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

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.