Cash control and bank reconciliation in QCE Accounting Unit 3
“Apply double-entry and GST principles to record cash receipts and payments, and prepare a bank reconciliation statement to verify the cash at bank balance against the bank statement”
Cash is the most liquid and most easily misappropriated asset, so it needs strong internal control: separation of duties, daily banking, and regular reconciliation. Every cash receipt and payment is recorded by double entry, with GST collected credited to GST Clearing and GST paid debited to GST Clearing. A bank reconciliation statement starts from the bank statement balance, adds outstanding deposits, subtracts unpresented cheques, and adjusts for bank errors to arrive at the cash at bank balance in the ledger. Any items the bank knows about but the business has not recorded (bank fees, interest, dishonoured cheques, direct debits) must first be journalised in the records before reconciling.
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What this dot point is asking
QCAA wants you to manage and verify the cash resources of a sole-trader trading GST business. You must record cash receipts and payments using correct double entry, account for GST on each transaction through the GST Clearing account, and prepare a bank reconciliation statement that proves the business cash at bank balance agrees with the bank statement once timing differences and errors are accounted for.
Controlling cash
Cash includes notes, coins, cheques and electronic balances. Because it is liquid and portable, it is the asset most exposed to theft and error, so a trading business builds internal controls around it:
- Separation of duties so that the person who handles cash is not the person who records it or reconciles the bank account.
- Daily banking of all receipts intact, so recorded receipts match deposits.
- Pre-numbered source documents (receipts, EFTPOS dockets, tax invoices) so transactions can be traced.
- Authorisation of payments and use of electronic transfers rather than petty cash where possible.
- Regular bank reconciliation, which is the key detective control that confirms the ledger balance is real.
Recording cash with GST
A GST-registered business charges 10% GST on taxable sales (GST collected, a liability owed to the ATO) and pays 10% GST on taxable purchases and expenses (GST paid, a reduction of that liability). Both flow through one account: GST Clearing.
When the business makes a cash sale of $1,100 including GST, the GST component is $1,100 / 11 = $100 and the sale revenue is $1,000:
- Debit Cash at Bank $1,100
- Credit Sales $1,000
- Credit GST Clearing $100
When the business pays a GST-inclusive expense such as $330 for advertising:
- Debit Advertising $300
- Debit GST Clearing $30
- Credit Cash at Bank $330
GST collected sits on the credit side of GST Clearing and GST paid sits on the debit side. The net credit balance is what the business owes the ATO (or a net debit balance is a refund due). Dividing a GST-inclusive total by 11 isolates the GST; dividing by 1.1 isolates the GST-exclusive amount.
The bank reconciliation statement
The cash at bank balance in the ledger and the balance on the bank statement rarely match at month end because of timing differences and unrecorded items. Reconciliation explains the gap.
Step 1: Update the records first. Compare the bank statement to the cash records and identify items the bank has processed but the business has not yet recorded. These are journalised before the statement is prepared:
- Bank fees and account charges: debit Bank Charges (plus GST paid where applicable), credit Cash at Bank.
- Interest received: debit Cash at Bank, credit Interest Revenue.
- Direct debits and direct credits not yet recorded.
- A dishonoured (bounced) cheque from a customer: reinstate the receivable, credit Cash at Bank.
Step 2: Identify timing differences. These are items correctly recorded by the business but not yet shown by the bank:
- Outstanding (unbanked) deposits: receipts recorded and banked late on the last day that the bank processes next period. Added to the bank statement balance.
- Unpresented cheques: payments recorded by the business that the payee has not yet banked. Subtracted from the bank statement balance.
Step 3: Prepare the statement. Start with the closing bank statement balance, add outstanding deposits, subtract unpresented cheques, and correct any bank errors. The result must equal the updated cash at bank ledger balance.
A favourable (positive) cash at bank balance is an asset; an overdrawn balance is a current liability (bank overdraft). The reconciliation confirms that the figure reported in the balance sheet is verified against an independent third party, the bank.
The data
At 30 June, Riverbend Traders has a cash at bank ledger balance of $8,450 (debit). The bank statement shows a closing balance of $9,180 in the business's favour. Investigation reveals:
- Bank fees of $33 not yet recorded.
- Interest earned of $40 not yet recorded.
- A deposit of $1,260 banked late on 30 June, not yet on the bank statement.
- Two unpresented cheques: $1,540 and $880.
- A customer cheque for $437 banked earlier was dishonoured this period.
Step 1: Update the records
Items the bank has processed but the business has not recorded are journalised first.
| Cash at bank | $ |
|---|---|
| Balance per ledger | 8,450 |
| Less bank fees | (33) |
| Add interest earned | 40 |
| Less dishonoured cheque | (437) |
| Updated cash at bank | 8,020 |
Step 2: Reconciliation statement
Now the timing differences are applied to the bank statement balance.
| Item | $ |
|---|---|
| Balance as per bank statement | 9,180 |
| Add outstanding deposit | 1,260 |
| Less unpresented cheques (1,540 + 880) | (2,420) |
| Balance as per cash at bank | 8,020 |
Step 3: Check
The reconciliation statement total ($8,020) equals the updated cash at bank ledger balance ($8,020), so the account reconciles. If the two figures had not matched, there would be an unrecorded item or listing error to find before signing off. The verified $8,020 is what appears as cash at bank in the balance sheet.
- Reconciling to the original ledger balance
- You must update the records for bank fees, interest, direct debits and dishonoured cheques first, then reconcile to the updated balance.
- Adding unpresented cheques and subtracting outstanding deposits
- It is the reverse: add outstanding deposits, subtract unpresented cheques from the bank statement balance.
- Forgetting GST on bank charges
- Some bank fees carry GST; split the GST to GST Clearing where the tax invoice shows it.
- Treating an overdraft as an asset
- A credit cash at bank balance is a bank overdraft, reported as a current liability, not negative cash.
Exam-style questions
Questions in the style of QCAA exam questions on this dot point, each with a worked answer. They are written by ExamExplained unless tagged "Past paper"; the year shows the paper a question is modelled on.
Practice1 markBusiness B is a GST-registered business. The owner decided to use funds from the business to pay the $1 100 electricity bill for her private home. How would this transaction be recorded in the general journal? (A) Drawings DR 1 100, Cash at bank CR 1 100 (B) Cash at bank DR 1 100, Drawings CR 1 100 (C) Drawings DR 1 100, GST credits received CR 100, Cash at bank CR 1 000 (D) Electricity DR 1 100, GST credits received CR 100, Cash at bank CR 1 000Show worked answer →
The correct answer is (A) Drawings DR 1 100, Cash at bank CR 1 100.
The payment leaves the business bank account, so Cash at Bank (asset) is credited the full $1 100. Because the owner has taken business funds for a private, personal purpose, this is drawings, not a business expense, so Drawings (a reduction in owner's equity) is debited $1 100.
No GST is split out. A business can only claim a GST input tax credit on a payment made for the business. A private household electricity bill is not a business cost, so there is no GST credit to record. That rules out C and D, which wrongly claim $100 GST. Option D also wrongly treats the private bill as a business Electricity expense, and B reverses the entry.