A by cathy.

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I am Cathy. I am a Certified Public Accountant and a business consultant for years. I want to share my expertise thru this blog which is intended to help people who are planning or who are already in business. The topics range from Accounting for Small Business, Cash Management, Inventory Management, Assets Management and Financing. The terminologies will be simplified for laymen and business jargons will be explained for clarity.

Wednesday, December 26, 2007

Understanding Cash Flow Part 1

Cash in the Bank

When I was working as an accountant, my boss asked me why we don't have cash in the bank while the business seems profitable.

He did not know that cash flow is different from profit or revenue; neither is cash in the bank is equivalent to cash position.

Even if the bank statement shows $15,000 balance at the end of the month, it does not necessarily mean that it is the amount available for business to use for payments.
Between the cut-off period of the bank's last entry item and the date when the cash balance is being determined, there are payments which checks are not yet presented in the bank for payment.

There may be loan proceeds that have been credited in the bank account and or there were charges that were debited from the bank's balance.

This is why a bank reconciliation is required at the end of the month to establish how much really is available for business as of the end of the previous month and is carried over at the beginning of the following month.

A simple proforma of a bank reconciliation is as follow:

Balance per bank ..................... XXX
Add Deposit in Transit*............ XXX
Less Outstanding Checks**...... ( XXX)
Adjusted balance per bank.....XXX

Balance per books.................. XXX
Add Bank Credits***...............XXX
Less Bank Debits****..............(XXX)
Adjust balance per bank......XXX

*Deposit in Transit are deposits made at the end of business day after the cut -off period of the bank statement.
**Outstanding checks are checks which disbursements have already been recorded in the books but payments are not yet made by the bank.

*** Bank credits refer to additions made by the bank to your account such as collections from your on-line payments remitted directly to the bank; loan proceeds and other adjustments that will increase the balance which are not yet recorded in the books.
**** Bank debits are deductions from your account such as bank charges.

Related Articles:

1. Understanding Cash Flow Part 2

2. Understanding Cash Flow Part 3



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