Based on our last week’s discussion, we have learned that cash is
classified under the “current assets” section. Moreover, we have learned that cash is the most liquid among them. Hence, it is prone to theft or embezzlement and misappropriation. The good news is there is what you called “cash management” when effective, may protect the company’s money from loss through theft or fraud.
One of the characteristics of a system of cash control is periodic
reconciliation of bank statement balance and cash balance in the company’s accounting records. Regular reconciliation of bank balance and book balance for cash uncovers immediately any error or irregularities in recording cash transactions. Any error or irregularity is, therefore, rectified immediately.
Disclaimer! This measure may not totally eliminate the possibilities of
misappropriation or errors, but can significantly reduce the chances of theft, loss, or inadvertent errors in the management of cash.
What is a bank reconciliation?
Bank Reconciliation - a statement which brings into agreement the cash balance per book and cash balance per bank. It is usually prepared monthly because the bank provides the depositor company its bank statement at the end of every month. (Show a printed example and define bank statement)
How does it work?
1. First, we need to observe and examine the bank statement. We should look at the beginning cash balance, the credit and debit memos, errors, if any, and the ending cash balance for the month ended.
2. Second, we need to compare the beginning and ending cash
balances per books with the bank statement. These two accounts should be equal because they are reciprocal accounts. Meaning, when one account is debited, the other account is credited or vice versa. Hence, in absence of errors committed by either in the bank or book balances, these reciprocal accounts should be the same. However, more frequent than not, these accounts differ due to timing.
3. Third, we should identify and define the book and bank reconciling items. (Use Robles book for the definitions)
Book - CMs, DMs, errors
Bank - DIT, OC, errors
4. Fourth, we apply the formula using the single - date bank
reconciliation. (Explain why single - date reconciliation) (Write the pro forma Bank Recon Statement using the adjusted balance method, Reference - Valix book)