1. Payment Methods and Bank Reconciliation

2. Chapter 1 Payment methods
Identify the appropriate use of different payment methods
Identify the effect of different payment methods on the bank balance
TITLE HERE MONTH 0000

3. Payment methods
How can businesses make payments?

4. Payment Method
Method
When the payers bank balance is reduced

5. Payment methods How can businesses make payments?
Cash, cheque, debit card, credit card, standing order, direct debit
Bank draft (bank cheque) , BACS (Bankers Automated Clearing Services), CHAPS (Clearing House Automated Payment System), faster payments (internet)

6. Cash Notes and coins withdrawn from the bank
Traditional form of payment for small value transactions. Used for:
Small items of office expenditure
the payment of wage for employees who do not have a bank account
Also need for a ‘petty cash’ system
Paying-in-slip used when cash is paid into the bank account.
Appears as a ‘counter credit’ on bank statement
Immediate reduction in bank account balance
Note: Payment made from the cash till will have no effect on bank balance

7. Cheque
A cheque is an instruction in writing, signed by the bank’s customer (who is paying the money- drawer) telling the bank (drawee) to pay a specific amount of money to a named person or business (payee).
Cheque banked by the payee
Cheque takes 3 working days to clear after the day it is banked
Once cleared money is available for use
The payer’s bank balance is reduced after the date of the payment

8. Cheque-Dishonoured cheque
If there are insufficient funds in the drawer’s account the drawee will dishonour the cheque and send the dishonoured cheque back to the payee.

9. Debit Card Is an electronic payment card
Which can be used for business expenses eg purchases and cash withdrawals.
Transactions can take place in person, by phone and online
Reduces the payer’s bank balance immediately

10. Prepayment card
A card which can be purchased and is given a ‘balance to spend’ – it can be ‘topped up’ when the balance runs low

11. Credit Card
A card issued on a ‘buy now and pay later’ basis; payment is made monthly in full or in part on receipt of a statement
Card used for paying for business expenses
It can be used for a sales rep who travels around for the business and has to pay for expenses incurred in her job.
The business is sent a credit card statement every month
Monthly lump sum deduction (full amount or minimum payment) made from bank account of the previous month’s expenses made on the card. Therefore , purchases do not have an immediate effect on the bank balance.
Credit card reduces funds at a later date

12. Charge card
A card issued on a ‘buy now and pay later’ basis; payment is made monthly in full by the user

13. You Try:
Activity 1: Effect payment methods have on the bank balance (part 1) BPP pg 7

14. Electronic bank transfer
A term used to describe the electronic transfer of funds through the bank’s computer systems.

15. Bank Draft
Is a non-cancellable cheque drawn on the bank rather than the customer’s account
Cheque issued by the bank – payment guaranteed. ‘as good as cash’
Business will request a bank draft specifying the payee and the amount.
The bank takes the amount plus a fee from the business’s bank account and provides the bank draft. The bank draft is then sent to the supplier
A paper-based document (similar to a cheque) issued by a bank – as good as cash – used for high value purchases; it can not be stopped or cancelled after it has been issued.
Used for example: buying a new car costing £34,000 for delivery the following day
Immediate reduction in bank account balance

16. Standing order (STO)
A method of making regular (fixed date, same amount) payments, set up with the bank by the business sending the money (by filling in a standing order schedule) – they can be processed by BACS or by Faster Payments
Standing orders are best suited for payments which are equal in amount eg useful for example paying a monthly rates bill of twelve fixed instalments of £258.90
Payment by standing order reduces the payer’s bank balance on the date the payment is made.

17. Direct Debit
A method of making payments direct from the bank where payments (amount) are for variable amounts and/or varying time intervals (date)
Variable date and amount BACS Payments, set up by the organisation receiving the payments
Used for example paying an electricity bill which has variable quarterly payments
To set up D.D the business must complete a direct debit mandate,
Payments by direct debit reduces the payer’s bank balance on the date the payment is made.

18. You Try
Activity 2 Payment methods (part 1) BPP pg 11

19. BACS
Bankers Automated Clearing Services – a system set up by the banks to make computer based direct payments between bank accounts
Electronic transfer processed by BACS set up on BACS system 3 days before the actual money transfer (used for Direct Credits and Direct Debits)
Reduction in bank account balance on the same day that the transfer reaches the account receiving payment

20. BACS DIRECT CREDIT
A deposit of money by a payer directly into a payee’s bank account – made electronically.
Details of each recipient’s bank account and the amount to be paid are submitted to the BACS clearing centre. Payments are taken directly from the business’s bank account and paid in to each recipient’s bank accounts
Payment by direct credit reduces the payer’s bank balance on the date the payment is made.
Direct BACS payments between bank accounts- with a three day clearance (the transfer is made three working days after the instructions are given)
Best to use eg for paying variable amounts to say twenty suppliers at the end of each month

21. CHAPS
An instruction by the business to its bank to move (electronic transfer) a large amount of money to the recipient’s account at another bank so the money is available the same working day
High value, same day payments sent through banks’ computer systems (Clearing House Automated Payment System) – they can not be cancelled after they have been sent.
Used for example paying £350,000 to a firm of solicitors for the purchase of a new shop.
Immediate reduction in bank account balance

22. Faster Payments
Same-day payments (usually 2 hours) between banks – the instructions can be given at the bank branch, by telephone or online
Small and medium sized payments
Immediate reduction in bank account balance

23. You Try
Activity 3: Effect payment methods have on the bank balance (part 2) - Bpp pg 12
Activity 4: Payment methods (part 2) – BPP pg 13

24. Payment methods
BOOKKEEPING CONTROLS

25. Payment methods (cont’d)
BOOKKEEPING CONTROLS

26. Payment methods (2)
BOOKKEEPING CONTROLS

27. Payment methods (2) (cont’d)
BOOKKEEPING CONTROLS

28. Payment methods and deduction from bank account
Same day
Next day
3 working days
Debit card ˇ
Cash
CHAPS
Credit card
Faster Payment
Cheque
Next month ˇ

29. Chapter 2 Bank reconciliations
Purpose of reconciliation
Locate differences between items on the bank statement and entries in the cash book
Use the bank statement to update the cash book
Produce a bank reconciliation statement
Proforma
Example
TITLE HERE MONTH 0000

30. Bank Reconciliation
Businesses bank accounts must be reconciled with the cash book so the company owners know exactly how much cash the business has at a particular point in time (eg month end).
Bank reconciliation statement: is a statement reconciling the bank statement balance on a given date to the correct, adjusted cash book balance on the same date.
In the assessment you will be asked to:
Update the cash book
Complete a bank reconciliation statement

31. CASHBOOK Cash Payments Book and cash Receipts Book
May be books of prime entry only of part of the double entry system

32. Cash Book Balance
£ Opening balance per the cash book X Add: Receipts X Less: Payments (X) Closing balance per the cash book X

33. The Bank Statement From the Bank’s side
The credit balance is the amount they owe you – a payable
The debit balance is the amount you owe them – the receivable – “Overdrawn”
Deposits will be credits on your statement
Withdrawals will be debits on your statement

34. Reconciling the bank statement to the cash book
Checking the bank statement to the cash book
Must be done regularly – i.e. monthly
Differences must be identified and either added into the cashbook or adjusted through the reconciliation
What differences can you find?

35. Differences Cash book to bank statement
Timing Differences
Unpresented cheques
Outstanding (Uncleared) lodgements
Bank statement transactions not on cash book –Cash book needs to be updated
Standing orders
Direct Debits
BACS
Bank interest (received or charged)
Bank charges

36. Cash Book vs Bank Statement
Which one is accurate? Which one gives the true picture of the cash balance?

37. Purpose
BOOKKEEPING CONTROLS

38. Bank Reconciliation Process
Check the opening balance from the cash book to the bank statement
Tick CRB items to the bank statement
Tick CPB items to the bank statement
‘Update the cash book’ - Add unticked items in the bank statement to the cash book
Prepare a bank reconciliation for any unticked items in the cash book
See - BPP page 23

39. Proforma Bank Reconciliation
£ Balance per bank statement X Less: Unpresented cheques (X) Add: Outstanding lodgements X Balance per cash book X

40. Proforma
BOOKKEEPING CONTROLS

41. Activities Work through illustration 1 p24-30
Activity 1 p31 – look at opening balance together
Activity 2 p35
Activity 3 p37
Test your learning p42-45

42. Example
BOOKKEEPING CONTROLS

43. Example (cont’d)
BOOKKEEPING CONTROLS

44. Example (2)
BOOKKEEPING CONTROLS

45. Example (2) (cont’d)
BOOKKEEPING CONTROLS

46. Lesson 1 Bookkeeping Controls Homework
For chapters 1 & 2:
Course book: complete all activities, test your learning questions Chapter 1 & 2, learn the keywords
Question bank questions – all completed and answers checked
Knowledge Topic 1