## **Learning Outcomes**

After reading this article, you will be able to: identify how bank transactions are recorded in business records, explain the concepts of deposits, outstanding lodgements, and bank charges, describe the reasons for timing differences between bank records and accounting records, update ledger accounts for bank-related transactions, and perform bank reconciliations in line with ACCA FA2 requirements.

## **ACCA Maintaining Financial Records (FA2) Syllabus**

For ACCA Maintaining Financial Records (FA2), you are required to understand the practical steps and accounting implications of dealing with bank-related transactions. This article supports the following syllabus areas:

- Record cash and bank transactions in the general ledger accounts
- Identify timing differences between the entity’s records and the bank statement balance
- Prepare and explain a bank reconciliation statement
- Update accounting records for items such as bank charges, deposits, and unpresented cheques

## **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. A cheque from a customer is received and banked on 30 June but has not appeared on the bank statement by 30 June. What is this item called?
2. Which of the following should be adjusted in the accounting records when preparing a bank reconciliation?
   a) Unpresented cheques  
   b) Outstanding lodgements  
   c) Direct debit bank charges  
   d) All of the above
3. True or false? Bank charges that appear on the bank statement but not yet in the cash at bank ledger account must be entered in the accounting records before reconciliation.
4. Briefly explain why timing differences arise between the bank statement and the cash at bank ledger account.

## **Introduction**

Bank transactions are a core part of business accounting. Every receipt or payment passing through the bank must be carefully recorded to ensure the cash at bank ledger account aligns with the official bank statement. However, timing differences, such as deposits not yet shown by the bank or bank charges not yet recorded in the accounts, commonly cause discrepancies. For ACCA FA2, you need to understand these timing issues, accurately account for all items, and perform reconciliations to ensure reliable financial records.

> **Key Term: deposit**
> A sum of money received by the business and paid into the bank account.
>
> **Key Term: outstanding lodgement**
> A receipt that has been recorded in the business accounts and paid into the bank but has not yet appeared on the bank statement.
>
> **Key Term: bank charge**
> A fee charged by the bank for providing banking services, usually debited automatically from the account.

## Recording Bank Transactions

All bank receipts and payments are recorded in the cash at bank ledger account (general ledger). Typical receipts include deposits from customers, while payments may include supplier payments, salaries, and bank charges.

When a business receives money, such as from a customer, and pays it into the bank, the double entry in the ledger is:

- Debit: Cash at bank
- Credit: Relevant income or receivable account

When an expense is paid or a bank charge is levied:

- Debit: Expense (e.g., wages, rent, bank charges)
- Credit: Cash at bank

## Timing Differences and Their Causes

The cash at bank ledger account and the bank statement often show different balances at a given date because of delays in processing certain transactions. The main types of timing differences are outstanding lodgements (deposits not yet credited by the bank) and unpresented cheques (cheques issued by the business but not yet processed by the bank).

- Outstanding lodgements increase the balance per the business’s cash at bank ledger account compared to the bank statement.
- Unpresented cheques decrease the ledger balance compared to the bank.

### Bank Charges

Banks deduct charges or service fees directly from the business’s account. These will appear first on the bank statement and only impact the business's records when the transaction is entered into the cash at bank ledger account. If missed, the ledger account will show a higher balance than the bank statement.

### **Worked Example 1.1**

A business’s cash at bank ledger account on 31 March shows a debit balance of \$2,200. The bank statement balance is \$1,850. The following items are identified:

- Cheques totalling \$600 have been issued to suppliers but not yet presented.
- A direct debit bank charge of \$50 appears in the bank statement but not in the accounting records.
- A deposit of \$250 received on 30 March is not yet credited on the bank statement.

**Question:** What adjustments are needed in the cash at bank ledger account before preparing the bank reconciliation?

> **Answer:**
> Enter the \$50 bank charge in the cash at bank ledger account:
>
> - Debit: Bank charges \$50
> - Credit: Cash at bank \$50
>   After the adjustment, reconcile the ledger account balance with the bank statement by accounting for the \$600 unpresented cheques (deducted from the bank statement) and the \$250 outstanding lodgement (added to the bank statement).

### **Exam Warning**

Always adjust the cash at bank ledger account for items such as direct debit charges, standing orders, and credit transfers that appear on the bank statement first. Timing differences like outstanding lodgements and unpresented cheques are not errors and should not be adjusted in the ledger—only in the reconciliation.

## The Bank Reconciliation Statement

A bank reconciliation statement explains the difference between the bank statement balance and the cash at bank ledger balance.

The process involves:

- Updating the cash at bank ledger account with any bank charges or other items found on the bank statement but not yet in the account.
- Identifying outstanding lodgements (deposits recorded in the business’s books but not yet credited by the bank).
- Identifying unpresented cheques (cheques issued but not yet cleared by the bank).
- Listing any other timing or error items.

### **Worked Example 1.2**

On 30 April, the cash at bank ledger account shows a balance of \$3,100 debit. The bank statement shows \$2,700 debit. The following are identified:

- Cheques issued but not yet presented: \$800.
- A standing order payment of \$200 for insurance, recorded in the bank statement but missed from the accounting records.

**Question:** What steps should you take to reconcile the bank balance?

> **Answer:**
> Adjust the cash at bank ledger for the \$200 standing order:
>
> - Debit Insurance \$200
> - Credit Cash at bank \$200
>   After the adjustment, proceed to the reconciliation: add any outstanding lodgements, and subtract unpresented cheques from the bank statement balance to align with the adjusted ledger balance.

## Common Bank Statement Items Not Yet Recorded

Items frequently found on the bank statement before being entered into the business’s records include:

- Bank charges and service fees
- Direct debits and standing orders for regular payments
- Interest paid or received
- Customer receipts paid directly into the bank by electronic transfer

These must be posted to the cash at bank ledger account before performing the reconciliation.

## Accounting for Deposits and Lodgements

When a cash or cheque deposit is paid into the bank, it is immediately recorded in the business’s cash at bank ledger account. However, there may be a delay before the deposit appears in the bank statement due to bank processing times. At period end, these deposits are classified as outstanding lodgements.

> **Key Term: timing difference**
> A temporary difference between the bank statement and the cash at bank ledger balance, typically caused by delays in processing deposits or cheques.

## Bank Charges and Their Treatment

Bank charges are automatically deducted by the bank and will appear on the bank statement before the business records the expense. To complete the double entry:

- Debit: Bank charges expense account
- Credit: Cash at bank

Always ensure all charges appearing on the bank statement are captured in the business’s accounts for accurate reconciliation and reporting.

### **Worked Example 1.3**

You receive your monthly bank statement and notice a \$25 charge not yet shown in your cash at bank ledger account. What is the correct accounting entry?

> **Answer:**
>
> - Debit: Bank charges \$25
> - Credit: Cash at bank \$25

The \$25 reduces the ledger account balance to match the bank statement.

## Completing the Bank Reconciliation

Final steps for reconciliation:

- Start with the adjusted cash at bank ledger account balance.
- Add outstanding lodgements (deposits not yet appeared on bank statement).
- Subtract unpresented cheques (cheques issued not yet cleared by the bank).
- The resulting figure should match the bank statement balance, confirming the records are accurate except for timing differences.

### **Revision Tip**

Before finalising a reconciliation, always check that all direct debits, standing orders, and bank charges are recorded in the cash at bank ledger account. Failing to do so will lead to unresolved differences.

## **Summary**

Bank transactions must be carefully recorded in the accounting system. Timing differences due to outstanding lodgements and unpresented cheques will create discrepancies between the bank statement and the business’s cash at bank ledger account. Regularly updating the ledger for bank charges and other direct entries is necessary. Bank reconciliation confirms that the balances are correct except for outstanding timing items, ensuring reliable reporting.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Define and record bank deposits, outstanding lodgements, and bank charges
- Recognise typical timing differences between accounting records and bank statements
- Identify necessary adjustments before bank reconciliation
- Prepare a basic bank reconciliation statement
- Understand the effect of unpresented cheques and outstanding lodgements on reconciliation

## **Key Terms and Concepts**

- deposit
- outstanding lodgement
- bank charge
- timing difference

Bank transactions and timing - Deposits, lodgements, and bank charges