Bank Reconciliation and Internal Control Week 2 Seminar Presentation 1

What’s bank statement? Beginning balance All deposits All checks Credit Memos Debit Memos Ending Balance All transactions! 2

What’s bank reconciliation? Book Balances Bank Balance 3

Differences between bank statement balance and book balance? 1. Deposit in Transit (You know, bank does not) 2. Outstanding Checks (You know, bank does not) 3. Debit Memo (Bank charges, NSF–bank knows, you do not) 4. Credit Memo (Interest income – bank knows, you do not) 5. Error of either side (Nobody knows…) 4

Steps of preparing bank reconciliation Bank section – begins with bank statement balance and ends with adjusted balance. Company section – begins with book balance and ends with the adjusted balance. 3. The two amount designated as adjusted balance must be equal. 5

Steps of preparing bank reconciliation Compare deposit and find out deposit in transit. Compare checks paid and find out outstanding checks. Locate debit memo and credit memo Look for errors of both sides Record reconciling items in the book, such as unrecorded bank debit memo. 6

Example Exercise – Adjusting Balance The following data were gathered to use in reconciling the bank account of Photo Op. Balance per bank $14,500 Balance per company records 13,875 Bank service charges 75 Deposit in transit 3,750 NSF check 800 Outstanding checks 5,250 7

Find out items that you know but the bank does not. Step I – Bank Section Find out items that you know but the bank does not. Bank Statement Ending Balance $14,500 + Deposit in transit (DIT) $ 3,750 Outstanding checks $ 5,250 Adjusted cash balance $13,000 8

Find out items that bank knows but you do not. Step II – Book Section Find out items that bank knows but you do not. Book Ending Balance $13,875 Bank service charges 75 NSF check 800 Adjusted cash balance $13,000 9

Example Exercise – Adjusting Balance What is the adjusted balance on the bank reconciliation? Journalize any necessary entries for Photo OP based upon the bank reconciliation. 10

Follow My Example – Adjusting Balance What is the adjusted balance on the bank reconciliation? Follow My Example – Adjusting Balance 11

Follow My Example – Adjusting Balance What is the adjusted balance on the bank reconciliation? Follow My Example – Adjusting Balance $13,000, as shown below. 12

Follow My Example – Adjusting Balance What is the adjusted balance on the bank reconciliation? Follow My Example – Adjusting Balance $13,000, as shown below. Bank section of reconciliation: $14,500 – $5,250 + $3,750 = $13,000 13

Follow My Example – Adjusting Balance What is the adjusted balance on the bank reconciliation? Follow My Example – Adjusting Balance $13,000, as shown below. Bank section of reconciliation: $14,500 – $5,250 + $3,750 = $13,000 Company section of reconciliation: $13,875 – $75 – $800 = $13,000 14

Follow My Example – Adjusting Balance Journalize any necessary entries for Photo OP based upon the bank reconciliation. Follow My Example – Adjusting Balance b. Accounts Receivable $800 Miscellaneous Expense 75 Cash $875 15

Adelphia Communications Sarbanes-Oxley Act of 2002 Enron WorldCom Adelphia Communications Trust and Confidence ? (Continued) 16

Sarbanes-Oxley Act of 2002 requires public companies to: 1) Maintain strong and effective internal controls 2) Companies and their independent accountants to report on the effectiveness of internal controls. 3) These reports will be required to be filed company’s annual 10-K report with Securities and Exchange Commission. (SEC). 17

Internal Control: Procedures and processes used by a company to: Safeguard its assets Process information accurately Ensure compliance with laws and regulations. 18

19 Control Environment Risk Assessment Internal Control Info&Communication Control procedures Monitoring 19

Control Procedures Responsibilities Operations, custody of assets Proofs Related Operations Accounting Security Measures 20

Controls over Cash: Customers purchasing products or services (McDonald’s, Wendy’s and Burger King) – Sales register 2. Customers making payments on account (Mail-order and Internet retailers such as Lands’ End and Amazon) - Electronic funds transfers (EFT) 3. Voucher system (procedures for authorizing and recording liabilities and cash payments) 4. Using Bank Accounts 21

Using bank account as a control Reduce the mount of cash on hand. 2. Independent recording of cash transactions through bank statements. 3. Facilitates the transfer of funds. 22