Chapter 9 : Bank Account and the bank reconciliation statement
9.1 Bank Account
Most businesses choose to open a current account to handle their cash transactions easily and safely.
Think of your bank account and your cash book as asset accounts. This means any transaction through
the bank must be recorded using the double entry principle for assets. Let's see how we do that!
1. Depositing Cash into the Bank
• To open a current account, you need to make an initial cash deposit. As the business receives more
cash, it can also be deposited into this account.
• When you deposit cash, your bank account balance goes up, and your physical cash balance goes
down. It’s a simple transfer!
• The double entry for this is to Debit the Bank account and Credit the Cash book.
• Remember to fill out a deposit slip. The bank will give you a copy, which serves as your official source
document for the transaction.
2. Depositing Cheques Received by the Business
• When you receive a cheque and deposit it, your bank account balance increases.
• If you deposit the cheque right away, you can skip the cash book and Debit the Bank account directly.
For example, if you receive a cheque for sales, you would Debit the Bank account and Credit the Sales
account.
• You need to complete a cheque deposit slip and submit it with the cheques. The bank will give you a
copy, which acts as your source document for the record.
3. Issuing Cheques for Payments
• Cheques are a great way to pay creditors, buy goods, or cover expenses.
• When you write a cheque, it’s a good practice to fill out both the cheque and the counterfoil (the part
left in the cheque book).
• When you issue a cheque, your bank account balance decreases. This means you will Debit the
relevant expense or payment account and Credit your Bank account.
• A payment voucher serves as your source document for this transaction.
4. Dishonouring of Cheques
• Sometimes, a bank might reject a cheque. This is called a "dishonoured cheque." This can happen for
several reasons, such as a signature mismatch, incorrect details, or insufficient funds.
• The bank will send a cheque return notification to inform you about the rejected cheque.
A) Dishonoured Deposited Cheques
• When you first deposit a cheque, you debit your bank account. However, if it's dishonoured, the bank
balance won't actually increase.
• You need to reverse the original entry. You should now Credit the Bank account to cancel the original
debit and Debit the Debtor's account to show that the person who gave you the cheque still owes you
money.
B) Dishonoured Issued Cheques
• When you issue a cheque, you credit your bank account. If that cheque is dishonoured, you need to
reverse that entry.
• To do this, you Debit the Bank account and Credit the relevant expense or creditor account, essentially
putting the money back into your bank account record.