After in-depth discussions on trade, bills and discounts, I now bring you to Banking Transactions-1 where we’ll think of the transactions that we undertake with the bank in our routine life, the withdrawals and deposits we make with it. Then, for each transaction, we’ll identify the accounting items and record the impact on these items (increase or decrease) through the use of our two tags debit and credit.
1. Money Deposit
One of the most common transactions that we have with a bank is that of depositing an amount in our savings or current accounts with the bank.
Let us try and account for this transaction. Depositing cash means a decrease in cash in our drawer, which is credited.
Secondly, there is an increase in our bank account balance (an asset), which is debited.
2. Withdrawal of Money
After deposit, the second most common transaction we have with the bank is withdrawal of an amount from our bank account for some reason.
As for accounting, withdrawing money from bank means we will find an increase in our cash at hand, which is debited.
And of course, there will be a decrease in our bank balance (an asset), which is credited.
3. Direct deposit by customer
Say, a customer purchases some goods from you on credit (in which case, he becomes a debtor).
After some days, when it comes to payment, instead of giving us physical cash, he transfers the amount directly into our bank account through NEFT or any other bank service.
Upon successful receipt of the amount in our bank account, we have an increase in our bank balance which is debited. And, we have to reduce the customer’s dues to the extent of the payment made for which we credit his name in the entry.
4. Cheque (from customer) previously deposited is dishonoured
When we deposit a cheque received from a customer, the result is more or less the same as the case of direct deposit by the customer i.e., our receivables from the customer decrease and bank balance increases. Hence, the entry too, remains the same where Bank item is debited and the customer’s name is tagged credit.
Sometimes, due to insufficient funds in the customer’s account, mismatched signature or any other reason, the customer’s cheque that we deposit in the bank may bounce. This, in accounting jargon, is called dishonour of a cheque.
To record a cheque dishonour, simply reverse the entry made for depositing the cheque.
Cheques in Hand
It is common for a cheque to sit around in our drawer for a day or two. If we do not deposit the cheque, our bank balance remains the same which rules out the use of Bank item in the journal entry. So, what do we do when we’ve received a cheque from our customer but do not plan to deposit it on the very same day? After all, we do need to cancel the customer’s dues the moment he gives us the cheque in order to maintain accurate records.
To resolve this little issue, we create a temporary accounting item called ‘Cheques in Hand’ and cancel it the day we deposit the cheque.
Cheques in Hand indicates that money will be put into our bank account i.e., our virtual pocket. Hence, it is categorised as an Asset and naturally, receives the debit tag upon its creation.
The supporting credit effect is created by crediting the customer’s name to indicate a decrease in his dues to us.
And, when we deposit the cheque in bank, the temporary Cheques in Hand will be credited.
And, the Bank item will be debited as this is the time where we actually expect our bank balance to increase.
That is all for banking transactions-1.
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