What are bank charges not yet recorded in the cash book, and how to account for them?
Businesses record all their cash transactions in a cash book and reconcile them with the bank balance as shown in the passbook. But often, these cash and bank balances do not match due to certain bank charges not yet recorded in the cash book. Likewise, particular cash transactions do not get logged onto the bank statement, thus necessitating carrying out a reconciliation exercise.
A cash book is a day book in which all the bank cash transactions are recorded in chronological order. It implies all the transactions paid for cash via bank account are posted in the cash book. However, cash payments made without a bank account are recorded in the petty cash book.
So, does this mean bank charges are not yet recorded in the cash book?
As all the cash bank transactions are chronicled in both ledgers, it is generally expected that the cash book and passbook balances will match. However, this isn’t usually the case due to misaligned timings for the recording of transactions.
To illustrate, banks charge certain fees to the business account, which are directly debited at the month’s end. This lowers the bank balance without a corresponding reduction in the cash book.
As a result, initially, the cash book has no record of any bank charges. However, on receiving the bank statement, these bank charges are recorded in the cash book to reconcile both the cash and bank balances.
So, why are bank charges not recorded in the cash book? Because businesses don’t know about these charges until the monthly bank statement has been shared with them.
Mostly, bank charges not yet recorded in the cash book are fees or expenses that a bank has already charged to the business’ account but which are yet to be entered into the firm's cash book. Some of the examples are:
- Monthly account fees: Banks may impose fixed monthly charges on firms for the maintenance of their accounts.
- Overdraft fees: Companies are required by banks to pay additional charges on drawing more than their predetermined overdraft limits.
- Specific transaction fees: Banks may levy fees for undertaking certain transactions, such as ATM withdrawals, wire transfers, and early account closures. Additional charges may also apply to payments involving third-party processing.
- Late payment fees: Businesses are levied penalty charges for delaying their payments, including credit card payments.
- Foreign transaction fees: Banks impose charges on making payments in foreign currency, such as using a debit card or an ATM abroad.
- Dishonoured cheques: Business firms are levied bank charges if their cheques bounce.
- Other miscellaneous bank charges may include cheque printing fees (for additional cheques), safe deposit box rental fees, cheque clearance charges, and charges for making payments over authorised limits.
In addition to bank charges, certain other transactions go unrecorded in the cash book, thus creating a balance mismatch between cash and bank balances. Some of these items not yet recorded in the cash book include:
- Bank interest: The interest earned on deposits is generally credited directly by the banks, and companies come across these details on the furnishing of the monthly bank statement.
- Standing instructions: Banks may make fixed payments (for insurance or rent) at stated intervals per the firm’s instructions without any issuance of cheques.
- Dividends and other interest: Banks collect dividends and interest on investments directly that may go unrecorded in the cash book.
- Direct payments: A company’s clients may make direct payments into the business account, which may result in a balance mismatch.
Since bank charges are an expense, they are credited to the cash book at the time of the reconciliation exercise.
For example, consider a company called FGH that notices a mismatch in its cash and bank balances. It comes across bank charges worth £100 in its monthly bank statement. This £100 will be deducted from the cash book’s final balance. Further adjustments may also be made for other banking items not yet recorded in the cash book.
However, even after adjusting for the items in the bank statement, the final balances of the cash book and passbook may still have variances. This could be because of some of the cash book items that went unrecorded in the bank statement. Common examples include:
- Deposits in transit: The company may issue deposit cheques towards the month’s end, which doesn’t get recorded in the passbook on time.
- Outstanding cheques: Cheques issued by the company to creditors but not presented to the bank for payment or not cleared by the bank.
- Dishonored cheques: If cheques made to the firm bounce, the bank will not record them.
Finally, to reconcile their cash and bank balances, companies draw up a bank reconciliation statement, which accounts for all of the above-mentioned unrecorded items.
As bank charges are indirect expenses, they get recorded in the expenses (debit) column of the profit and loss account.
Fees, dividends, interest, and certain bank charges not yet recorded in the cash book can cause a discrepancy between balances recorded per the cash book and passbook. Firms can resolve these differences by drawing a bank reconciliation statement.