Lecture Notes 1
In the books of a business, money paid in and out of the bank are entered into a Cash Book. This activity is usually done by a business on a regular basis. At the same time, the bank will also be recording all inflows and outflows of money from a business's bank account.
If all the entries in the Cash Book prepared by the business were exactly the same as those held by the bank, then the balance on the business bank account and the balance on the Cash Book would be the same. Unfortunately, it isn't usually that simple, particularly in the case of current account holders. There are usually items that differs on both documents. To see if there are differences, then you may have to compare both the bank statement, that is issued by the bank on a monthly basis and the business's cash book.
The Bank Statement
A statement of account issued by a bank to each depositor once a month is called a bank statement. This statement shows:
- the balance at the beginning of the period
- deposits and other amounts added during the period
- cheques and other amounts subtracted during the period
- the balance at the end of the period
The Cash Book
This is a summary of all cash and bank transactions in a business. It is prepared by a business's accountant.
Reasons for Differences between Bank Statement and Cash Book Balances
When a bank statement is received from the bank by its customer, it will be examined against the cash book to identify the items that account for the difference in balances. This process is called the bank reconciliation.