Bank Reconciliation-part 2

Bank Reconciliations-part 2— useful for internal control

In our last article we examined the Bank reconciliation and how it is prepared.
In this article we will examine the usefulness of the bank reconciliation report to the company. We try to write this article so that it will be understood by individuals who have little or no accounting knowledge, but who might have an interest in the topic.

Our past experience with auditors, who examined the accounts at year-end, is that they paid much attention to the bank reconciliation. Not just the year-end reconciliation, but also to some or all of the monthly reconciliations. Why is this so important to the audit process and the company?

TIMELY PREPARATION
When the reconciliation is done on a timely basis, expense and revenue items that were missing can be booked in the correct period, not in subsequent period. This will help to ensure that the company’s profit and loss statement more accurately reflects the results of operation for the period. Thus management, owners and shareholders will not be deceived by operating results that are incorrect.

Profit and Loss error
A possible danger when the account is in error is that management could make significant decisions, such as declaring a dividend, agreeing on wage increases, buying expensive equipment, agreeing on bonus etc, bases on erroneous results.

Budgetary control
Another problem when errors are not discovered on a timely basis is that some company budgets that are prepared using prior year monthly expenses and revenue as a base, could be in error, as a result of errors in the source data.

Faulty balance sheet analysis
Yet another problem could be that a non-expense item that is omitted will affect the company’s balance sheet, and the resulting financial analysis. For example, let’s say the bank has provided a loan to the company, and the monthly repayment is being deducted by a standing charge to the company’s bank. If the company’s accountant did not have a timely prepared bank reconciliation, and he forgot to book the repayment,
the company’s working capital will be overstated because the bank balance is higher than it should be. Note that the books are in balance, but the cash and liabilities are overstated.

MONITORED BY SENIOR MANAGERS
All bank reconciliations should be monitored by a senior employee to ensure that proper investigation and corrective measures are done for any reconciling items. Some of the items on a reconciliation that should cause a red flag are:

A) Reconciling items carried over from month to month

If the same reconciling item remains on the bank reconciliation for more than one accounting period, it should raise a red flag. A good example is un cashed checks.
Most companies and individuals would cash or deposit a check they receive within a few days. If this did not happen after a full accounting cycle, it could mean that the check should have been written back for some reason, that the payee may have died, or that the check was a duplicate, in which case another check for the same service was already cashed.

ACT AS DETERRENT
A dishonest employee knowing that bank reconciliations are monitored on a timely basis, will think twice before committing fraud involving the company’s bank account, since he or she knows that the fraud might be discovered very soon after it is committed.

Bank Reconciliation--part 1

When an accounting system is set up, one of the important accounts that will be present to facilitate bank reconciliation is the cash account. Other names used for this account is cash control account, bank account, checking account, bank operating account etc.

Bank reconciliation is a comparison of this general ledger account with the company's bank account as evidenced by a bank statement sent by the company’s bankers, usually at month end. The cut off date could be other than month end, depending on the company’s accounting period end date. The bank reconciliation to prepared to find items that are missing, or not properly treated in either account.

The most common differences and their treatment are:

BANK CHARGES
Each monthly the bank usually charge a fee for the operation of the bank account. This fee is usually not posted prior to month-end close. By arrangement the bank may put through a standing charge for loan interest, loan repayment etc. which the accountant may forgot to record in the general ledger.
To correct this omission: [Debit Bank Charges, interest etc and credit the bank account in general ledger.]

DEPOSITS IN-TRANSIT
This is a timing difference and is due to the fact that deposits near end of month may not have been posted by the bank, because the deposits arrived after month end. No general ledger entry is necessary for this item.

OUTSTANDING CHECKS
These represent checks that were issued in a particular month, but was not cashed by the payee as at the end of that or subsequent month end. No general ledger entry is necessary for this item.

CHECKS ISSUED AND THEN CANCELLED
These represent checks that may have been reported lost by the payee. The accountant called the bank and stopped payment but did not record the entry in the general ledger.
Accounting entry: Debit the bank account to which the check was credited when paid, and debit the relevant expense account—thus reversing the expense.

LOAN PROCEEDS FROM BANK
Sometimes getting a loan approved by the bank can be exciting. Once the excitement is over everyone forget to record the entry in general ledger. To correct this omission, debit the general ledger bank account set up to represent the amount of the loan, credit the relevant loan account to show the liability.

The above list of reconciling items is not exhaustive, but represents some of the items that might need adjusting at period end.

Constructing the reconciliation

Using the items described above,the reconciliation would be:

Balance per bank statement as at……2011…
say $220,000

ADD
Deposits in-transit say 30,000

LESS
Uncashed checks balance at month end (30,000) Reconciled bank balance
215,000


Balance on general ledger bank account
111,200

Add: Bank loan received 100,000
Check issued and then cancelled
4,000

LESS: bank charge
(200)
Reconciled general ledger bank account 215,000

The above statement demonstrates that the correct bank balance at the end of the period is $ 215,000, this will be the balance after the adjusting journal entries to record the bank loan, cancelled check and bank charges have been posted in the correct reporting period. The bank statement is currently showing $220,000 because $30,000 deposit is not yet received by the bank, and $35,000 checks have not been cashed by the payee.

NEXT: Our next article will discuss the importance of the bank reconciliation.