CHAPTER NINE

BANKING SYSTEMS AND SERVICES

Learning objectives

At the end of this chapter candidates should be able to:

• State the types of bank accounts an entity can open with the bank;

• State the methods of handling, and storing money and security aspects;

• Prepare Adjusted Cashbook;

• Prepare a bank reconciliation statement;

Types of Bank Accounts

To be able to transfer money from one account to the other, a customer must have a bank account, which
are of many types. These are:

Savings Account

This type of account is meant for the small savers to keep their surplus funds. This account is usually
opened by individuals such as clubs, associations, salary, earners, petty traders etc.

Current Account

A current account is operated by the use of cheques. Money can be withdrawn from the account anytime
without giving prior notice to the banker. For this reason it is called “Demand Deposit.” The customer
usually does not enjoy any interest on current account balances. In a few cases, little interest may be given
by the bank. A current account customer may be granted an overdraft.

Interest Bearing Accounts

Some businesses usually open some other accounts on which they can earn interests; these could be
referred to as interest-bearing accounts. These consist of savings accounts and fixed deposit accounts.
They will transfer surplus cash from the current account to these accounts to earn interests.

Fixed Deposit Account

A fixed deposit account is an account kept with the bank in form of investment for a specific

period of time usually 30 days, b60 days, 90 days or 180 days. A fixed rate of interest is payable by the
bank on such deposits.

Adequate notice of withdrawal from or termination of the investment must be given to the bank or else
the customer forfeits his right to the next interest payable on the investment or suffers penal charge for
premature termination.

Methods of Handling, Storing and Security as aspects of Money

In the management of day-to-day business activity, an entity must keep an eye, monitor, track and control
cash to ensure safety and security. The following are best practices of cash handling, storing and security
of cash.

a) Organisation is crucial to effective cash management

The entity must be fully aware of its location, daily cash needs and threshold of cash to maintain for daily
transactions. This will prevent the entity to prevent cash losses and cash mishandling problems from day
to day operations of a business.

b) Keep an eye on your cash

It is crucial for an entity to at all time to know where its cash and how much of the is with who to put in in
place necessary cash handling and management tools. An entity may engage technology to manage its
cash to ease cash management problems.

c) Implement Policies and Procedures

The entity must implement and improve on the cash management procedures put in place to reduce cash
mishandling. The staff must be well trained to be comfortable on the use of the policies and procedures
to manage cash in an entity.

d) Keep less cash in vault

The entity must not keep large amount in in the vault to discourage staff from being dishonest and take
away the cash for personal use or do teeming and lading by taking the same amount of money for personal
use and return the same at the end of the month. The entity can set cash limit to be kept in the iron and
fire proof safe.

e) Invest in Technology

The entity can invest in technology, for example, putting an alarm system in the fire proof iron vault such
that when the maximum cash limit is reached, the alarm sounds and the cashier will go to the bank to
deposit the excess cash in the safe.

f) Cash Storage System

Cash must be stored in the fire proof and secured safe located in a secured area with security lock to be
controlled by the vault manager.

g) Use of Mercury Light

To detect counterfeit or fake money, the cash office must be equipped with mercury light to be used to
detect fake money that a fraudulent customer may pay to the cashier.

h) Cash Register Balance

The entity must maintain a cash register ledger to record income received and payments made from day-
to-day cash collection of the cashier.
i) Insurance Policy

The cashiers must be well insured so that the entity will be indemnified when there is a loss of cash.

Bank Statement and Bank Reconciliation Statement

• A cash book is a financial journal that contains all cash deposits and withdrawals for a time
period. This is prepared by the account holder.
• A bank statement is a statement, typically sent to the account holder by the bank every month,
summarizing all transactions in an account during a set time period.
• A bank reconciliation statement is a statement drawn up by an entity to verify cashbook and
bank statement balances.

Differences between the cashbook balance and the balance on the bank statement

Most times, the balance shown on the cashbook is different from the balance on the bank statement.
When this happened, it can be traced to some of the following factors;

(a) Unpresented cheques:-These are the cheques drawn on the bank to the payees but have not been
presented to the bank for payment. The cashbook of the business would have been credited (that is it has
been treated as payment through the bank by the business). This transaction would appear on the credit
side of the cash book but missing from the debit side of the bank statement.

(b) Uncredited cheques:- These are cheques deposited in the business bank Account and not yet recorded
in the bank statement until three or four days thereafter, whereas it would have been recorded on the
debit side of the cashbook.

The transaction will appear on the debit side of the cashbook but missing from the credit side of the bank
statement.

(c) Bank charges: These are charges made by the bank to cover the expenses in Handling Bank account.
The major charges are based on the volume (i.e. Turnover) of the transactions on the account. It is
sometimes called commission on turnover (COT). Other charges are charges for cheque book, interest
charges on bank over draft facilities from the bank, administration expenses etc. These charges would have
been recorded in the bank statement but will be missing on the credit side of the cash book.

(d) Standing Order: This is where the business entity has instructed its bank to Make regular amounts of
money at given dates to some other third parties. On due dates, the bank would have made the payments
but the fact will not be known to the business. An example is where a business instructs its bank to make
regular payments of insurance premiums on its policies to its insurance company. The bank would show
the debit entries on the bank statement but the credit entries will be missing on the cash book of the
business.

(e) Direct Debits: These are direct payments of expenses on behalf of the business by the bank, e.g
electricity bills and telephone bills. These have the same effect as the bank charges.

(f) Direct Credits: These are amounts received on behalf of the business directly by the bank. The bank
account would have been credited and shown on the bank statement but the entry will be missing from
the debit side of the cash book e.g. dividends on investments.
(g) Error of the customer or/of the bank

PREPARATION OF ADJUSTED CASHBOOK

Two main steps are involved in the preparation of a bank reconciliation statement.

(1) Determine the adjusted cash book balance.

(2) Reconciling the adjusted cashbook balance with the bank statement balance.

Determining the adjusted Cash Book Balance

Cash Book (with Adjustment) Format

Adjusted Cashbook
Dr Cr
Balance b/d (credit bal.) X Balance b/d (debit bal.) X
Direct credit X Direct debits X
Understatement cash X Standing order X

Cheque earlier lodged

Commission received X Now dishonoured X
Dividend received X Bank charges X
Bal c/d (debit/overdrawn) X Overstatement of cash X
Bal c/d (credit) X
XX XX

Preparing the bank reconciliation statement

Adjusted Balance as per cash book xx

Add: Unpresented cheques xx
Error of overstatement by bank xx
xx
Less: Uncredited cheques xx
Error reducing the business balance Committed by bank xx
(xx)
Balance as per bank statement xx