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    Bank Reconciliation

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    Fantay
    Bank reconciliation is a process to ensure the bank balance recorded in a company's accounting records matches the balance on the bank statement. It involves identifying and resolving any differences between these balances. Reconciliations list additions like deposits not yet recorded by the bank and subtractions like outstanding checks. Preparing reconciliations helps ensure all cash transactions are accounted for and that book and bank cash records are accurate. Electronic funds transfers now allow companies to transfer funds electronically without using paper, like transferring payroll funds directly to employee bank accounts.

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    Bank Reconciliation

    Uploaded by

    Fantay
    255 views6 pages
    Bank reconciliation is a process to ensure the bank balance recorded in a company's accounting records matches the balance on the bank statement. It involves identifying and resolving any differences between these balances. Reconciliations list additions like deposits not yet recorded by the bank and subtractions like outstanding checks. Preparing reconciliations helps ensure all cash transactions are accounted for and that book and bank cash records are accurate. Electronic funds transfers now allow companies to transfer funds electronically without using paper, like transferring payroll funds directly to employee bank accounts.

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    Bank reconciliation is a process to ensure the bank balance recorded in a company's accounting records matches the balance on the bank statement. It involves identifying and resolving any differences between these balances. Reconciliations list additions like deposits not yet recorded by the bank and subtractions like outstanding checks. Preparing reconciliations helps ensure all cash transactions are accounted for and that book and bank cash records are accurate. Electronic funds transfers now allow companies to transfer funds electronically without using paper, like transferring payroll funds directly to employee bank accounts.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    255 views6 pages

    Bank Reconciliation

    Uploaded by

    Fantay
    Bank reconciliation is a process to ensure the bank balance recorded in a company's accounting records matches the balance on the bank statement. It involves identifying and resolving any differences between these balances. Reconciliations list additions like deposits not yet recorded by the bank and subtractions like outstanding checks. Preparing reconciliations helps ensure all cash transactions are accounted for and that book and bank cash records are accurate. Electronic funds transfers now allow companies to transfer funds electronically without using paper, like transferring payroll funds directly to employee bank accounts.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 6

    Bank Reconciliation

    For effective control, the reasons for the difference between the cash balance on the bank
    statement and the cash balance in the accounting records should be determined by preparing
    bank reconciliation.
    Bank reconciliation is a listing of the items and amounts that causes the cash balance reported
    in the bank statement to differ from the balance of the cash account in the ledger. Bank
    reconciliation, which is prepared by the company (not by the bank), properly done, it explains
    all differences between the company’s cash records and the bank statement figures. It ensures
    that all cash transactions have been accounted for. It also establishes that bank and book (your
    own) records of cash are correct.
    Bank reconciliation is usually divided into two sections. The first section begins with the cash
    balance according to the bank statement and ends with the adjusted balance. The second section
    begins with the cash balance according to the depositor’s records and ends with the adjusted
    balance. The two amounts designated as the adjusted balance must be equal. The content of the
    bank reconciliation is shown below.

    Cash balance according to bank statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $XXX


    Add: Additions by depositor not on bank statement . . . . . . . . . $XX
    Bank errors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XX XX
    Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $XXX
    Deduct: Deductions by depositor not on bank statement . . . . . . $XX
    Bank errors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XX XX
    Adjusted balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$XXX

    Cash balance according to depositor’s records. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $XXX


    Add: Additions by bank not recorded by depositor . . . . . . . . . . . $XX
    Depositor errors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XX XX
    Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $XXX
    Deduct: Deductions by bank not recorded by depositor . . . . . . . $XX
    Depositor errors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XX XX
    Adjusted balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $XXX
    NOTE: The two adjusted balances must be equal
    The following steps are useful in finding the reconciling items and determining the adjusted
    balance of Cash:
    1. Compare each deposit listed on the bank statement with unrecorded deposits appearing in
    the preceding period’s reconciliation and with deposit receipts or other records of
    deposits. Add deposits not recorded by the bank to the balance according to the bank
    statement.
    2. Compare paid checks with outstanding checks appearing on the preceding period’s
    reconciliation and with recorded checks. Deduct checks outstanding that have not been
    paid by the bank from the balance according to the bank statement.
    3. Compare bank credit memorandums to entries in the journal. For example, a bank would
    issue a credit memorandum for a note receivable and interest that it collected for a
    depositor. Add credit memorandums that have not been recorded to the balance
    according to the depositor’s records.
    4. Compare bank debit memorandums to entries recording cash payments. For example, a
    bank normally issues debit memorandums for service charges and check printing charges.
    A bank also issues debit memorandums for not-sufficient-funds checks. A not-sufficient-
    funds (NSF) check is a customer’s check that was recorded and deposited but was not
    paid when it was presented to the customer’s bank for payment. NSF checks are normally
    charged back to the customer as an account receivable. Deduct debit memorandums that
    have not been recorded from the balance according to the depositor’s records.
    5. List any errors discovered during the preceding steps. For example, if an amount has been
    recorded incorrectly by the depositor, the amount of the error should be added to or
    deducted from the cash balance according to the depositor’s records. Similarly, errors by
    the bank should be added to or deducted from the cash balance according to the bank
    statement.
    Example: assume that the bank statement for Power Networking shows a balance of $3,359.78 as
    of July 31, 2015. The cash balance in Power Networking’s ledger as of the same date is
    $2,549.99. The following reconciling items are revealed by using the steps outlined above:
    Deposit of July 31, not recorded on bank statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 816.20
    Checks outstanding: No. 812, $1,061.00; No. 878, $435.39; No. 883, $48.60 . . . . . . . . . . . 1,544.99
    Note plus interest of $8 collected by bank (credit memorandum), not recorded in the journal . . . . 408.00
    Check from customer (Thomas Lema) returned by bank because of insufficient funds (NSF) . . . . . 300.00
    Bank service charges (debit memorandum), not recorded in the journal . . . . . . . . . . . . . . . . . . 18.00
    Check No. 879 for $732.26 to Nile Co. on account, recorded in the journal as $723.26 . . . . . . . . 9.00

    Power Networking
    Bank Reconciliation
    July 31, 2015
    Cash balance according to bank statement ………………………………………… $3,359.78
    Add: Deposits in transit ………………………………….…………………….. $816.20
    Subtotal …………………………………………….…………………………… $4,175.98
    Less: Outstanding checks
    No. 812 ……………………………………………… $1,061.00
    No. 878 ……………………………………………… 435.39
    No. 883………………………………………………48.60 1544.99
    Adjusted cash balance per bank ………………………………………………….$2,630.99

    Cash balance according to depositor’s record………………………………...…… $2,549.99


    Add: note receivable and interest collected by bank……………………...…… 408.00
    Subtotal ……………………………………………………………….........……$2,957.99
    Less: Bank service charge ………………………..……………. $18.00
    NSF check returned ……………………………………… 300.00
    Error in recording check No.879………………..………… 9.00 327.00
    Adjusted cash balance per depositor ……………..………………………………$2,630.99

    No entries are necessary on the depositor’s records as a result of the information included in the
    first section of the bank reconciliation. This section begins with the cash balance according to the
    bank statement. However, the bank should be notified of any errors that need to be corrected on
    its records.
    Any items in the second section of the bank reconciliation must be recorded in the depositor’s
    accounts. This section begins with the cash balance according to the depositor’s records. For
    example, journal entries should be made for any unrecorded bank memorandums and any
    depositor’s errors .The journal entries for Power Networking, based on the preceding bank
    reconciliation, are as follows:
    July 31: Cash . . . . . . . . . . . . . . . . . . . . . . . . . . 408.00
    Notes Receivable . . . . . . . . . . . . . . . . . . 400.00
    Interest Revenue . . . . . . . . . . . . . . . . . . . 8.00
    (To record Note collected by bank)

    July 31: Accounts Receivable––Thomas Lema . . . . . . . . $300.00


    Miscellaneous Administrative Expense . . . . . . . 18.00
    Accounts Payable––Nile Co. . . . . . . . . . . . . . . . 9.00
    Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $327.00
    (NSF check, bank service charges, & error in recording Check No. 879)

    After these entries have been posted, the cash account will have a debit balance of $2,630.99.
    This balance agrees with the adjusted cash balance shown on the bank reconciliation. This is the
    amount of cash available as of July 31 and the amount that would be reported on Power
    Networking’s July 31 balance sheet.

    Although businesses may reconcile their bank accounts in a slightly different format from what
    we described above, the objective is the same: to control cash by reconciling the company’s
    records to the records of an independent outside source, the bank. In doing so, any errors or
    misuse of cash may be detected.

    For effective control, the bank reconciliation should be prepared by an employee who does not
    take part in or record cash transactions. When these duties are not properly separated, mistakes
    are likely to occur, and it is more likely that cash will be stolen or otherwise misapplied. For
    example, an employee who takes part in all of these duties could prepare and cash an
    unauthorized check, omit it from the accounts, and omit it from the reconciliation.
    Electronic Funds Transfer (EFT) System
    It is not surprising that companies and banks have developed approaches to transfer funds among
    parties without the use of paper (deposit tickets, checks, etc.). Such procedures, called electronic
    funds transfers (EFT), are disbursement systems that use wire, telephone, or computers to
    transfer cash balances from one location to another. Use of EFT is quite common. For example,
    many employees receive no formal payroll checks from their employers. Instead, employers send
    electronic payroll data to the appropriate banks. Also, individuals now frequently make regular
    payments such as those for house, car, and utilities by EFT.

    EFT transfers normally result in better internal control since no cash or checks are handled by
    company employees. This does not mean that opportunities for fraud are eliminated. In fact, the
    same basic principles related to internal control apply to EFT transfers. For example, without
    proper segregation of duties and authorizations, an employee might be able to redirect electronic
    payments into a personal bank account and conceal the theft with fraudulent accounting entries.

    6.1 Petty Cash and Change Funds


    6.1.1 Petty Cash
    Better internal control over cash disbursements is possible when companies make payments by
    check. However, using checks to pay small amounts is both impractical and a nuisance. For
    instance, a company would not want to write checks to pay for postage due, working lunches, or
    taxi fares. A common way of handling such payments, while maintaining satisfactory control, is
    to use a petty cash fund to pay relatively small amounts.

    The operation of a petty cash fund, often called an imprest system, involves three steps:
    1. establishing the fund
    2. making payments from the fund
    3. replenishing the fund

    Establishing petty cash Fund: A petty cash fund is established by first estimating the amount of
    cash needed for payments from the fund during a period, such as a week or a month. After
    necessary approvals, a check is written and cashed for this amount. The money obtained from
    cashing the check is then given to an employee, called the petty cash custodian, who is
    authorized to disburse monies from the fund.
    Making Payments from petty cash Fund: Each time, money is paid from petty cash the
    custodian records the details of the payment on a petty cash receipt form. For control purposes,
    the company may place restrictions on the maximum amount and the types of payments that can
    be made from the fund. The company does not make an accounting entry to record a
    payment when it is made from petty cash. Instead, the company recognizes the accounting
    effects of each payment when it replenishes the fund.

    Replenishing petty cash Fund: When the money in the petty cash fund reaches a minimum
    level, the company replenishes the fund.

    To illustrate normal petty cash fund entries, assume that a petty cash fund of $100 is established
    on August 1. The entry to record this transaction is as follows:
    Aug. 1: Petty cash . . . . . . . . . . . . . . . . . 100
    Cash . . . . . . . . . . . . . . . . . . . . . . . . . . 100
    (To establish a petty cash fund)

    At the end of August, the petty cash receipts indicate expenditures for the following items: office
    supplies, $28; postage (office supplies), $22; store supplies, $35; and daily newspapers
    (miscellaneous administrative expense), $3. The entry to replenish the petty cash fund on August
    31 is as follows:
    Aug. 31: Office Supplies . . . . . . . . . . . . . . . . ………. . 50
    Store Supplies . . . . . . . . . . . . . . . . . . . . . . . . . 35
    Miscellaneous Administrative Expense . . . . . . 3
    Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
    (To replenish petty cash fund)

    Replenishing the petty cash fund restores it to its original amount of $100. You should note that
    there is no entry in Petty Cash when the fund is replenished. Petty Cash is debited only when the
    fund is initially set up or when the amount of the fund is increased at a later time. Petty Cash is
    credited if it is being decreased.

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