Bank Reconciliation: A Comprehensive Guide for Financial Accounting, Exercises of Financial Accounting

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UNIT 10: FINANCIAL

ACCOUNTING

LO 3: PERFORM BANK RECONCILIATIONS TO ENSURE COMPANY AND BANK RECORDS ARE CORRECT

UNIT 10: FINANCIAL

ACCOUNTING

M3: APPLY THE RECONCILIATION PROCESS DEMONSTARTING THE USE OF DEPOSIT IN TRANSIT,OUSTANDING CHEQUES AND NOT SUFFICEINT FUNDS (NSF) CHEQUE.

› The key terms to be aware of when dealing with a

bank reconciliation are:

› Deposit in transit. Cash and/or checks that have

been received and recorded by an entity, but

which have not yet been recorded in the records

of the bank where the entity deposits the funds.

› If this occurs at month-end, the deposit will not

appear in the bank statement, and so becomes a

reconciling item in the bank reconciliation. A

deposit in transit occurs when a deposit arrives at

the bank too late for it to be recorded that day, or

if the entity mails the deposit to the bank (in which

case a mail float of several days can cause a

delay), or the entity has not yet sent the deposit

to the bank at all.

› NSF cheque. A cheque that was not honored by

the bank of the entity issuing the check, on the

grounds that the entity's bank account does not

contain sufficient funds. NSF is an acronym for

"not sufficient funds." The entity attempting to

cash an NSF cheque may be charged a processing

fee by its bank. The entity issuing an NSF cheque

will certainly be charged a fee by its bank.

› Differences between the bank statement and the cash book. › When attempting to reconcile the cash book with the bank statement, there are three differences between the cash book and bank statement: › unrecorded items › timing differences › errors ›

› They are not recorded in the cash book simply because the business does not know that these items have arisen until they see the bank statement. › The cash book must be adjusted to reflect these items.

› Bank reconciliation adjustments › Timing differences › These items have been recorded in the cash book, but due to the bank clearing process have not yet been recorded in the bank statement: › Outstanding/unpresented cheques (cheques sent to suppliers but not yet cleared by the bank). › Outstanding/uncleared lodgements (cheques received by the business but not yet cleared by the bank).

› Errors in the cash book › The business may make a mistake in their cash book. The cash book balance will need to be adjusted for these items. › Errors in the bank statement › The bank may make a mistake, e.g. record a transaction relating to a different person within our business bank statement. The bank statement balance will need to be adjusted for these items.

› Outstanding or unpresented cheques › Suppose a cheque relating to a payment to a supplier of Poor boy is written, signed and posted on 29 March. It is also entered in the cashbook on the same day. By the time the supplier has received the cheque and paid it into his bank account, and by the time his bank has gone through the clearing system, the cheque does not appear on Poor boy statement until, say, 6 April. Poorboy would regard the payment as being made on 29 March and its cash book balance as reflecting the true position at that date.

› Bank Reconciliation Procedure: › 1.On the bank statement, compare the company’s list of issued checks and deposits to the checks shown on the statement to identify uncleared checks and deposits in transit. › 2.Using the cash balance shown on the bank statement, add back any deposits in transit. › 3.Deduct any outstanding checks. › 4.This will provide the adjusted bank cash balance. › 5.Next, use the company’s ending cash balance, add any interest earned and notes receivable amount. › 6.Deduct any bank service fees, penalties, and NSF checks. This will arrive at the adjusted company cash balance. › 7.After reconciliation, the adjusted bank balance should match with the company’s ending adjusted cash balance.

• › BANK RECONCILIATION STATEMENT AS AT FEBRUARY 1,

› When there is overdraft the situation will just opposite to that when there is a favourable balance. Hence, reverse steps would, of course, be taken while preparing Bank Reconciliation Statement. When there is an overdraft, the bank Pass Book shows a debit balance and the Bank Account in the Cash Book shows a credit balance. The reasons for the discrepancies mentioned earlier are the same, under overdraft, but in opposite direction. The following template can be used to prepare the bank reconciliation statement: