Bank reconciliation

• Cash account is Debit in our records but Credit in bank’s records (as from the bank’s view the entity is a creditor).

• The bank sends the entity a summary of the transactions in the form of a bank statement, thereby allowing a comparison of records.

Reasons balance in bank statements does not equal

cash account• Timing differences

– Outstanding checks– Deposits in transit

• New Information– Bank fees (SC), FID– Interest paid/received– NSF checks– Direct deposits

• Errors

Reconciliation process

• Schedule that explains the differences between bank statement balance and company’s cash balance is called a bank reconciliation.

Balance as per bank statement:

+ Deposits in transit (outstanding deposit) – Outstanding checks+ or – Bank errors = Adjusted cash balance: bank

NB: Non of the above need to be recorded in company’s records, i.e. journal entries.

No Entries

Cash balance per ledger:

+ Receipts reported on bank statement but not in ledger (e.g. note receivable, direct deposit, interest) – Bank charges – NSF cheques+ or – Bank errors = Adjusted balance as per ledger accountNB: All of the above need to be recorded in company’s records, i.e. journal entries.

ExampleYou have been supplied with the following information produced by comparing the records of Oneup Limited with the most recent bank statement:a debit balance as per cash at bank account in ledger as

at 30 June, $13 100.00.b credit balance as per bank statement as at 30 June,

$17 315.90.c deposits not reflected on bank statement, $2 400.00.d unpresented cheques (outstanding cheques) 30 June, $6 285.90.e service charge on bank statement not recorded in books,

$50.00.f cheque for postage expense, $400.00, incorrectly recorded

in books as $780.00.

1 Prepare a bank reconciliation statement as at 30 June.2 Prepare entries in general journal form to update the

records of Oneup Limited.

OneUp Limited Bank reconciliation statement at 30 J une

Balance as per bank statement 17 315.90 Cr Add: Deposit in transit 2 300.00 19 615.90 Less: Outstanding cheques 6 285.90 Adjusted balance as per cash at bank account

13 330.00 Cr

Ending balance per company records 13 100.00 Cr Add: Correction – cheque for $400

incorrectly recorded as $780

380.00

13 480.00 Deduct: Bank charges 150.00 Adjusted balance as per cash at bank account

13 330.00 Cr

Bank

Books

General journal

J une 30 Bank charges 150.00Cash at bank 150.00

Cash at bank 380.00Postage expense 380.00

Petty cash

• Fund set up to handle small cash expenditures (e.g. postage and miscellaneous supplies). Avoids inconvenience and expense of writing many small cheques.

• Size – depends on number and amounts of minor expenditures.

• Can be maintained by handling the fund on an imprest basis – fund contains a fixed amount.

Prepare the following general journal entries for petty cash

1 Establishing a $200 fundDr. Petty Cash $200 Cr. Cash - Bank $200

2 Replenish the fund – the following expenses had been incurred: postage $27.50, office supplies $50.80, transportation $73.40, coffee $15.90

Journal to replenish fund:

Dr. Postage expense $27.50Dr. Office supplies exp $50.80Dr. Transportation exp $73.40Dr. Miscellaneous exp $15.90

Cr. Cash-Bank $167.60

Journal to increase the petty cash fund up to $ 300

Dr. Petty Cash $200 Cr. Cash - Bank $200

Whereas the entry to decrease the petty cash fund:

Dr. Cash-Bank $xxx Cr. Petty Cash $xxx