Bank Reconciliations Internal Control Systems, Cash and Receivables.

The need for reconciliations in company transactions…………….. The use of banking facility is an important step in controlling cash transactions. Cash management requires that each day’s cash receipts are deposited in the company’s bank account using pay-in slips and that all disbursement be made by cheque. Using cheques and pay-in slips assist in keeping complete track of all monetary transactions. The bank’s records of deposits received and cheques paid provides a cross- check on the internal cash records of the company – Bank’s monthly statements. Bank statements – shows the balance at the beginning of the month, the deposits, the cheques paid, and other debits and credits during the month, and the balance at the end of the month.

Preparing a bank reconciliation: scope for disagreement between a company’s cash account and the monthly bank statements….. Simple RULE :- difference will always exist and reconciliation is a tool used to correct that differences. Certain transactions recorded by the company may not appear on the bank’s records and certain transactions that appear on the bank statement may not have been yet recorded by the company. Therefore, Bank reconciliation acts as a medium to explain the differences between the cash balance on the bank statement and the balance according to the company’s records.

Reasons for the differences……………. Outstanding cheques: issued by the company but not yet presented to the bank for payment. Cheques under collection: cheques sent to the bank but not yet collected by the bank at the time of preparation of the bank statement. Amounted added to the company’s bank account but not yet recorded on the company’s books. Example: Bills receivables that have been paid for straight into the company’s bank account by the debtor but not yet entered in the company’s book as having accounted for. Amounts deducted from the company’s account by the bank but not yet recorded on the company’s book. Example: Bank’s service charges etc etc. Scope for manual entry errors can never be disregarded.

An Illustrative example of Bank Reconciliation. Benz Motors – Bank Statement on June 30 Balance in Bank Statement : Rs Balance as per company Cash Balance Account book: Rs Some recording errors that needs to be accounted for:- Deposited a cheque in the bank Rs on June 30 but not yet credited in the bank account. Cheques issued by the company and recorded in the company books but not yet presented to the bank – Cheque No. DateAmount (RS) / / / / /

Continue…….. Bank service charges included in the bank statement but in the company books Rs. 130 Interest payment received by the bank but not yet recorded in the company books Rs. 87. Bill receivables for Rs. 900 and interest payment of Rs. 12 credited to the company’s bank account but not yet entered in the company books. Entry error committed in the payment for purchase of merchandise. Payment for Rs was entered as Rs That is, Rs.63 extra was credited from the Cash Account Book.

Solutions: Bank Reconciliation Adjusting Balance…………….from bank statement Bank Balance as per Bank Statement Add, Cheque deposited in the Bank by the company Deduct Outstanding cheques Cheque No Cheque No Cheque No Cheque No Cheque No ( ) Adjusted Bank Balance, June

Continue…………. Adjusting company book balance…………… Balance as per books Add Bill Receivables and Interests Entry errors (purchase merchandise) Interest credited Deduct Bank Service Charges (130.00) Adjusted Book Balance