ACCA Applied Knowledge · Financial Accounting
Cash in ACCA Financial Accounting: Chapter Guide
Cash covers how you record money in and out of a business and prove the records are right. You keep a cash book and petty cash book, then reconcile the cash book to the bank statement. To solve questions, update the cash book first, then list the timing differences.
What this chapter covers
This chapter is about the cash and bank records of a business. You learn how the cash book and petty cash book record receipts and payments. You then learn how to compare the cash book with the bank statement and explain every difference.
The core idea is simple. The bank statement and the cash book describe the same money from two points of view. They often disagree. Some differences are errors or missing items in your own books. Others are only timing differences, such as cheques not yet cleared. You must tell these apart.
This chapter links to the rest of FA. Cash is a current asset in the statement of financial position. The corrected bank balance feeds into trial balance questions, error correction and suspense accounts, and the preparation of financial statements. Bank and cash movements also appear in the statement of cash flows, so a clean grasp of cash helps there too.
Cash questions are usually short, rule-based and predictable, so they are a good source of safe marks in the 35 two-mark objective test questions of Section A. The same skills also support the longer accounts preparation question in Section B, where a wrong bank balance can spoil a whole statement. Once you learn the method, you can answer fast, and speed on easy questions leaves more time for harder ones.
Cash: topics in the order to study them
- 1Cash Book and Petty Cash BookStart here because you must know how receipts, payments, and petty cash vouchers are recorded before you can check them against anything.
- 2Bank AdjustmentsNext, learn the items that change the cash book, such as bank charges, interest, direct debits, standing orders and dishonoured cheques, so you know which side to adjust.
- 3Bank Reconciliation StatementsFinish with the reconciliation, because it combines everything: you update the cash book for adjustments, then reconcile to the bank statement using timing differences.
How to prepare Cash
Prepare this chapter by learning the method first and then drilling it with short objective-style questions.
- Learn what the cash book is and which entries sit on the debit and credit sides. Debit is money in. Credit is money out.
- Practise the petty cash imprest system: the float is topped up by exactly the amount spent, so the float returns to its fixed level.
- Make a list of bank items that are not yet in your cash book: charges, interest, direct debits, standing orders, direct credits and dishonoured cheques. Say which way each one moves the cash book.
- Make a second list of timing differences: unpresented cheques and outstanding lodgements (deposits not yet credited by the bank). These never change the cash book.
- Always work in two steps: adjust the cash book to get the corrected balance, then reconcile that to the bank statement balance.
- Do timed practice on multiple choice, multiple response and number entry questions. Check each answer by asking whether the final figures agree.
- Review every wrong answer and note whether the slip was direction, sign, or choosing the wrong list.
Common mistakes in Cash
Adjusting the cash book for unpresented cheques or outstanding lodgements.
Fix: Remember that these are timing differences. They only appear in the reconciliation, never in the cash book.
Adding an item that should be subtracted, such as a bank charge or dishonoured cheque.
Fix: Before writing a figure, say aloud whether the business has more or less cash because of it.
Mixing up the bank's view and the business's view of the balance.
Fix: Work from the business's cash book view. A favourable balance in the cash book is a debit; the bank records the same money as a credit in its own books.
Using the wrong starting balance in a reconciliation.
Fix: Correct the cash book first, then reconcile the corrected cash book to the bank statement using only timing differences.
Getting the petty cash reimbursement wrong.
Fix: Under imprest, reimburse the total of vouchers paid out. The box cash plus vouchers should equal the float.
Missing the instruction on multiple response and number entry questions.
Fix: Underline how many answers to select and any rounding or sign requirement before you calculate.
Last-day revision: Cash
- 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.
Cash practice questions
- A company's petty cashier records a $35 payment for stationery and a $20 payment for postage from the imprest float. Which double entry is m…
- At 31 March, the cash book of Delta Ltd shows a bank balance of $4,200 debit. Cheques issued to suppliers of $1,500 have not yet been presen…
- At 30 June, the cash book of Tarn Ltd shows a bank overdraft of $2,150. The bank statement shows a different balance. Comparing the two, the…
- At 31 March, a company's cash book shows a bank balance of $4,200 debit. A bank statement check finds bank charges of $150 not yet recorded …
- A company's bank statement shows an overdrawn balance of $3,000. Unpresented cheques issued to suppliers total $1,200, and deposits not yet …
- At 31 March, Linton Co's cash book shows an overdraft of $2,650. The following are then found: a customer's cheque for $480 recorded in the …
- Which of the following is the correct double entry when a customer's cheque of $500, previously recorded as received and banked, is returned…
- When preparing a bank reconciliation, the cash book shows a debit balance of $6,500. The bank statement shows a direct debit of $400 and a d…
Cash in other exams
The same ground in other exams, if you are preparing for more than one or want another angle on it.
Cash: frequently asked questions
What is the difference between a cash book and a petty cash book?
The cash book records the main receipts and payments, usually through the bank. The petty cash book records small, day-to-day expenses paid in cash. Petty cash is often run on the imprest system with a fixed float.
Why does the bank statement balance differ from my cash book balance?
There are two reasons. The bank may have items your cash book does not yet show, such as charges or direct debits. There can also be timing differences, such as unpresented cheques and outstanding lodgements.
Do I adjust the cash book for unpresented cheques?
No. The cheque is already recorded in your cash book when you write it. It only shows in the bank statement later, so it appears in the reconciliation as a timing difference.
How should I practise this chapter for the computer-based exam?
Use short objective-style questions on reconciliations and adjustments, and time yourself. Focus on getting direction and sign right. Check that the corrected cash book and bank statement agree at the end.