slips spent. At any moment the notes in the tin plus the slips should equal the float, which makes it the simplest reconciliation of all. A tin that comes up short with no slip to explain it is found the same week, while someone still remembers the purchase, rather than at the year end when nobody does.

10. How often, and with what

A reconciliation is quick when it is monthly and miserable when it is yearly, because timing items and errors pile on top of each other. Many small businesses now keep the cash book in accounting software that reads the bank's feed and suggests a match for each line; the owner's job shrinks to confirming matches and explaining what is left. The method is the same, and so is the reason: the figure every other lesson in the course uses — the cash at the month end — is only as good as this check.

11. In the world: the café that thought it had 2,100 more

A café owner kept her cash book in a spreadsheet and checked it against the bank only when her accountant asked, once a year. In the spring she planned a new coffee machine on the strength of a balance of 6,400 in the book. The bank said 4,300.

Her accountant sat down with twelve statements. Most of the gap was the card-machine provider's fees, about 110 a month, taken by automatic payment and never written into the book: 1,320 over the year. A further 270 was two bank charges. That left 510, and 510 divides by nine to 56.67 — not exactly, so not a swapped pair. It turned out to be a supplier's payment of 255 that had been entered as a receipt: the book had added it instead of taking it away, an error of twice 255.

Corrected, the book showed 4,300 and matched the bank. The coffee machine waited a quarter. From then on she reconciled on the first Monday of each month, which took about twenty minutes, entered the card fees as they happened, and her monthly review started from a balance she knew was true.

12. In the world: why lenders and tax authorities ask for records

A bank considering a loan, and a tax authority checking a return, both start from the same place: the business's records of money in and out and the documents behind them. A cash book that reconciles to the bank every month is the simplest evidence that the rest of the figures can be trusted.

13. Where this goes wrong

The bank statement is the cash book. It is the bank's record, and it lags behind what the owner has already done.

A difference means someone made a mistake. Most differences are timing, and clear by themselves.

Timing items go into the cash book. They are already in it; they adjust the statement.

If the totals match, the book is right. Two errors can cancel; check line by line.

14. Corner Bean's first week of May

1. Open with the balance brought forward.

   $1400$

   From April's reconciled cash book.

2. Add the weekend takings.

   $1400 + 380 = 1780$

   A receipt raises the balance.

3. Take off the roaster.

   $1780 - 620 = 1160$

   A payment lowers it.

4. Add the Town Hall's payment of invoice 114.

   $1160 + 240 = 1400$

   Mark invoice 114 as paid.

5. Take off the rent.

   $1400 - 900 = 500$

   The book's balance at the week's end.

15. Fixit Mobile's June reconciliation

1. Read the two balances.

   $\text{book } 2150; \quad \text{statement } 2280$

   They differ by 130.

2. Check off the lines and list the differences.

   $\text{charge } 15; \ \text{unpresented } 320; \ \text{uncredited } 175$

   Everything else matches.

3. Enter the bank's charge in the book.

   $2150 - 15 = 2135$

   The corrected cash book.

4. Take the unpresented payment off the statement.

   $2280 - 320 = 1960$

   It will still leave.

5. Add the uncredited takings.

   $1960 + 175 = 2135$

   They will still arrive.

6. Compare the two figures.

   $2135 = 2135$

   Reconciled; carry 2135 forward.

16. Long Row Gardens' September, with an error

1. Read the two balances.

   $\text{book } 1890; \quad \text{statement } 1650$

   They differ by 240.

2. List the timing items.

   $\text{unpresented } 280; \ \text{uncredited } 430$

   No bank charges this month.

3. Adjust the statement.

   $1650 - 280 + 430 = 1800$

   Still 90 short of the book.

4. Find the difference left.

   $1890 - 1800 = 90$

   Not timing: an error.

5. Divide it by nine.

   $90 \div 9 = 10$

   Look for two swapped digits.

6. Find the line.

   $\text{seed order of } 540 \text{ entered as } 450$

   The book understated a payment by 90.

7. Correct the book and compare.

   $1890 - 90 = 1800$

   Reconciled.

17. Your turn: book 3100 with a 20 charge to enter; statement 3350; 450 unpresented; 180 uncredited

1. Correct the cash book.

   $3100 - 20 = 3080$

   The bank's charge goes in.

2. Adjust the statement.

   $3350 - 450 + 180 = 3080$

   Less unpresented, plus uncredited.

3. Your turn: work this step out. Its working is at the end of the packet.

   Compare the two figures.

18. Guided practice

Corner Bean's cash book for the first week of May opens with $800$ dollars in the account. On the 2nd the weekend takings of $500$ are paid in; on the 3rd the roaster is paid $790$; on the 5th the Town Hall pays an invoice of $120$; on the 6th the rent of $760$ goes out. Fill in the running balance after each entry, in dollars, with a minus sign below zero.

19. Guided practice

Complete the worked solution: Long Row Gardens' cash book shows $1820$ dollars at the end of April. The statement shows $1915$. The bank took a charge of $5$ that is not in the cash book, a payment of $230$ is not yet on the statement, and $130$ paid in on the 30th has not yet been credited. Reconcile the two.

1. Take the bank's charge off the cash book.

   $1820 - 5 =$ _k

   The bank has done it; the book must show it.

2. Take the unpresented payment off the statement.

   $1915 - 230 =$ _m

   It will still leave the account.

3. Add the uncredited takings.

   $(\text{statement less payment}) + 130 =$ _j

   They will still arrive.

4. Compare the two results.

   $\text{corrected book} = \text{adjusted statement}$

   Every difference is explained, so the balance can be trusted.

5. Carry the corrected balance forward.

   $\text{May opens at the corrected figure}$

   Next month's reconciliation starts from a true balance.

20. Guided practice

Fixit Mobile's bank statement shows $1710$ dollars at the end of June. A payment of $450$ to the parts supplier, made on the 29th, is in the cash book but not yet on the statement, and the $180$ of takings paid in on the 30th has not yet been credited. What should the cash book show, in dollars?

Answer:

21. Practice

Five differences Dan found between Fixit Mobile's cash book and the bank statement at the end of March. Match each to what it is.

22. Practice

At the end of September a café's cash book shows $3180$ dollars and its bank statement $2840$. A payment of $180$ has not yet reached the statement and $430$ of takings has not yet been credited. The only other difference is one payment entered wrongly in the cash book. By how many dollars does the cash book overstate the balance?

Answer:

23. Practice

Long Row Gardens sent three invoices to restaurants in March: $200$, $330$ and $390$ dollars. By the end of the month the first had been paid in full and the second in part, $200$ of it. Fill in the month's invoice record, in dollars.

24. Somewhere new

A mobile dog groomer's cash book shows $3030$ dollars at the end of the month and her bank statement $2715$. The bank took a fee of $25$ that is not in the cash book; a payment of $190$ for shampoo is not yet on the statement; $300$ paid in on the last day is not yet credited. Fill in her reconciliation, in dollars.

25. Lesson test

Lesson test: one question per skill, one attempt each, no hints. Your answers are checked when you submit.

26. Test question

Corner Bean's cash book shows $3160$ dollars at the end of the month. The statement shows two things the cash book does not: a bank charge of $15$, and $580$ paid straight into the account by a catering client. What should the corrected cash book show, in dollars?

Answer:

27. What you can do now

You can reconcile a cash book with the bank and say why each difference exists. Tell someone why a difference that divides by nine is worth a second look. Next: a month's profit when the money and the work fall in different months.

Working for the steps left to you

17. Your turn: book 3100 with a 20 charge to enter; statement 3350; 450 unpresented; 180 uncredited, step 3