Standing Order is an instruction to the bank to transfer funds of a specific amount to another account on a specific date on a recurring basis. It is very similar to a direct debit except that the amount and date of payment cannot be varied. The payment is initiated by the payee himself although the account in which the funds will be transferred needs to be first authorized by the payer. Standing orders are useful where regular payments of fixed amounts are to be made to certain parties such as the payment of mortgage rent and loan installments.
Bank records the amount paid as soon as the transfer through standing order is made but the business entity records the amount when it receives intimation by the bank through bank statement or otherwise. Therefore, the balance as per bank statement may be lower than the balance as per cash book due to payments made through standing orders not yet accounted for by the entity. The difference needs to be eliminated by adjusting the cash book of the company before the preparation a bank reconciliation.
Example
ABC & Co has made a standing order to its bank to transfer an amount of $5000 on the last day of the month as security charges to a security company. On 31 December 2010, the bank statement shows a balance of $20,000 whereas the cash book balance is $25,000. The difference represents the amount of payment through standing order not yet recorded by ABC Co. LTD.
| Bank Statement of ABC & Co. for the month of December 2010 | |||||
|---|---|---|---|---|---|
|
Date |
Particulars |
Opening Balance |
Debit |
Credit |
Balance |
|
01-12-2010 |
|
25,000 |
- |
- |
25,000 |
|
30-12-2010 |
Fund Transfer |
25,000 |
5,000 |
- |
20,000 |
In order to eliminate the difference between the two balances, ABC Co. LTD must record the following accounting entry:
|
Debit |
Security Charges Payable |
$5,000 |
|
Credit |
Bank |
$5,000 |
This will reduce the cash book balance to $20,000 which is equal to the balance as shown in the bank statement.