Title of Chapter

Chapter 8Part II Bank Reconciliation 2009 The McGraw-Hill Companies, Inc.Chapter 8: Internal Control and Financial Reporting of Cash.1Bank Procedures and ReconciliationBanks help businesses control cash by offering services that:Safeguard Cash The bank provides a secure place to deposit cash.Improved Efficiency and Effectiveness The bank strengthens the processing of cash.Independent Verification The bank statement is used to help the company account for its cash transactions.

McGraw-Hill/IrwinSlide #7-2Regardless of how good a companys internal control system may be, it can always be circumvented by collusion among two or more employees. When employees collude, they are able to cover for each other and make the embezzlement difficult to find. In recent years we have seen collusion at the highest levels of management. The intent of most of these plans was to make the companys financial position look stronger than it actually was. Top management gained from the appreciation in the value of the companys stock. Most of these managers had significant stock options as part of their compensation plan.Bank Procedures and ReconciliationControllingCash in theBankCash receipts should be recorded immediately upon receipt and deposited intact daily.Cash disbursements should be made by prenumbered check.Up to date signature card should be maintained.A deposit ticket should be used for all deposits.A monthly bank reconciliation should be prepared by an independent party.McGraw-Hill/IrwinSlide #7-3Part ICash is the asset most susceptible to misappropriation, so we need special controls over cash. To begin, all cash receipts should be recorded immediately and deposited intact daily. The only exception is for cash needed for cash registers or petty cash funds.

Part IIPrenumbered deposit tickets should be used for all deposits. The deposit tickets should be maintained for as long as necessary.

Part IIIAll cash disbursements, with the exception of petty cash, should be made by prenumbered checks. It is a very good policy to have two check signers.

Part IVAll bank accounts should be reconciled each month by an independent party. That party is the internal auditor in large organizations. As a result of the reconciliation, adjusting entries are usually required to have the general ledger account show the true cash balance.

Part VWe must make certain that all current employees who are authorized to sign checks have signed the bank authorized signature card.The Bank StatementThe bank statement format varies from bank to bank, but the statement usually contains these common elements:

an overall summary of the activity in the account,

a list of specific transactions posted to the account, including checks cleared, deposits made, and other transactions, and

a running balance in the account.

Because amounts that are removed from a bank account reduce the banks liability, they are reported as debits on the bank statement. Debit CardSlide 4Part IFor each cash account opened by a business , the bank will generate a monthly statement of account that is either mailed to or is accessed online by the business. The format varies from bank to bank, but the statement usually contains these common elements:

an overall summary of the activity in the account, a list of specific transactions posted to the account, including checks cleared, deposits made, and other transactions such as NSF checks, bank service charges, and EFTs, and a running balance in the account.

Part IITo understand how these items are reported on a bank statement, it is important to realize that the bank statement is presented from the banks point of view. The amounts in a companys bank account are liabilities to the bank, because they will eventually be used by or returned to the company. As with all liabilities, increases are reported as credits on the bank statement. Amounts that are removed from a bank account reduce the banks liability, so they are reported as debits on the bank statement. This is why we carry debit cards in our wallets that allow us to take money out of our bank accounts, thus reducing (or debiting) the banks liability.4Your Bank May Not Know About

Errors made by the bankTime lagsDeposits that you made recentlyChecks that you wrote recently

You May Not Know About

Interest the bank has put into your accountElectronic funds transfersService charges taken out of your accountCustomer checks you deposited but that bounced (NSF checks)Errors made by you

Need for ReconciliationSlide 5All size companies should prepare monthly bank reconciliations. We have listed the reasons for preparing the reconciliation by indicating when information may not be known by the bank and what information the company may not know about the months processing of cash. The bank reconciliations helps us understand the differences between the balance on the bank statement and the balance in the Cash, general ledger account. You probably prepare a monthly bank reconciliation for your personal checking account. 5Bank Reconciliation

The bank reconciliation reports on the differences between the balance on the bank statement and the balance in the general ledger cash account. The reconciliation results in the up-to-date ending cash balance that will appear on the balance sheet.

McGraw-Hill/IrwinSlide #7-6Part IAs you know from your personal finances, the bank reconciliation explains the difference between the cash balance shown on your bank statement and the cash balance in the general ledger cash account. In your case, the general ledger is your checkbook. We should be able to reconcile the bank statement to the true cash balance and the cash account to the up-to-date cash balance.

Part IICommon adjustments to the cash balance shown on the bank statement are deposits in transit and checks that are outstanding at the end of the period. We always add the deposits in transit to the bank balance and deduct any checks outstanding.

Part IIISome common adjustments to the general ledger cash account include amounts collected by the bank, like electronic funds transfers, and interest earned on our checking account. Both of these amounts will be added to the general ledger cash balance. Any bank service charge and non-sufficient funds checks are subtracted. A non-sufficient funds check is one that we deposited in our checking account but the maker of the check did not have sufficient cash to cover it. Sometimes we refer to these as bounced checks.If an error is found on the bank statement, an adjustment for it is made to the bank balance to determine the up-to-date cash balance. An error made on our books requires an adjusting journal entry to correct.

Bank ReconciliationMcGraw-Hill/IrwinSlide #7-7Both the bank and our accounting department can make errors that go undetected until we prepare the bank reconciliation. These errors always need to be analyzed and corrected. All reconciling items that appear on the general ledger cash side of our reconciliation require an adjustment to our books. The adjustments change the general ledger balance to the up-to-date cash balance.Bank ReconciliationJerry Company is preparing the bank reconciliation for the month of June.The June 30th balance on the bank statement is $4,892.56, and the Cash general ledger balance on this date is $4,240.54.There was a deposit in transit in the amount of $475.The bank erroneously deducted a $200 check drawn on the books of Mary, Inc. from our account.At June 30th there were three checks outstanding. Check 1078 dated 6/28, for $372.33; Check 1080 dated 6/29, for $402.41; and Check 1081 dated 6/30, for $66.89.More InformationMcGraw-Hill/IrwinSlide #7-8On the next two screens we present information relating to the bank reconciliation for Jerry Company for the month of June. You may choose to either print these screens or jot down the information.

Jerry Company is preparing the bank reconciliation for the month of June.The June 30th balance on the bank statement is $4,892.56, and the Cash general ledger balance on this date is $4,240.54.There was a deposit in transit in the amount of $475.The bank erroneously deducted a $200 check drawn on the books of Mary, Inc. from our account.At June 30th there were three checks outstanding. Check 1078 dated 6/28, for $372.33; Check 1080 dated 6/29, for $402.41; and Check 1081 dated 6/30, for $66.89.

Bank ReconciliationDuring the month of June the bank collected an EFT in the amount of $875.A check actually written for $146.88 for supplies was erroneously recorded in our records by the bookkeeper as $173.88.Jerry Company earned interest of $9.25 on its checking account.The bank assessed a service charge of $12.75 for June and we deposited a NSF check in the amount of $413.11.Lets prepare the bank reconciliationMcGraw-Hill/IrwinSlide #7-9During the month of June the bank collected an EFT in the amount of $875.A check actually written for $146.88 for supplies was erroneously recorded in our records by the bookkeeper as $173.88.Jerry Company earned interest of $9.25 on its checking account.The bank assessed a service charge of $12.75 for June and we deposited a NSF check in the amount of $413.11.Bank Reconciliation

McGraw-Hill/IrwinSlide #7-10We begin the reconciliation with the unadjusted bank balance. The first item on the reconciliation is to add the deposits in transit of $475.Bank Reconciliation

McGraw-Hill/IrwinSlide #7-11The bank erroneously deducted another companys check from our account. To correct the error we add the $200 to the bank balance.Bank Reconciliation

McGraw-Hill/IrwinSlide #7-12The last reconciling item on the unadjusted bank balance is to deduct our three outstanding checks. These checks have been written and mailed and will clear the bank shortly.

After all our adjustments we have a up-to-date cash balance at June 30th of $4,725.93. Now lets move to the general ledger cash account balance.Bank Reconciliation

McGraw-Hill/IrwinSlide #7-13Our first reconciling item is to add the EFT deposited directly into Jerrys bank account by the bank.Bank Reconciliation

McGraw-Hill/IrwinSlide #7-14Our bookkeeping error involving the purchase of supplies amounts to $27 and is added to the unadjusted book balance. The interest earned on our bank account first appears on the bank statement. Now we must add the interest to our cash account.Bank Reconciliation

McGraw-Hill/IrwinSlide #7-15We deduct the bank service charge of $12.75. The N S F check did not clear the bank. We recorded it as a deposit in our books but the bank was unable to obtain the funds from the maker so the check was returned. We deduct all N S F checks from the unadjusted book balance.

Notice that the up-to-date cash balance on the bank side of the reconciliation and on the book side are the same. We have been able to explain all of the differences between the bank account balance and the balance on our books.

We must prepare adjusting entries for all items on the book portion of the reconciliation. After we prepare the adjustments, the general ledger balance will be equal $4,725.93. Lets make the adjusting entries now.Every reconciling item that appears on the unadjusted book balance section requires a journal entry to adjust the general ledger cash balance to the up-to-date cash balance.

Bank ReconciliationMcGraw-Hill/IrwinSlide #7-16First, lets group together all adjustments that will increase our cash account. You may want to look back at the reconciliation before we go on.

Part IIThe first adjusting entry is to debit, or increase, cash for $911.25, and credit accounts receivable for the amount of the EFT collected by the bank on our behalf, credit supplies expense for our bookkeeping error, and credit interest revenue for the interest earned on the checking account. Now lets look at all the adjustments that will reduce our cash account.

Part IIIWe begin by debiting bank service charge expense for $12.75, and accounts receivable for the amount of the N S F check. We credit, or reduce, cash for the total of $425.86. After all these adjustments are posted, the balance in our cash account is the up-to-date cash balance.Sheet1Updates to Company's BooksEnding cash balance per booksAdd+Interest earnedAdd+Electronic funds transfersDeduct-NSF checksDeduct-Bank service chargesEquals=Up-to-date ending cash balance

Sheet2

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Sheet1Updates to Bank StatementEnding cash balance per bankAdd+Deposits in transitDeduct-Outstanding checksEquals=Up-to-date ending cash balance

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Table 1Jerry CompanyBank Reconciliation StatementJune 30, 2006Unadjusted Bank Balance, June 30$4,892.56Add: Deposits in transit475.00Bank error200.00Less: Outstanding checksCheck No. 1078 - June 28372.33Check No. 1080 - June 29402.41Check No. 1081 - June 3066.89(841.63)True Cash balance, June 30$4,725.93Unadjusted Book Balance, June 30$4,240.54Add: Account collected by bank875.00Bookkeeping error27.00Interest earned on checking account9.25Less: Bank service charge(12.75)NSF Check(413.11)True Cash balance, June 30$4,725.93

Sheet2Services meet customer needs2.4Service superior to competitors' service3.1Employees respond to special requests3.3Employees give prompt service3.65Employees superior to competitors'3.75

Sheet2

Sheet3

Table 1Jerry CompanyBank Reconciliation StatementJune 30, 2009Unadjusted Bank Balance, June 30$4,892.56Add: Deposits in transit475.00Bank error200.00Less: Outstanding checksCheck No. 1078 - June 28372.33Check No. 1080 - June 29402.41Check No. 1081 - June 3066.89(841.63)True Cash balance, June 30$4,725.93Unadjusted Book Balance, June 30$4,240.54Add: Account collected by bank875.00Bookkeeping error27.00Interest earned on checking account9.25Less: Bank service charge(12.75)NSF Check(413.11)True Cash balance, June 30$4,725.93

Sheet2Services meet customer needs2.4Service superior to competitors' service3.1Employees respond to special requests3.3Employees give prompt service3.65Employees superior to competitors'3.75

Sheet2

Sheet3

Table 1Jerry CompanyBank Reconciliation StatementJune 30, 2009Unadjusted Bank Balance, June 30$4,892.56Add: Deposits in transit475.00Bank error200.00Less: Outstanding checksCheck No. 1078 - June 28372.33Check No. 1080 - June 29402.41Check No. 1081 - June 3066.89(841.63)Up-to-date cash balance, June 30$4,725.93Unadjusted Book Balance, June 30$4,240.54Add: Account collected by bank875.00Bookkeeping error27.00Interest earned on checking account9.25Less: Bank service charge(12.75)NSF Check(413.11)True Cash balance, June 30$4,725.93

Sheet2Services meet customer needs2.4Service superior to competitors' service3.1Employees respond to special requests3.3Employees give prompt service3.65Employees superior to competitors'3.75

Sheet2

Sheet3

Table 1Jerry CompanyBank Reconciliation StatementJune 30, 2009Unadjusted Bank Balance, June 30$4,892.56Add: Deposits in transit475.00Bank error200.00Less: Outstanding checksCheck No. 1078 - June 28372.33Check No. 1080 - June 29402.41Check No. 1081 - June 3066.89(841.63)Up-to-date cash balance, June 30$4,725.93Unadjusted Book Balance, June 30$4,240.54Add: Collection of EFT875.00Bookkeeping error27.00Interest earned on checking account9.25Less: Bank service charge(12.75)NSF Check(413.11)True Cash balance, June 30$4,725.93

Sheet2Services meet customer needs2.4Service superior to competitors' service3.1Employees respond to special requests3.3Employees give prompt service3.65Employees superior to competitors'3.75

Sheet2

Sheet3

Table 1Jerry CompanyBank Reconciliation StatementJune 30, 2009Unadjusted Bank Balance, June 30$4,892.56Add: Deposits in transit475.00Bank error200.00Less: Outstanding checksCheck No. 1078 - June 28372.33Check No. 1080 - June 29402.41Check No. 1081 - June 3066.89(841.63)Up-to-date cash balance, June 30$4,725.93Unadjusted Book Balance, June 30$4,240.54Add: Collection of EFT875.00Bookkeeping error27.00Interest earned on checking account9.25Less: Bank service charge(12.75)NSF Check(413.11)True Cash balance, June 30$4,725.93

Sheet2Services meet customer needs2.4Service superior to competitors' service3.1Employees respond to special requests3.3Employees give prompt service3.65Employees superior to competitors'3.75

Sheet2

Sheet3

Table 1Jerry CompanyBank Reconciliation StatementJune 30, 2009Unadjusted Bank Balance, June 30$4,892.56Add: Deposits in transit475.00Bank error200.00Less: Outstanding checksCheck No. 1078 - June 28372.33Check No. 1080 - June 29402.41Check No. 1081 - June 3066.89(841.63)Up-to-date cash balance, June 30$4,725.93Unadjusted Book Balance, June 30$4,240.54Add: Collection of EFT875.00Bookkeeping error27.00Interest earned on checking account9.25Less: Bank service charge(12.75)NSF Check(413.11)Up-to-date cash balance, June 30$4,725.93

Sheet2Services meet customer needs2.4Service superior to competitors' service3.1Employees respond to special requests3.3Employees give prompt service3.65Employees superior to competitors'3.75

Sheet2

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Edmonds JournalDebitCreditCash (+A)911.25Accounts Receivable (-A)875.00Supplies Expense (-E, +OE)27.00Interest Revenue (+R, +OE)9.25Bank Service Charge Expense (+E, -OE)12.75Accounts Receivable (+A)413.11Cash (-A)425.86

Edmonds AnalysisAssets=Liab.+EquityRev.Exp.=Net Inc.Cash Flow

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