## **Learning Outcomes**

After reading this article, you will be able to describe standard cash book structures, explain the accounting treatment for bank overdrafts, record and interpret contra entries between receivables and payables, and identify their impact on financial statements for ACCA FA2. You will also recognise common errors and accurately record these items according to double-entry principles.

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

For ACCA Maintaining Financial Records (FA2), you are required to understand how cash book transactions are structured and recorded in the general ledger, including the treatment of bank overdrafts and contra entries. This article addresses:

- Recording receipts and payments in cash and bank accounts
- Reporting cash and bank balances (including overdrawn accounts) in financial statements
- Identifying the impact of overdrafts as current liabilities
- Preparing and recording contra entries between trade receivables and payables
- Complying with double-entry principles for all cash book and contra transactions

## **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 company’s cash at bank ledger has a credit balance at year end. How should this be classified in the statement of financial position?
2. What is the double entry required for a contra between a trade receivable and trade payable in the same business relationship?
3. True or false? Contra entries will affect the overall sales and purchases totals recorded in the financial statements.
4. Briefly explain when a bank overdraft appears as a debit balance in the cash book.

## **Introduction**

Managing business funds involves frequent movement of money in and out of cash and bank accounts. The cash book structure is designed to record both receipts and payments, ensuring all transactions are captured using the double-entry system. Bank overdrafts and contra entries between receivables and payables bring additional considerations, affecting how balances are reported and reconciled.

This article reviews the correct structure and use of the cash book, explains how to record and report bank overdrafts, and demonstrates the accounting for contra entries. Accurate treatment of these items is regularly tested in ACCA FA2 exams.

## Cash Book Structure

The cash book records all cash and bank transactions, acting as both a book of prime entry and part of the double-entry system. It is commonly divided into two main sections:

- The receipts (debit) side, for incoming funds to the bank or cash account.
- The payments (credit) side, for outgoings paid from these accounts.

All entries must specify the other general ledger account involved, such as sales, purchases, wages, or capital introduced.

> **Key Term: cash book**
> A book of prime entry that records all receipts and payments of cash and through the bank. It serves as both a record of transactions and as part of the double-entry system.

## Bank Overdrafts

A bank overdraft arises when withdrawals from the bank exceed available funds, resulting in a credit balance in the cash at bank account in the entity's records.

In the double-entry system:

- An increase in bank funds is a debit (asset) in the cash at bank account.
- An overdraft results in a credit (liability) balance.

At the reporting date, if the cash at bank account has a credit balance, this is presented as a current liability in the statement of financial position.

> **Key Term: bank overdraft**
> A credit balance on the entity’s cash at bank account, representing an amount owed to the bank and classified as a current liability.

## Recording Overdrafts in the Cash Book

The cash book structure accommodates both positive and overdrawn balances. Receipts are debited; payments, including those leading to an overdraft, are credited. At period end, a debit balance represents a cash asset; a credit balance (overdraft) is a liability.

Bank interest and fees on overdrafts are typically credited to the bank account and debited to the relevant expense account.

### **Worked Example 1.1**

A business starts the month with \$2,500 in its bank account. During the month, it issues payments totalling \$5,000 and receives income of \$1,000.

What is the month-end balance on the cash at bank account, and how is it classified?

> **Answer:**
> Opening balance: \$2,500
> Plus receipts: +\$1,000 = \$3,500
> Less payments: -\$5,000
> Closing balance: \$3,500 - \$5,000 = -\$1,500
> The account has a \$1,500 credit balance, shown as a bank overdraft (current liability) in the statement of financial position.

## Contra Entries

A contra entry occurs when a business acts as both a supplier and a customer with another entity, giving rise to mutual receivable and payable balances. Instead of settling each amount separately, the lower of the two balances may be offset—this is known as a contra.

In double-entry terms, a contra reduces both the trade receivables and trade payables balances.

> **Key Term: contra entry**
> An accounting entry that reduces both a trade payable and a trade receivable balance when the same party is both a customer and a supplier.

### Recording Contra Entries

The double entry for a contra is always:

- Debit Trade Payables (reducing liability)
- Credit Trade Receivables (reducing asset)

This reflects a payment settled by offset, not actual cash flow.

### **Worked Example 1.2**

On 31 March, Jasper Co owes \$600 to Minerva Co, and Minerva Co owes Jasper Co \$400 for goods sold. The companies agree to offset the lower balance.

Present the journal entry for this transaction in Jasper Co’s books.

> **Answer:**
> The lower balance is \$400. The double entry is:
>
> - Debit Trade Payables \$400 (reducing the amount owed to Minerva Co)
> - Credit Trade Receivables \$400 (reducing the amount Minerva Co owes Jasper Co)
>   The outstanding payable after the contra is \$200.

### **Revision Tip**

Review typical cash book, overdraft, and contra entries as these are common short-form questions in the FA2 objective test.

## Cash Book Closing Balances and Reporting

At the end of the reporting period, total both sides of the cash at bank and cash in hand (petty cash) accounts and calculate the balance carried forward. Key points:

- If the cash at bank account has a **debit balance**, report as a current asset.
- If the cash at bank account has a **credit balance**, report as a bank overdraft (current liability).
- The cash in hand account should never have a credit balance; if it does, investigate for errors.

> **Key Term: cash at bank**
> The general ledger account reflecting the total funds available at the bank—or the amount owed to the bank if overdrawn.

## Financial Statement Impact

Bank overdrafts increase current liabilities and reduce working capital. Contra entries decrease both receivables and payables but do not affect net assets or profit. Ensure correct presentation of these items, and always check balances for appropriateness at period end.

### **Worked Example 1.3**

A business’ trial balance shows:

- Trade receivables: \$7,000
- Trade payables: \$8,500

The business agrees a \$2,000 contra entry with a supplier who is also a customer.

What are the revised balances?

> **Answer:**
> New trade receivables = \$7,000 - \$2,000 = \$5,000
> New trade payables = \$8,500 - \$2,000 = \$6,500
> Both balances are reduced by the amount of the contra.

### **Exam Warning**

Remember: Contra entries do not record a sale or purchase. They only offset existing ledger balances. Never record a contra as income or expense.

## **Summary**

The cash book records all money in and out, including entries that may result in a bank overdraft (reported as a current liability). Contra entries between receivables and payables offset balances for parties who are both customers and suppliers, reducing both asset and liability balances. Accurate recording and correct classification are essential for reliable financial statements and ACCA exam success.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Define and structure the cash book for bank and cash transactions
- Identify and record bank overdrafts as credit balances, classifying as current liabilities
- Understand and enter contra entries between receivables and payables
- Present closing cash at bank balances correctly in financial statements
- Apply double-entry rules throughout all cash book and contra transactions

## **Key Terms and Concepts**

- cash book
- bank overdraft
- contra entry
- cash at bank

Cash book structures - Bank overdrafts and contra entries