Chapter 8

Report
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
Statement Date/Credit
Line Closing Date
FREDERICTON, NB, E3B 5C2
April 30, 2003
457923
ACCOUNT NUMBER
Balance
Deposits and Credits
Last Statement
No.
Total Amount
13,256.90
20
34,805.10
Balance
Cheques and Debits
Total Amount
This Statement
32,154.55
15,907.45
26
DEPOSITS AND
CHEQUES AND DEBITS
CREDITS
DAILY BALANCE
Date No. Amount
Date
Amount Date Amount
4-2
435
644.95
4-5
436 3,260.00
4-4
437 1,185.79
4-3
438
776.65
4-8
439 1,781.70
4-7
440 1,487.90
4-8
441 2,420.00
4-11
442 1,585.60
4-12
443 1,226.00
=================
4-29
NSF
425.60
4-29
459 1,080.30
4-30
DM
30.00
4-30
461
620.15
4-2
4,276.85
4-3
2,137.50
4-5
1,350.47
4-7
982.46
4-8
1,320.28
4-9 CM
1,036.00
4-11
2,720.00
4-12
757.41
4-13
1,218.56
==============
4-27
1,545.57
4-29
2,929.45
4-30
2,128.60
Symbols:
4-2
16,888.80
4-3
18,249.65
4-4
17,063.86
4-5
15,154.33
4-7
14,648.89
4-8
11,767.47
4-9
12,802.47
4-11
13,936.87
4-12
13,468.28
=============
4-27
13,005.45
4-29
14,429.00
4-30
15,907.45
CM
Credit Memo
EC
Error Correction
NSF
Not Sufficient Funds
DM
Debit Memo
INT
Interest Earned
SC
Service Charge
Reconcile Your
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


Credit memoranda


Charges against depositor’s account (e.g.
service charges, Returned Check/NSF
(insufficient funds) cheques)
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)
Classwork / Homework
Homework:
P377 BE 7-8, BE7-9, BE7-10, BE7-11, BE7-12
P380 E7-7, E7-8

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