Cash in hand and cash at bank

Welcome to the World of Cash!

In this chapter, we are going to explore one of the most important parts of any business: Cash. Think of cash as the "blood" of a business. Just like our bodies need blood to keep moving, a business needs cash to pay its bills, buy stock, and pay its employees. We will learn how businesses manage their money, how they record it, and how they make sure none of it goes missing. Don't worry if this seems a bit heavy on details at first—we'll break it down step-by-step!

1. Cash Management: Keeping the Business Running

A business usually keeps its money in two places: Cash in hand (physical notes and coins in the office) and Cash at bank (money kept safely in a bank account).

Why do businesses need to keep cash?

Businesses need cash for "operational needs." This just means they need money for daily activities, such as:
• Paying for small items like stamps or cleaning supplies (Cash in hand).
• Paying big bills like rent, electricity, or suppliers (usually via Cash at bank).
• Having a safety net for emergencies.

Key Terms to Know

• Cash in Transit: Money that is on its way from the business to the bank but hasn't been recorded by the bank yet.
• Cash Receipts: Any money coming into the business.
• Cash Payments: Any money going out of the business.

Quick Review: Remember that Cash in hand and Cash at bank are Current Assets because they are already in the form of money or can be used immediately.

Key Takeaway: Managing cash is about ensuring the business always has enough "fuel" to keep running daily while keeping the bulk of its money safe in the bank.

2. Recording Cash Transactions

When we record cash, we use the Cash in hand account and the Cash at bank account. Since these are Asset accounts, the rules of Double-Entry apply:

• Increase in Cash: Debit (Dr) the account.
• Decrease in Cash: Credit (Cr) the account.

Dishonoured Cheques (The "Bounced" Cheque)

Sometimes, a customer pays us with a cheque, but when we try to bank it, the bank refuses to pay. This is a Dishonoured Cheque.
Why does this happen?
1. The customer doesn't have enough money in their account.
2. The cheque has an error (wrong date, missing signature).
3. The cheque is "stale" (too old).

How to record a Dishonoured Cheque

When a cheque is dishonoured, we must reverse the entry we made when we first received the cheque. We need to "charge" the customer again because they still owe us money!

Step-by-Step for Dishonoured Cheques:
1. Debit the Trade Receivable (customer) account to show they owe us money again.
2. Credit the Cash at bank account to show the money is no longer there.

Wait! What if there was a discount?
If you gave the customer a Cash Discount (Discount Allowed) when they paid, you must also cancel that discount.
• Debit: Trade Receivable (Total amount)
• Credit: Cash at bank (Amount on the cheque)
• Credit: Discount Allowed (The discount you are taking back)

Common Mistake: Students often forget to cancel the discount. If the cheque "bounces," the customer loses the privilege of the discount!

3. Internal Controls: Protecting Your Money

Because cash is so easy to steal or lose, businesses use Internal Controls to safeguard it.

Four Main Ways to Control Cash:

1. Segregation of Duties: Different people should handle different tasks. For example, the person who collects the cash should not be the same person who records it in the books. This prevents one person from stealing money and hiding it in the records.
2. Custody of Cash: Physical cash should be kept in a locked safe, and only certain people should have the key.
3. Authorisation: Every payment made by the business must be approved (signed off) by a manager.
4. Bank Reconciliation: Regularly checking the business's records against the bank's records.

Did you know? Even small businesses use internal controls. Think about a fast-food restaurant where the cashier gives you a receipt—that's a way to ensure the sale is recorded in the system!

4. Bank Reconciliation: Solving the Mystery

Have you ever checked your bank balance and realized it's different from what you thought you had? Businesses face this every month! A Bank Reconciliation Statement is a report that explains why the Cash at bank ledger balance and the Bank Statement balance are different.

Why are the balances different?

There are two main reasons: Timing Differences and Errors.

1. Timing Differences (Transactions we know, but the bank doesn't yet):
• Unpresented Cheques: We wrote a cheque to a supplier, so we reduced our books. However, the supplier hasn't gone to the bank to collect the money yet.
• Deposits in Transit: We put money in the bank's deposit box late at night, but the bank hasn't processed it on our statement yet.

2. Items on the Bank Statement (Transactions the bank knows, but we don't yet):
• Direct Deposits: A customer paid us directly into our bank account.
• Direct Payments / Standing Orders: The bank automatically paid a bill (like insurance) for us.
• Bank Charges/Interest: Fees the bank charges us for their services.
• Dishonoured Cheques: We only find out the cheque bounced when we see it on the bank statement.

How to Reconcile (The Process)

Step 1: Update the Cash at bank Ledger.
Look at the Bank Statement. Record anything there that isn't in your ledger (like bank charges or direct deposits). This gives you the Adjusted Cash at bank balance.

Step 2: Prepare the Bank Reconciliation Statement.
Start with the Balance as per Bank Statement and adjust for the things the bank doesn't know yet:
\( \text{Balance as per Bank Statement} \)
\( + \text{Deposits in Transit} \)
\( - \text{Unpresented Cheques} \)
\( = \text{Adjusted Cash at bank balance} \) (This should now match your ledger!)

Key Takeaway: The goal is to make sure your "Adjusted Ledger" matches your "Reconciliation Statement." If they match, your records are accurate!

5. Presentation in Financial Statements

At the end of the year, we must show our cash on the Statement of Financial Position (SFP).

If you have money in the bank (Positive balance):
It is listed under Current Assets as Cash at bank and Cash in hand.

If you owe the bank money (Bank Overdraft):
Sometimes a business spends more than it has. This is called a Bank Overdraft. It is listed under Current Liabilities because you have to pay the bank back very soon.

Memory Aid:
Asset = Added money (Positive)
Liability = Loan from the bank (Overdraft)

Summary Takeaway: Cash is recorded as an asset when positive and a liability when negative (overdraft). Internal controls and bank reconciliations are vital "check-ups" to ensure our cash information is honest and accurate!