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.