Transcript Chapter 8
CHAPTER
7
INTERNAL CONTROL AND CASH Chapter 7 Quiz (Unit 3 Quiz#1) will occur on Thursday, Nov 13
USE OF A BANK
The use of a bank minimizes the amount of cash that must be kept on hand and contributes significantly to good internal control over cash.
A company can safeguard its cash by using a bank as a depository and clearing house for cheques received and cheques written.
Bank Statement
Each month the bank will provide you with a
bank statement
which shows all the activity in the client’s bank account.
Bank statement has debit column and credit column.
Debit column
amounts are reduction of the bank account such as “cheque payment” activity.
Credit column
amounts are increase of the bank account such as “deposit” activity.
BANK STATEMENTS
A bank statement shows: 1.
cheques paid and other debits charged against the account 2.
deposits and other credits made to the account 3.
account balance after each day’s transactions
ACCOUNT STATEMENT
W. A. LEE COMPANY 500 QUEEN STREET FREDERICTON, NB, E3B 5C2 Statement Date/Credit Line Closing Date April 30, 2003 457923 ACCOUNT NUMBER Balance Last Statement 13,256.90
Deposits and Credits No.
Total Amount 20 34,805.10
Cheques and Debits Total Amount 26 32,154.55
CHEQUES AND DEBITS Date No.
Amount DEPOSITS AND CREDITS Date Amount Date
Balance This Statement 15,907.45
DAILY BALANCE Amount 4-2 4-5 4-4 4-3 4-8 4-7 4-8 435 436 437 438 439 440 441 644.95 4-2 3,260.00 4-3 1,185.79 4-5 776.65 4-7 1,781.70 4-8 1,487.90 4-9 CM 2,420.00 4-11 4,276.85 4-2 2,137.50 4-3 1,350.47 4-4 982.46 4-5 1,320.28 4-7 1,036.00 4-8 2,720.00 4-9 16,888.80
18,249.65
17,063.86
15,154.33
14,648.89
11,767.47
12,802.47
4-11 4-12 442 443 1,585.60 4-12 1,226.00 4-13 757.41 4-11 1,218.56 4-12 13,936.87
13,468.28
================= 4-29 NSF ============== 425.60 4-27 ============= 1,545.57 4-27 13,005.45
4-29 4-30 4-30
Symbols:
459 DM 461 CM 1,080.30 4-29 30.00 4-30 620.15
Credit Memo
EC
Error Correction
2,929.45 4-29 2,128.60 4-30 NSF
Not Sufficient Funds
14,429.00
15,907.45
Reconcile Your
DM
Debit Memo
INT
Interest Earned
SC
Service Charge Account Promptly
Bank Reconciliation
Accountant must perform
bank reconciliation
every month. Bank reconciliation is a
worksheet,
which explains any
differences
between the bank statement records and the accounting records.
RECONCILING THE BANK ACCOUNT
Bank Reconciliation is necessary because the balance per bank and balance per books are seldom in agreement due to time lags and errors.
Basically you compare the bank statement with accounting record and make notes about why there is any discrepancy.
A bank reconciliation should be prepared by an employee who has no other responsibilities pertaining to cash. (segregation of duty)
Things that show in accounting records but they have not been recorded in bank statement… Deposits in transit
(must be added to BS balance) Deposits which were deposited too late to the bank. For example, if an employee made the deposit at 7pm on March 30, then this deposit would not show up in
March bank statement
. (which covers from March 1 to March 30)
Outstanding cheques
(must be subtracted from BS balance) Accountant wrote a check and recorded the journal entry in accounting record on March 28, but the supplier’s employee did not deposit this check to the bank yet. This check will not show in the
March bank statement.
(It will show up in April bank statement)
Things that show in bank statement but they do not show in accounting records… Service Charges :
The monthly fees that banks charge to customers for using their bank. ( should be subtracted from Accounting number)
Charges for depositing NSF cheques :
A check was issued by this company, but the company’s bank account did not contain enough money to pay out the check amount then it is called NSF check. Then
bank would charge
$35. ( should be subtracted from Accounting number )
Things that show in bank statement but they do not show in accounting records… Misc. Bank Charges and Credits
:
Banks charge
the customer when they print more checks for customer or issue money order (or certified check) for their customer. ( should be subtracted from Accounting number )
Credits for Interest Earned
: The interest the
business earned
on the bank account in the month. ( should be added to Accounting number )
Steps in Preparing a Bank Reconciliation 1.
2.
3.
Compare the desposits
listed on the bank statement with the deposits shown in the company’s accounting records. Any desposits not yet recorded by the bank are
deposits in transit and should be added to the bank ST balance. Compare the paid checks (indicated in bank statement)
received with any outstanding checks in the accounting records. Any outstanding check amounts should be
deducted from the bank ST balance
.
Add to the accounting records
any collections made by the bank. (such as interest income) They will issue a credit memorandum stating the circumstances.
Steps in Preparing a Bank Reconciliation 4. Deduct from the accounting records
any debit memoranda issued by the bank such as
bank service fee
, NSF check charges etc…. 5.
Make appropriate additions or deductions
to correct any errors in the balance per the bank statement or the balance per the depositor’s records.
6.
Make sure
that the
adjusted balance of the bank statement
is
equal
to the
adjusted balance in the accounting records.
7.
Prepare journal entries
to record any items in the reconciliation listed as adjustment.
Terms
Debit memoranda
Charges against depositor’s account (e.g. service charges, Returned Check/NSF (insufficient funds) cheques)
Credit memoranda
Amounts that increase depositor’s account (e.g., interest earned and daily deposits of cash and check from branch)
Adjusted balance
Reconciled or correct bank account balance
Bank Reconciliation Procedures Balance Per Bank Statement -outstanding cheques +deposits in transit +/- bank errors = correct cash amount Balance Per Books -NSF cheques -cheque printing or other service charges +notes collected by bank +/- book errors = correct cash amount Illustration 8-11
Summary
Bank Statement Balance
You add or subtract items which must appear in the Bank Statement, but they
did not appear on Bank Statement of this month.
If the item increased Book Balance, then you
add
this item to BSB.
Book Balance
You add or subtract items which must appear in the Bank Ledger Account, but they
did not appear on BLA
.
If the item decreased BSB, then you
subtract
this item from Book Balance.
Reconciling Journal Entries
Accounting Books
Each
reconciling item
in determining the adjusted balance per books
MUST be journalized and posted
Bank Statement
Do NOT journalize
any entries on bank side (because they are already mentioned in accounting records)