Principles of Financial Accounting Chapter 4- Bank Reconciliations

Cash controls include:

-Assigning different individuals to receive, record, disperse, and maintain cash (Segregation of Duties). -Store cash and blank checks in a safe or bank vault with access limited to authorized personnel only. -Complete a thorough background check on any employees with access to cash or cash records. -Reconcile the cash records with bank statement monthly (Bank Reconciliation)

What can cause cash balances to differ?

-Checks written by the company that have not cleared the bank. -Cash receipts by the company that have not been deposited in the bank. -Interest earned on the bank balance that the company has not recorded.

Reconciling the bank account involves three steps:

1. Reconcile the bank's cash balance 2. Reconcile the company's cash balance 3. Update the company's cash account

What is the purpose of completing a bank reconciliation?

A bank reconciliation is utilized to help maintain control of cash by identifying differences in the balance of cash in the bank account and the balance of cash in the company's own records and determine whether these differences are due to timing differences or errors.

If the bank's reconciled balance does not match the company's reconciled balance...

A mistake has been made and needs to be found and corrected before continuing and entering journal entries.

Journal entry recording errors To adjust for error resulting in too little cash deducted or too much cash added on company records

Account Needing Adjustment $$$ Cash $$$

Journal entry for NSF checks

Accounts receivable $$$ Cash $$$ (To increase the A/R balance to where it was before the customer's check was deposited, since the payment from the customer did not go through.)

When preparing a bank reconciliation, a deposit outstanding would be:

Added to the bank's cash balance.

What asset is the most susceptible to fraud?

Among all a company's assets, cash is the one most susceptible to fraud. Because of this, companies develop strict procedures to maintain control of cash.

Step 3 of bank reconciliation

As a final step in the reconciliation process, a company must update the balance in its Cash account, to adjust for the items used to reconcile the company's cash balance (in step 2). -Additions require a debit to cash and a credit to the appropriate corresponding account. -Subtractions require a credit to cash and a debit to the appropriate corresponding account.

Journal entry- debit card purchases/EFTs To record any purchases that should be recorded as short-term or long-term assets, such as supplies, prepaids, equipment, etc

Asset Account $$$ Cash $$$

Bank's side of the reconiliation:

Bank Balance per Bank Statement *+* Deposits Outstanding *-* Checks Outstanding *+/-* Bank Errors ------------------------------------- Bank Balance per Reconciliation

Journal entry recording errors To adjust for error resulting in too much cash deducted or too little cash added on company records

Cash $$$ Account Needing Adjustment $$$

Journal entry for automatic deposits Cash received from customer on account

Cash $$$ Accounts Receivable $$$

Journal entry for automatic deposits Cash received from customer in advance

Cash $$$ Deferred Revenue $$$

Journal entry for bank interest

Cash $$$ Interest Revenue $$$

Journal entry for automatic deposits Cash received from a borrower

Cash $$$ Notes Receivable $$$ Interest Revenue $$$

What does "cash" include?

Cash includes coins and currency, checks received, and balances in savings and checking accounts. Cash also includes credit card and debit card sales, as well as cash equivalents, defined as investments that mature within three months from the date of purchase (such as money market funds, Treasury bills, and certificates of deposit).

Regarding a bank reconciliation, what item is recorded by the company but not by the bank?

Checks outstanding

Company's side of the reconciliation:

Company's Cash Balance *+* Automatic Deposits *+* Bank Interest *-* NSF Checks *-* Debit Card Purchases *-* EFTs *-* Bank Fees *+/-* Company Errors ------------------------------------- Company's Balance per Reconciliation

After preparing a bank reconciliation, the service fee charged by the bank would be recorded with a:

Debit to Service Fees Expense

Cash transactions that have been recorded by the company but not the bank include:

Deposits outstanding

Who is responsible for the establishment and success of a company's internal controls?

Everyone in a company has an impact on the operation and effectiveness of internal controls, but Management must take final responsibility for the establishment and success of the company's internal controls.

Deposits outstanding

Exist when certain cash receipts of the company have not been added to the bank's record of the company's balance. In other words, the company recorded the deposit and physically deposited the money into the bank, but the bank has not processed the deposit yet.

Checks outstanding

Exist when certain checks the company has written have not been subtracted from the bank's record of the company's balance. In other words, the company wrote the check and gave it to the intended recipient, but the recipient has not cashed the check.

Journal entry- debit card purchases/EFTs To record any purchases that should be expensed in the current period, such as advertising expense, utilities expense, rent expense, etc

Expense Account $$$ Cash $$$

What is the goal of internal controls?

Improving the accuracy and the reliability of financial information.

Cash transactions recorded by the bank but not yet recorded by the company include:

Interest earned Service fees NSF checks

What are Internal Controls?

Internal control is a company's plan to safeguard the company's assets and improve the accuracy and reliability of accounting information. Effective internal control builds a wall to prevent misuse of company funds by employees and fraudulent or errant financial reporting.

A company's plans to minimize theft and enhance the accuracy of accounting information are referred to as:

Internal controls

Do checks written by the company and recorded by the bank need to be accounted for in a bank reconciliation?

No

After preparing a bank reconciliation, a check outstanding for the payment of advertising would be recorded with a:

No entry is needed

Fraud

Occurs when a person intentionally deceives another person for personal gain or to damage that person.

When writing journal entries for our company's bank reconciliation...

Only pull the entries from the company side *NOT* the bank side.

Step 1 of bank reconciliation

Reconcile the bank's cash balance 1. Identify the transactions recorded by the company, but not yet recorded by the bank. (Deposits outstanding and checks outstanding) 2. Adjust the bank's cash balance by adding deposits outstanding and subtracting checks outstanding. 3. Adjust the bank's cash balance for any errors made by the bank that were discovered during the reconciliation process.

Step 2 of bank reconiliation

Reconcile the company's cash balance: 1. Add any automatic deposits that were received by the bank that have not yet been recorded by the company. 2. Add any interest received from the bank on the bank balance that has not yet been recorded by the company. 3. Subtract any checks deposited and recorded by the company that the bank has determined to be nonsufficient funds (NSF). 4. Subtract any debit card purchases that were deducted by the bank that have not yet been recorded by the company. 5. Subtract any electronic fund transfers (EFTs) that were deducted by the bank that have not yet been recorded by the company. 6. Subtract any bank fees charged by the bank for various activities (such as monthly fee, overdraft penalties, NSF fees, etc.) that have not yet been recorded by the company. 7. Adjust the company's cash balance for any recording errors made by the company that were discovered during the reconciliation process.

Journal entry- bank fees

Service Fee Expense $$$ Cash $$$

What can cause the balance of cash in the bank statement *not* to equal the balance of cash in the accounting records?

The company deposited a customer check that was found by the bank to have insufficient funds.

What date should the journal entries for bank reconciliation be stated as?

The last day of the month/period.

Errors

can be made either by the company or its bank and may be accidental or intentional

A bank reconciliation reconciles the bank statement with the company's...

cash account in the balance sheet.

Timing differences in cash

occur when the company records transactions either before or after the bank records the same transactions