## **Learning Outcomes**

By the end of this article, you will be able to identify the structure and function of the cash book, explain how to record bank charges and interest, and accurately process contra entries. You will recognise how these entries impact the cash and bank balances, apply correct double entry, and avoid common errors in bookkeeping for bank-related transactions.

## **ACCA Recording Financial Transactions (FA1) Syllabus**

For ACCA Recording Financial Transactions (FA1), you must be able to record all cash and bank movements with accuracy and clarity. Focus your revision in this area on the following:

- The use and layout of the cash book as a book of prime entry
- Accurate entry of bank charges and interest in the cash book and general ledger
- The double entry for both interest received and paid
- The purpose, identification, and recording of contra entries for transfers between cash and bank
- Understanding the effect of these entries on business records and correcting common errors

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. How should bank charges that appear only on a bank statement be recorded in the cash book and general ledger?
2. What is a contra entry, and how does it affect the cash and bank columns of the cash book?
3. True or false? Interest received from the bank is recorded as income in the accounting records.
4. When transferring cash between the office and the bank, what entries are made in the cash book?

## **Introduction**

Effective recording of all payments and receipts is essential for a business. The cash book is the main record for documenting cash and bank transactions. Entries such as bank charges, interest, and contra transfers between cash and bank must be entered with complete accuracy. Failure to do so can misstate balances and lead to errors in financial reporting.

Understanding these specific entries, and their effect on the general ledger, ensures your records reflect the true position of the business and meet ACCA exam requirements.

> **Key Term: cash book**
> A book of prime entry used to record all receipts and payments of cash and bank, including both income and outgoings.

## **BANK CHARGES**

Bank charges are fees deducted by the bank for account services. They are usually not known until a bank statement is received and must then be entered as business expenses.

> **Key Term: bank charges**
> Fees charged by the bank for operating the account, such as maintenance or transaction processing.

When a bank charge appears on the bank statement, record it as a payment (credit) in the bank column of the cash book, described as "Bank charges." In the general ledger, debit the bank charges expense account and credit the bank account.

### **Worked Example 1.1**

A business notices a bank charge of £15 on its bank statement.

**Question:** How should this be recorded in the cash book and posted to the accounts?

> **Answer:**
> Enter £15 on the payments side (credit) of the cash book, in the bank column, as "Bank charges." Post a debit of £15 to the Bank Charges expense account and a credit of £15 to the bank account in the general ledger.

### **Exam Warning**

Always record bank charges as soon as they are identified on a bank statement. Omitting them will result in incorrect expense totals and misstated bank balances.

## **BANK INTEREST**

Banks may pay interest on credit balances or charge interest on overdrawn accounts. Both types must be entered correctly in the cash book and general ledger.

> **Key Term: interest received**
> Money earned by the business from the bank, usually for positive account balances.
>
> **Key Term: interest paid**
> Interest charged by the bank to the business on overdrawn balances or loans.

Interest received is recorded as a receipt (debit) in the bank column, and then posted as income in the general ledger. Interest paid is recorded as a payment (credit) in the bank column and posted as an expense.

### **Worked Example 1.2**

A business receives £8 interest from its bank and also pays £5 in overdraft interest, both shown on the latest bank statement.

**Question:** How are these two entries recorded in the cash book and accounts?

> **Answer:**
> Record £8 in the receipts (debit) side of the cash book under the bank column as "Interest received." Post a debit to the bank account and a credit to the Interest Received (income) account in the general ledger.
>
> Record £5 in the payments (credit) side under the bank column as "Interest paid." Post a debit to the Interest Paid (expense) account and a credit to the bank account in the general ledger.

### **Revision Tip**

Bank interest and charges should always be recorded as soon as the bank statement arrives—not when they are expected.

## **CONTRA ENTRIES**

A contra entry records the internal transfer of funds between the business's own cash and bank accounts. It does not represent income or expense but moves money between two asset accounts.

> **Key Term: contra entry**
> An entry in both cash and bank columns of the cash book to record the transfer of funds between the business's accounts, with no overall change in total company funds.

When depositing cash into the bank:

- Debit (receipt) in the bank column, credit (payment) in the cash column for the same amount.
- Both sides are marked "C" (for contra) to show this is an internal transfer and not an external transaction.

When withdrawing from the bank for use as office cash:

- Debit (receipt) cash column, credit (payment) bank column for the same amount.
- Again, both sides are marked "C" to indicate contra.

### **Worked Example 1.3**

A business pays £150 cash into its bank. Later, it withdraws £60 from the bank for office cash.

**Question:** How are these transfers shown in the cash book?

> **Answer:**
> For the deposit: Debit £150 in the bank column (receipts) as "Cash lodged—C", credit £150 in the cash column (payments) as "Bank deposit—C".
>
> For the withdrawal: Debit £60 in the cash column (receipts) as "Cash drawn from bank—C", credit £60 in the bank column (payments) as "Cash withdrawal—C".

### **Exam Warning (Contra Entries)**

Never record only one side of a contra entry. Both the cash and bank columns must reflect the transfer. This avoids errors in cash and bank balances.

## **Summary**

All cash book entries for bank charges, interest, and contra transfers must be recorded precisely and posted to the general ledger. Bank charges and interest paid are expenses shown in the payments side. Interest received appears as income on the receipts side. Contra entries are clearly marked and entered on both cash and bank sides for all internal movements.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Define the cash book and its use for bank-related transactions
- Record bank charges in the cash book and post to expenses
- Distinguish and record interest received (income) and interest paid (expense)
- Define contra entries and show their effect on both cash and bank columns
- Apply correct double entry for all cash book entries relating to the bank

## **Key Terms and Concepts**

- cash book
- bank charges
- interest received
- interest paid
- contra entry

Cash book structure and use - Bank charges, interest, and contra entries