Cash book & bank statement

Explanation of Cash Book and Bank Statement

Most businessmen use a two or three column cash book (with a bank column) for recording transaction made through the bank account. Each time cash, cheques, money orders or postal orders, etc. are deposited in the bank, the cash book (bank column) is debited, i.e. an entry is made in the bank column on the debit side of the cash book. Similarly, when a cheque is issued to a supplier an entry is made in the bank column on the credit side of the cash book.

Just as a businessman keeps his cash book so as to stay informed of his position with the bank, the bank also maintains some records to ensure that its position with each account holder is always known. This record is usually kept in the form of a personal account maintained more or less on the same lines as a businessman maintains personal accounts for his debtors and creditors.

As a matter of practice, banks send to each account holder a list of entries made in their personal account maintained by the bank. This sheet is called a bank statement. Most businesses ask for their bank statement at the end of each month.

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Banks use accounting machines or computers to keep their accounts. These machines usually do not follow a two-sided personal account. Instead, they use the following format.

Bank Statement Format

Cash book and bank reconciliation statement

When an account holder deposits money with the bank, from the bank’s point of view the bank’s liability to the account holder is increased. You will recall that increases in liabilities are credited. The bank, therefore, credits the personal account of the account holder and the entry appears in the Cr. column of the bank statement. When an account holder issues a cheque, which is paid by the bank, the bank debits his personal account (being a reduction in its liability).

Thus, such entries appear in the debit column of the bank statement. Accounting machines (now computers) calculate the balance on the account after each transaction and show it in the ‘Balance Column’. If the balance is a Cr. balance, the last column shows ‘Cr.’ if the balance is a Dr. balance, the last column shows Dr. Given below is a typical bank statement:

Example

Cash Book and Bank Statement

Notice, in particular, the following two points:

When David deposits money with the bank he makes an entry on the debit side of his cash book, while the bank records all deposits received from him in the credit column of his statement of account. Can you guess the reason?

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When a deposit is made by an account holder, his asset (cash at bank) is increased; hence he makes a debit entry in his cash book. But at the same time from the bank’s point of view, a deposit received from the account holder increases the bank’s liability to the account holder; hence the bank credits the personal account maintained for that account holder in its books.

When David writes out a cheque he makes an entry on the credit side of his cash book (being a reduction in asset, cash at bank). When the bank pays out cash against that cheque it records the payment in the debit column of his statement of account. Can you guess reason?

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