Chapter 5: Cash and bank

Question 1

What is a bank?

Answer 1

a licensed financial institution where the public can deposit and borrow money. A bank’s services include safekeeping savings deposits and providing loan facilities.

Question 2

3 types of banking institutions

Answer 2

• retail banks
• investment banks,
• central banks

Question 3

Retail banks offer…& services are…

Answer 3

offer a wide array of services for individuals and businesses alike.

Their services to clients include (not exhaustive):
- providing individuals or businesses with bank accounts to deposit money
- issuing loans, overdraft facilities or credit cards facilities
- making payments to organisations in other countries
- supplying financial insurance

Question 4

Investment bank

Answer 4

is part of corporate or commercial banking that provides services for a fee. Investment banks usually focus on businesses instead of individual clients.

Their services to clients include (not exhaustive):
- providing advisory services on stock market fluctuations and mergers and acquisitions
- trading financial instruments such as bonds, derivatives, and shares for clients or profit.
- Arranging capital raising and initial public offering (IPO) for corporate clients

Question 5

A central bank

Answer 5

is an institution that exists within a country to manage a country’s money supply and ensure financial stability. Central banks provide financial services for their government and other commercial banking systems.

Central banks oversee other commercial banking institutions and act as ‘the bankers’ bank’ by lending banks money if they need a short-term loan.

A country’s central bank implements the government’s monetary policy and sets the currency rate on a particular day.

The Bank of England is the United Kingdom’s (UK) central bank, while the Federal Reserve is for the United States of America (USA).

Question 6

Types of business bank accounts

Answer 6

Current accounts, Savings accounts, Overdraft account

Question 7

Current Accounts

Answer 7

A business may hold a current account in a bank, which facilitates receipts and payments for business activities.

A current account pays a low rate of interest or none at all. Thus, keeping savings or large amounts of money is not advisable.

Question 8

Savings accounts

Answer 8

A business usually keeps its surplus funds (any extra money) in a savings account. A savings account pays a higher interest than a current account.

Question 9

Overdraft account

Answer 9

An overdraft provides access to cash for short-term needs with interest charged on balance owed.

The maximum available funds in the overdraft account and applicable bank charges are agreed upon with the bank before the issue of the overdraft facility.

Overdraft balances are often repayable on demand, which might occur if the bank decides that the business’s default risk is unacceptable.

Question 10

Cash payments.
There are different ways a business can receive money from customers and make payments to our suppliers, such as:
- cash payments
- cheque payments
- EFTPOS payments - credit or debit card
- Electronic Bank Transfers - standing order, direct debit or direct credit

Answer 10

Customers may pay for goods or services of a business by cash. A business may also pay their pay suppliers similarly for any purchases made

Question 11

Cash receipt. a RECEIPT is

Answer 11

a financial document that confirms a cash receipt/payment has been made in exchange for goods or services.

A business may prescribe different types of cash receipts depending on the nature of the transaction, such as:

A Till receipt
- is generated from the cash register. A till with a paper roll will print individual receipts after successful payment.
At the start of the day, the cash register will contain a float amount. The float is used to give the customers change.

A manual receipt
- is a pre-printed template form that the seller fills up by pen once payment is successful. The pre-printed receipt form can be bought from most stationary shops.

Question 12

Cash payment security measures
When receiving a cash payment, a business should:

Answer 12

• Cheque if the banknote received is genuine or fake using a fake currency detection machine
• Store excess cash in a safe during the day. Only leave the amount needed for business operations in the till (cash register).
• A SAFE is a large storage box that protects valuable items such as cash against theft. A safe kept in an office should be lockable and have limited access. To open the safe, a unique code or a key is needed
• Deposit the excess cash in the bank at the end of each day so that only small amounts of money are kept on the business premises.
  When depositing cash at a bank, ensure the time and route taken to the bank each day is varied to deter potential thieves from predicting movements.
• If possible, more than one person should be sent to the bank. Larger businesses can arrange for security companies to collect the cash directly from their building to the bank.

The cash deposits will be accompanied by filling a PAYING-IN SLIP from the paying-in book provided by the bank. The paying-in slip confirms the amount deposited into the bank account.

Question 13

Cheque payment. A cheque is..

Answer 13

a written instruction from the drawer/payer to their bank to pay the payee a sum of money from the drawer’s account.

The Bank provides each business bank account with a cheque book. Cheques are individually detached, and a cheque stub is left in the book. The cheque stub is a supporting document as it contains details of the payment, such as the payee’s name, the date and the amount paid.

A business may receive or make payments using cheques

Question 14

Cheque Requisition Form

Answer 14

A business bookkeeper will first receive the purchase invoice from the payee supplier to issue a cheque payment.
However, businesses may issue cheques before purchase invoices have been received. a business may issue cheques to organisations that do not provide invoices. the bookeeper raises a CHEQUE REQUISITION FORM as financial documentation evidence in such cases

Question 15

Scenarios examples where Cheque Requisition Forms are raised include:

Answer 15

• Charities who do not request payment. Therefore, donations to charities by cheque might not have an invoice.
• Deposits for hiring a venue or renting a piece of equipment might not be invoiced until the total amount of the invoice is charged.
• Advances to travelling employees who may have to incur expenses before claiming the money back.

The cheque requisition form will include the date, payee, amount, signature of the person authorising payment, and any backing documentation

Question 16

Elements of a Cheque

Answer 16

1. Name of the bank
2. The payee’s name. Only the payee, Labels Co, can cash this cheque.
3. Date of the cheque
4. Amount to be paid in numbers. The amount must match the written amount
5. Name of the business
6. Name of the authorised signatory of the business
7. Cheque code number
8. Written amount to be paid. “Dollars only” is written at the end for security purposes. This is to deter someone from adding extra amounts after the “two hundred”, such as “thousand”.

Question 17

Bank Clearing System

Answer 17

Once a cheque is received, the payee will deposit it with their bank. The bank then passes it to a clearing centre, which transfers it to the drawer’s bank.

The drawer’s bank has a legal responsibility during this time (for example, three working days) to either pay the funds into the payee’s account or return the cheque with reasons for non-payment.

Non-payment can be due to several reasons, including:
- insufficient funds in the drawer’s account
- the cheque being filled incorrectly
- or the cheque contains a fraud risk

The returned cheque is called a DISHONOURED OR BOUNCED cheque. For dishonoured or bounced cheques, banks may incur charges on the drawer for processing an unpaid cheque.
Most cheques are cleared without complications. Therefore, businesses typically assume funds will be deposited into their account when they cash their cheque.

To CANCEL OR STOP a cheque before the cheque has been cashed, the drawer may contact the bank. The cheque stub in the chequebook should note all evidence of transactions, including cancelled cheques

Question 18

Cheque payment Security Measures.
When issuing cheques for payments, a business should ensure:

Answer 18

• The date in the cheque is the day the cheque is prepared. If the date is made incorrectly for the future date, the payee must wait until then to cash the cheque.
• Payee detail in the cheque is not omitted. If the payee section is not completed, this may lead to someone entering their name as the payee and transferring funds illegally.
• The cheque amount in words matches the amount in figures. If not, the banks may return the cheque due to incorrect filing.
• The cheque is signed by the person whose name is printed on the cheque.
• The cheque requisition form is authorised by a senior member of the accounts department.

Question 19

When receiving cheques from customers, a business should ensure:

Answer 19

• All details in the cheque are correctly written, including the amount, the date, and the business name.
• The drawer signs the cheque.
• A copy of the cheque is obtained, and details are recorded in the business’s accounting systems.
• Placing the received cheque in a locked safe if unable to cash into the bank.
• Cashing in the cheque at the bank immediately

Similar to banking in cash, the cheque deposit must be accompanied by filling in a PAYING-IN SLIP from the paying-in book provided by the bank. The paying-in slip confirms the details of the deposited cheque

Question 20

A Banker’s Draft is

Answer 20

a cheque from a bank.
A business will first transfer the money to the bank, and the bank subsequently writes a cheque to the business’s named recipient. A typical cheque can be refused if insufficient money is in the drawer’s account, but a banker’s draft is guaranteed to be paid.

A banker’s draft is usually used to pay for high-value items. For example, to purchase property or land.

Question 21

Electronic Funds Transfer at Point of Sale (EFTPOS) is a system of

Answer 21

paying for goods or services in shops using CREDIT or DEBIT cards. The payment from the customer’s account is electronically transferred directly to the business’s account using handheld machines.

Money is paid at the point of purchase by the credit card company. At the end of each month, the customer receives a statement for the balance owed. The statement shows details of each transaction that has taken place, who it was to, the date and the amount.

Debit cards work similarly. However, the money is taken from the customer’s bank account. The transactions then appear on the customer’s bank statement.

Question 22

Elements of a Credit and Debit Card
Details on the front of the card include:

Answer 22

• the card number
• whether it is a debit or credit card
• the brand of card (eg. MasterCard or Visa)
• The account holder’s name
• Validity start date and end date of the card

Details on the back of the card include:
- a signature strip for the card owner to sign
- The three-digit card verification number

Question 23

EFTPOS Clearing System

Answer 23

Credit cards or debit cards can be used to make purchases of items by inserting the card into the EFTPOS machine.

For debit cards, the machine automatically cheques if sufficient funds are in the account to pay for the goods.

The customer confirms the value of their purchase by entering their four-digit PIN or signing the receipt. Upon successful transfer, the machine prints a receipt. For confirmation via signature, the sales assistant must ensure the customer’s signature matches the signature on the back of the card.

Some cards have a ‘contactless’ facility which allows the user to make small payments by touching or waving the card over an electronic reader in a shop. The contactless facility is also available on selected digital devices linked to a debit or credit card. Transactions will appear on the customer’s statement a few days later.

Question 24

Application of Credit and Debit Cards
Online sales & Telephone sales

Answer 24

Online sales - Customers can enter their card details into an online purchasing system to make payments for goods purchased online.

Telephone sales - A sale can be made by telephone by providing all the card details to the sales assistant, who will enter them into the machine to complete the payment.

Question 25

EFTPOS Payment Security Measures

Answer 25

• Access to the card facility must be recorded and secured to specifically authorised individuals.
• The authorised user must sign the debit or credit card upon issue.
• Keep up to date with the card usage transactions to identify suspicious activities
• The authorisation pin should be secret and unique to each account
• When keying in the authorisation pin, customers should cover the keypad to limit public view
• Contact the banks and lodge a police report if the card is lost or stolen

Question 26

Intro to Cash Receipts and Payments

Answer 26

In a cash sale or purchase, goods and services are bought and paid immediately using cash.

Remittance advice or receipt accompanies the cash receipt or payment transaction. These transactions are reflected in a business’s accounting system by transferring information from the remittance advice or receipt into the relevant ledger accounts using double entries.

Question 27

Relevant Cash Receipts and Payments Account
Cash transactions are recorded to relevant ledger accounts below:

Answer 27

1.Sales Account (Income)
In a cash sale, a business sells goods or services to a customer for cash.
A business may make cash payments for inventories or expenses. Inventory purchases will affect the Purchases account, while cash purchases for expenses will affect the individual expense account.

2. Purchases Account (Expense)
   A business may purchase items from suppliers such as raw materials or finished goods to resell to customers. These purchases are classified as expenses.

3.Individual Expense Account (Expense)
A business may pay for business expenses using cash. Examples of such costs include electricity bills and rental payments.

4.Cash/Bank Account (Asset)
Cash or Bank accounts are affected when cash is received or paid out.

Question 28

Cash Receipts and Payment Transactions and Double Entries
Cash Sales ->

Answer 28

A cash sale arises due to customers of a business paying cash for goods or services. It affects two ledger accounts.

• Cash/Bank Account (asset category, cash assets increased)
• Sales Account (income cat, sales income increased)

The amount to be entered into these accounts is the Net Amount (Price after Discounts and Sales Tax).

Question 29

Cash purchases (inventory)
Cash purchases for inventory are immediate payments made for goods a business intends to sell. Cash purchase of stock affects two ledger accounts.

Answer 29

• purchases (expenses category, purchases expenses increased)
• cash / bank (asset category, cash assets decreased)

Question 30

Cash payments (expenses)
Cash payments for expenses such as electricity bills, rent, or advertising fees affect two ledger accounts

Answer 30

• individual expense (expense category, expenses have increased)
• cash/bank (asset cat, cash assets decreased)

[ go over calculation q]

Question 31

Bank statements
At the end of each period, businesses will receive a bank statement with details of all transactions within the business bank account.

Bank statements are a reliable source of documentation and are an external source document. Bank statements should be monitored routinely to help identify errors.

Reasons for keeping track of the bank statement include:

Answer 31

• Identifying if there are any fraudulent transactions
• Ensuring no outdated standing orders are being paid out
• Confirming transactions are not in the wrong amount
• Ensuring no omission and double payment of transactions
• Verifying there is sufficient money in the bank account for payments

Errors within the bank statement should be notified to the relevant bank quickly and professionally to ensure the business sustains no monetary losses and relationships with banks or vendors are not negatively affected due to these errors.

Question 32

Bank reconciliations
A bank reconciliation is performed by comparing the information from the BANK STATEMENT and the BANK LEDGER ACCOUNT.
both sources give info on the transactions and the bank account balance during a period. However, the balances may not tally due to:

Answer 32

Timing differences such as:
- UNPRESENTED CHEQUE is a cheque payment made to a supplier, and the supplier has not deposited it yet
- OUTSTANDING LODGEMENT is cash or cheque payments received and taken to the bank but not yet processed and recorded in the bank statement. This could be due to cheques cashed on the same day the bank statement is prepared.
- DIRECT CREDIT receipts or payments which take a few days to clear the bank may also cause a timing difference between when the transactions were made and when they appear on the bank statement
- OMISSION OF TRANSACTIONS such as standing orders, bank charges, or interest received. These are reflected in the bank statement but not in the ledger accounts
- Transactions are posted twice, or an incorrect amount was posted into the Bank Ledger Account.

Question 33

Steps for Bank Reconciliation are:
(to align the balances in the bank statement and bank ledger accounts)

Answer 33

1.Check that opening balances agree
2. Compare closing balances on the bank statement and the bank ledger. Entries in the bank statement with corresponding entries in the bank ledger are highlighted.
3. Items not highlighted on the bank statement (no associating entry in the ledger) are recorded in the ledger account. A new bank ledger balance is calculated.
4. The new bank ledger balance and bank statement balance are compared again.
A bank reconciliation is drawn up using a template if they still do not agree.

• Record the bank statement balance at the top.
• Make adjustments by deducting any uncleared payments (unpresented cheques) and adding any uncleared receipts (outstanding lodgements).
• The amended bank statement balance should agree with the new bank ledger balance.