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Cash Controls Checklist: Bank Reconciliation and Journal Entries

Learn how to reconcile your bank statement with your cash records and make necessary journal entries to ensure accurate financial reporting.

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Cash Controls Checklist: Bank Reconciliation and Journal Entries

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  1. CHAPTER 9 Cash Controls

  2. Checklist

  3. The Bank Statement The bank maintains records of: • All deposits made into the business’ bank account • Checks issued by the business • Interest taken directly from the bank account • Direct deposits from a customer into the bank account etc. This record is sent to the business as a bank statement every month.

  4. Bank Reconciliations • A simple internal control involves comparing and reconciling the items in the company’s cash records with the items shown on the bank statement. This is achieved by preparing a schedule called a bank reconciliation statement. Business bank account Bank statement This process of verifying the records is called a bank reconciliation and should be performed once a month.

  5. Bank ReconciliationsExample #1 • Consider a simple example. It requires you to confirm if the bank statement of Mindworks Architect Inc. matches its general ledger bank account for the month of January.

  6. Bank ReconciliationsExample #1 Compare the closing balances on the GL Bank Account and the bank statement What do you think is the difference? Cash in your bank account has decreased without your knowledge. Why do you think this happened? The bank charged you service charges that you did not account for! This has caused the decrease in cash in your bank account.

  7. Common Reasons Cash Decreased • Some common reasons that could have caused cash to be deducted from your bank account without your knowledge: • Interest has been charged for a loan and this has been automatically deducted from your account. • Principal for a loan has been automatically deducted from your account. • You ordered check forms from the bank and forgot to record them. • You purchased a computer on your debit card but forgot to record it. • Your general ledger account has to be corrected by entering adjusting journal entries.

  8. Journal Entries to Make Corrections What is the journal entry to record the $20 in bank service charges from the bank statement?

  9. Journal Entries to Make Corrections - Question 200 200 200 200 Dr. Cash Dr. Interest Expense Dr. Cash Dr. Cash Suppose $200 interest against a loan was deducted directly from your bank account and you did not record it. Which of the following correctly adjusts the error? 200 200 Cr. Loan Cr. Cash 200 Cr. Interest Expense Cr. Account Payable 200

  10. Journal Entries to Make Corrections - Question 200 250 200 250 Dr. Interest expense Dr. Cash Dr. Loan Payable Dr. Cash Suppose $250 principal against a loan was deducted directly from your bank account and you did not record it. Which of the following correctly adjusts the error? 200 250 200 Cr. Interest Expense Cr. Cash Cr. Cash 250 Cr. Loan Payable

  11. Journal Entries to Make Corrections • Suppose you purchased a computer on your debit card for $1,400 and forgot to record it, what is the journal entry to record this?

  12. Journal Entries to Make Corrections • Suppose cash decreased by $5,000 because a check that a customer gave you was returned due to non-sufficient funds (NSF) and you did not record it, what is the journal entry to correct this?

  13. Bank ReconciliationsExample #2 • Let’s now reconcile the bank statement of Mindworks Architect Inc. to its general ledger bank account for the month of February.

  14. Bank ReconciliationsExample #2 Compare the closing balances on the GL Bank Account and the bank statement. What do you think is the difference? Cash in your bank account has increased without your knowledge. Why do you think this happened? Interest that you did not know about has been directly deposited into your account. This has caused an increase to the cash in your bank account.

  15. Common Reasons Cash Increased • You received interest from savings that was directly deposited into your account. • A customer deposited cash against an old invoice directly into your account. • You secured a loan and the bank directly deposited it into your bank account. • Your general ledger accounts have to be corrected by entering adjusting journal entries.

  16. Journal Entries to Make Corrections - Question 220 220 220 220 Dr. Interest Revenue Dr. Interest Revenue Dr. Accounts Receivable Dr. Cash 220 220 Suppose you received $220 interest from savings that was directly deposited into your bank account, what are the journal entries to correct this? Cr. Interest Revenue Cr. Accounts Receivable 220 Cr. Cash Cr. Cash 220

  17. Journal Entries to Make Corrections • Suppose a customer deposited $800 against an invoice directly into your bank account, what is the journal entry required to correct this?

  18. Journal Entries to Make Corrections • Suppose you secured a loan of $2,000 and the bank deposited it directly into your account but you did not record it, what is the journal entry to correct this?

  19. Bank ReconciliationExample #3 • Let’s reconcile the bank statement of Mindsworks Architect Inc. to its general ledger bank account for the month of March.

  20. Bank ReconciliationExample #3 Step 1: Compare every item on the GL Account and the bank statement and identify the differences. There are two entries that are not on the GL Account. These additional entries in the bank statement caused the difference in the ending balances. We need to correct this in our General Ledger Bank Account.

  21. Bank ReconciliationExample #3 $10,650 $10,830 ? + $200 Interest received ? - $20 Bank charges $10,830 $10,830 Reconciled balance Step 2: • Create a bank reconciliation worksheet with three columns and enter the ending balances. • Record the items that appear on the bank statement and not in the general ledger account. • Since interest has been deposited into your bank account, but not in the accounting records it must be added to the cash ledger account. • Since bank charges have been deducted from the bank account, but not in the accounting records it must be subtracted from the cash ledger account. The reconciled balances should match.

  22. Bank ReconciliationExample #3 $10,650 $10,830 ? + $200 Interest received • As the adjusting amounts are in the ledger column of the Bank Reconciliation worksheet we need to prepare adjusting journal entries to record the missing items. ? - $20 Bank charges $10,830 $10,830 Reconciled balance Step 3:

  23. Bank ReconciliationExample #3 Step 4: In a manual bookkeeping system you need to post these journal entries to the general ledger. In a computerized system this is posted automatically. 200 Mar 31 Cash Interest Revenue 200 Interest earned Mar 31 20 Bank Charges Cash 20 Bank service charges

  24. Bank ReconciliationExample #4 • Let’s reconcile the bank statement of Mindsworks Architect Inc. to its general ledger bank account for the month of April.

  25. Bank ReconciliationExample #4 Step 1: Compare every item on the GL Bank Account and the bank statement and identify the differences. There are two entries that appear in your GL but do not appear in your bank statement. These additional entries in the GL caused the difference in the ending balances. Why do you think your bank did not record these entries?

  26. Bank ReconciliationExample #5 • Why do you think your bank did not record these entries? • You deposited a check of $6,200 from Trident. It took a few days for the bank to process it and enter the amount into your bank account. This is probably why it does not show on your bank statement but you have already entered it in your ledger. • Similarly, you mailed a check of $450 to Ridge. It may take few days for them to receive it and deposit it in the bank. This is probably why it does not show on your bank statement but you have already entered it in your ledger.

  27. Bank ReconciliationExample #5 Bank Reconciliation Example #5 Step 2: $8,230 $13,980 + $6,200 • Create a bank reconciliation worksheet with three columns and enter the ending balances. • Record the items that appear on the bank statement and not in the general ledger account. • The deposit of $6,200 recorded on your books will only appear at a future date in your bank statement so add it to your bank account column in your bank reconciliation work sheet. • The withdrawal of $450 recorded on your books will appear at a future date in your bank statement so deduct it from your bank account column in your bank reconciliation worksheet. Trident check deposit - $450 Ridge check payment $13,980 $13,980 Reconciled balance The reconciled balances should match.

  28. Bank ReconciliationExample #5 Step 3: April 30th The adjusting amounts are only in the bank account column of the bank reconciliation worksheet and there are no ledger corrections. We therefore do not need to prepare adjusting journal entries. The bank will likely include these items in its statement in the following month. $8,230 $13,980 ? Trident check deposit + $6,200 ? - $450 Ridge check payment ? ? $13,980 $13,980 Reconciled balance Any check that has been issued and not cleared or deposited and does not appear on your bank statement is only a matter of timing and requires no adjustment. No Journal Entries

  29. Bank ReconciliationExample #6 • Let’s reconcile the bank statement of Mindsworks Architect Inc. to its general ledger bank account for the month of May.

  30. Bank ReconciliationExample #6 Step 1: • Compare every item on the GL Bank Account and the bank statement and identify the differences. • The bank has made an error and withdrew $300 from your bank account. • You have made an error and entered the incorrect check amount of $450 instead of $350.

  31. Bank ReconciliationExample #6 • Create a bank reconciliation worksheet with three columns and enter the ending balances. • Record the items that appear on the bank statement and not in the general ledger account. • The bank incorrectly deducted $300 from your bank account, therefore it needs to be added back to your bank account (you need to inform the bank to do this – for now add it back to your bank account column in your bank reconciliation work sheet). • When investigating the difference between the bank statement and the GL, you discover that you recorded Morris’ check at $450 which should have been recorded by you as $350. The bank cashed the check at the correct amount. To correct the error, you must make an adjustment for the difference. Step 2: May 31st $10,730 $10,930 Check incorrectly charged on 3rd May to your bank account. + $300 Error on check ($450 - $350) ? + $100 $11,030 $11,030 Reconciled balance The reconciled balances should match.

  32. Bank ReconciliationExample #6 Step 3: • The bank will update its statement in the following month for this entry. • We need to request the bank to correct their records. May 31st $10,730 $10,930 Check incorrectly charged on 3rd May to your bank account. + $300 Error on check ($450 - $350) ? + $100 $11,030 $11,030 Reconciled balance Assume that the check was used to purchase inventory from Morris Printers Inc. A journal entry for this has to be entered by us.

  33. Bank ReconciliationExample #6 Step 4: • In a manual bookkeeping system you need to post the journal entries to the general ledger. In a computerized system this is posted automatically. May 31 100 Cash 100 Inventory To correct the check to Morris Inc.

  34. Checklist

  35. Petty Cash • A petty cash fund is set up to pay small (petty) expenses. • It is not worth producing a check for a purchase of $2.

  36. Petty Cash BALANCE SHEET ASSETS LIABILITIES Petty cash is an asset account. Think of it as a separate cash account for small expenses. CASH ACCOUNTS PAYABLE UNEARNED REVENUE PETTY CASH ACCOUNTS RECEIVABLE BANK LOAN INVENTORY STOCKHOLDERS’ EQUITY COMMON STOCK PREPAID EXPENSES RETAINED EARNINGS PROPERTY, PLANT & EQUIPMENT

  37. Petty Cash Which of the following is typically not paid using the petty cash fund? The fund is not used for several items: • Loans • Cashing personal checks • Paying wages or expenditures exceeding a predetermined amount Wy Postage Coffee & Donut Auto Loan

  38. Controlling the Petty Cash Fund • When establishing a petty cash fund, the following needs to be considered: • Designate an individual as a petty cashier or petty cash custodian • Establish petty cash periods and amounts • Establish a petty cash fund • Have users of petty cash provide receipts • Provide a summary of petty cash • Reconcile any overage or shortage • Summary slip is presented to cashier • Reimburse the petty cash fund

  39. Controlling the Petty Cash Fund #1. Designate an individual as a petty cashier or petty cash custodian. Petty Cash Custodian: • An individual responsible for safekeeping the cash and maintaining records of all fund related activities.

  40. Controlling the Petty Cash Fund #2. Establish petty cash periods and amounts. The petty cashier determines: The amount appropriate for the petty cash fund: • Small businesses: may set a limit of $100. • Large businesses: may set a limit of $1,000. • The actual amount will depend on company policy. (b) Replenishment periods: • Bi-weekly, monthly, etc.

  41. Controlling the Petty Cash Fund • #3. Establish the petty cash fund. The petty cash fund is established as follows: CASH - $100 CR x PETTY CASH + $100 DR x • $100 is now in the petty cash fund. • In some businesses, this $100 will be placed into an envelope or a petty cash box.

  42. Controlling the Petty Cash Fund #4. Have users of petty cash provide receipts. • What happens when expenses from the petty cash fund need to be paid? • Money is taken from the petty cash box. • Receipts are placed into petty cash for safekeeping. • Examples include: meals for office, stamps, parking, etc. • There are no accounting entries necessary at this point.

  43. Controlling the Petty Cash Fund • #5. Provide a Summary of Petty Cash. • At the end of the period, all petty cash transactions are summarized on a Petty Cash Summary Slip.

  44. Controlling the Petty Cash Fund • #6. Reconcile any overage and shortage. • It is common for a petty cash fund to have more, or less cash than accounted for. • -These amounts are called “cash over and short”. -They can be caused through incorrect counting or even theft.-Careful controls are necessary to ensure that the cash is accounted for. Cash over and short

  45. Cash Over or Cash Short? Cash Short: Cash Over:

  46. Calculation of Cash Over and Short Compare: vs. the amount of cash that should be in the petty cash box the amount of cash actually in the petty cash box In other words, compare: Petty cash balance - disbursements vs. Actual cash remaining in petty cash (physically counting the cash) Cash over and short

  47. Controlling the Petty Cash Fund • #7. Summary slip is presented to cashier. • The cashier is the person within the organization who signs the checks. • The petty cashier presents them with the summary slip along with any supporting vouchers. • After reviewing these documents, the cashier provides the petty cashier with a check to reimburse the petty cash fund.

  48. Controlling the Petty Cash Fund • #8. Reimburse the petty cash fund. • Once the summary slip is complete, the petty cash fund needs to be reimbursed and all expenses allocated to their appropriate expense accounts.

  49. Petty Cash Fund: Summary 1 Set up a $200 Petty Cash Fund. 2 Pay expenses and organize receipts. These receipts are summarized on a petty cash summary slip. 3 Replenish petty cash by recording payment of expenses.

  50. Increasing the Petty Cash Fund • Note: To increase the fund, it is the same process as establishing the fund. Below is the journal entry to increase the fund by $100. 100 100

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