ACCT1001 · Financial Accounting 1
Cash and Bank Reconciliation
Cash is the most liquid and most fraud-prone asset, so this topic runs from internal controls, through the bank reconciliation set-piece, to the Statement of Cash Flows. Internal controls — separation of duties, the petty-cash imprest system, daily banking — protect cash and are examinable as short-answer points. The centrepiece is the bank reconciliation: the cash ledger balance and the bank statement balance rarely agree, so you reconcile them by adjusting each side for items it has not yet recorded — outstanding (unpresented) cheques and deposits in transit on the bank side; bank fees, interest, dishonoured cheques and errors on the book side. Only the book-side items generate adjusting journal entries. The chapter closes with the Statement of Cash Flows under AASB 107 by the direct method, classifying cash flows into operating, investing and financing activities. You must be able to prepare a bank reconciliation, write the resulting adjusting entries, and classify and present cash flows.
What this chapter covers
- 016.1 What counts as 'cash' (AASB 107)
- 026.2 Internal controls over cash & the petty-cash imprest system
- 036.3 The bank reconciliation set-piece
- 046.4 Bank-side items: outstanding cheques & deposits in transit
- 056.5 Book-side items & the adjusting entries they require
- 066.6 The Statement of Cash Flows (AASB 107) by the direct method
Worked example: a bank reconciliation and its adjusting entries
- +2Adjust the bank balance for items the bank hasn't processed: $5,150 − $620 outstanding cheques + $400 deposit in transit = $4,930.
- +2Adjust the book balance for items the firm hasn't recorded: $4,800 − $30 fees + $160 interest = $4,930.
- +1Confirm they agree: both adjusted balances are $4,930 — the reconciliation balances.
- +1Identify the journal entries: only the book-side items need entries — Dr Bank Charges $30 / Cr Cash; Dr Cash $160 / Cr Interest Revenue. Outstanding cheques and the deposit in transit need no entry (the bank will catch up).
Key terms
- Internal control
- The policies and procedures that safeguard assets and ensure reliable records — for cash, the key controls are separation of duties (the person who handles cash does not also record it), daily banking, and the petty-cash imprest system. They reduce the opportunity for error and fraud.
- Petty-cash imprest system
- A fixed-float system for small cash payments: a set amount of cash is held, and it is topped back up to that fixed float by reimbursing the exact total of the vouchers spent. The reimbursement entry records the expenses; the petty-cash account itself stays at its fixed imprest amount.
- Outstanding (unpresented) cheque
- A cheque the firm has written and recorded but that the payee has not yet presented to the bank, so it has not cleared the bank statement. It is a bank-side reconciling item (deducted from the bank balance) and needs no journal entry — the bank will process it in time.
- Deposit in transit
- Cash the firm has received and recorded but that has not yet appeared on the bank statement. It is a bank-side reconciling item (added to the bank balance) and requires no journal entry; like an outstanding cheque, it is a timing difference that the bank will catch up on.
- Statement of Cash Flows
- A statement (AASB 107) that classifies the period's cash movements into operating, investing and financing activities. The direct method lists actual cash receipts and payments from operations. It explains the change in the cash balance and complements the accrual-based income statement.
Cash and Bank Reconciliation FAQ
Which reconciling items need a journal entry and which do not?
Only the book-side items need entries — the things the bank knew about but the firm had not yet recorded, such as bank fees, interest earned, dishonoured cheques and automatic payments. Bank-side items (outstanding cheques and deposits in transit) are timing differences the bank simply hasn't processed yet, so they reconcile the balances but require no journal entry; they clear themselves in the next period.
Why don't the cash ledger and the bank statement agree?
Because of timing and recording differences. Some items the firm has recorded but the bank has not yet processed (outstanding cheques, deposits in transit), and some items the bank has recorded but the firm has not yet learned about (fees, interest, dishonoured cheques, direct debits). The reconciliation adjusts each side for the items it is missing; when both adjusted balances match, the cash figure is verified.
How does the petty-cash imprest system work?
A fixed float of cash is set aside for small payments. As money is spent, vouchers replace the cash, so float plus vouchers always equals the fixed imprest amount. When the cash runs low, the fund is reimbursed back up to the float, and that reimbursement entry records all the expenses at once (Dr the various expenses / Cr Cash). The petty-cash account balance itself never changes — that fixed amount is what makes it controllable.
What is the difference between the direct and indirect methods for cash flows?
Both produce the same net cash from operating activities, but they present it differently. The direct method lists actual operating cash receipts and payments (cash from customers, cash paid to suppliers and employees). The indirect method starts from profit and adjusts for non-cash items and working-capital changes. ACCT1001 focuses on the direct method for the operating section under AASB 107.
Exam move
Memorise which side of the bank reconciliation each item belongs to and whether it needs a journal entry — this is the whole game. Bank-side items (outstanding cheques, deposits in transit) adjust the bank balance and need no entry; book-side items (fees, interest, dishonoured cheques, errors) adjust the book balance and each generates an adjusting journal. Lay the reconciliation out in two columns, drive both to the same adjusted figure, then write only the book-side entries. Have the cash internal controls ready as crisp short-answer points (separation of duties, imprest petty cash, daily banking), and practise classifying cash flows into operating, investing and financing for a direct-method Statement of Cash Flows.
