Cash: formula sheet

Key formulas

Cash book sides

Debit = receipts. Credit = payments.

Applies to bank and cash columns. An overdraft is a credit balance.

Discount allowed

Dr Discount allowed (expense) ; Cr Receivables

Shown in the debit discount column. The bank receives the amount net of discount.

Discount received

Dr Payables ; Cr Discount received (income)

Shown in the credit discount column. The bank pays the amount net of discount.

Contra entry

Cash into bank: Dr Bank, Cr Cash. Cash drawn from bank: Dr Cash, Cr Bank

Both entries stay inside the cash book.

Imprest reimbursement

Top-up = total petty cash payments in the period = float − closing petty cash

This holds only if no extra cash was put in or taken out during the period. The top-up is posted Dr Petty cash, Cr Bank.

Petty cash check

Opening float + receipts − payments = closing cash

Closing cash plus vouchers (payments) equals the float. After the top-up, the cash returns to the float.

Reconciliation from bank statement to cash book

Balance per bank statement − unpresented cheques + outstanding lodgements = Corrected cash book balance

Use this when the balances are shown as positive (in hand) amounts. Reverse the signs for an overdraft.

Updating the cash book: bank items not yet recorded

Debit cash book: direct credits, interest received. Credit cash book: bank charges, direct debits, standing orders, dishonoured customer cheques. Cash book errors: debit the cash book if the error understated the balance, credit it if the error overstated the balance.

These are corrected in the cash book, not listed in the reconciliation.

Unpresented cheque

Cheque paid by you, in cash book, not yet on bank statement → deduct from bank statement balance

The bank balance is too high compared with your true position.

Outstanding lodgement

Receipt banked by you, in cash book, not yet on bank statement → add to bank statement balance

The bank balance is too low compared with your true position.

Dishonoured cheque

Dishonoured customer cheque received: Dr Receivables, Cr Bank (cash book)

A customer's cheque was returned unpaid. The earlier receipt is reversed and the debt is owed again.

Bank charges and fees

Dr Bank charges (expense); Cr Bank

Reduces the cash book balance.

Overdraft interest charged by the bank

Dr Finance cost; Cr Bank

Reduces the cash book balance. Use Finance cost for interest, not the bank charges account.

Interest received from the bank

Dr Bank; Cr Interest income

Increases the cash book balance.

Direct debit or standing order paid

Dr Relevant expense or payable; Cr Bank

Same accounting for both. Use the expense account that matches the payment, such as insurance or rent.

Direct credit or bank transfer received

Dr Bank; Cr Receivables (or income)

Customer paid directly into the bank. Credit receivables if it settles an invoice.

Dishonoured cheque from a customer

Dr Receivables; Cr Bank

Reverses the original receipt. The customer owes you again.

Your own cheque to a supplier that bounced or was stopped

Dr Bank; Cr Payables

Reverses your earlier payment. Rare in exams.

Bank errors

No cash book entry

Show only on the reconciliation. Correct the bank balance, not the cash book.

Updated cash book balance

Unadjusted cash book balance + unrecorded bank receipts − unrecorded bank payments (including dishonoured customer cheques)

Include only items the bank has processed but the cash book does not yet show. Use this figure in the statement of financial position as cash or overdraft.

Quick revision

• Cash book debit side is receipts. Credit side is payments.
• A bank overdraft is a credit balance in the cash book.
• Under the imprest system, the top-up equals the petty cash spent.
• Bank charges, interest paid, direct debits and standing orders reduce the cash book balance.
• Interest received and direct credits increase the cash book balance.
• A dishonoured cheque received from a customer reduces the cash book and reinstates the receivable.
• Unpresented cheques are deducted from the bank statement balance, and outstanding lodgements are added, to reach a figure equal to the adjusted cash book balance.
• Timing differences do not need a cash book entry. Missing bank items do.
• The reconciled balance must equal the corrected cash book balance, and that figure goes in the statement of financial position.
• A favourable balance in the cash book is a debit; the bank records the same money as a credit (a liability to the customer) in its own books.

Common mistakes

• Putting discount allowed on the credit side. Fix: Discount allowed is an expense, so it is a debit. Remember: allowed goes with receipts on the debit side.
• Including the discount in the bank column. Fix: The bank column holds only the money actually received or paid. Discount stays in its own column.
• Adjusting the cash book for unpresented cheques or outstanding lodgements. Fix: They are already in the cash book. Use them only in the reconciliation.
• Adding unpresented cheques to the bank statement balance. Fix: Unpresented cheques are still to leave the bank, so deduct them from the bank statement balance. Outstanding lodgements are added.
• Adjusting the cash book for unpresented cheques or outstanding lodgements Fix: These are already in the cash book. Only the bank has not processed them yet. Leave the cash book alone.
• Debiting the bank for a dishonoured cheque Fix: The cheque failed, so the money never arrived. Credit bank and debit receivables.

Exam tips

• In objective test questions, read for the word net. The bank figure is usually after discount.
• For number entry, work only in the bank column and check whether the answer is a debit or an overdraft.
• For multiple response, check each statement on its own. Typical traps are discount side and which book is the book of prime entry.
• Always check that float equals cash held plus vouchers in petty cash questions.
• In multi-task questions, write the ledger posting for the discount totals separately.
• Read the requirement first. Many objective questions ask only for the corrected cash book balance, which never includes timing items.
• In multiple response questions, select the items that need a cash book adjustment, and leave out timing differences.
• In number entry questions, check whether the answer is an overdraft and enter it as the question asks.