2. Bank Reconciliations Flashcards
How is cash reported in the financial statements?
The cash at bank account is one of a business’s nominal ledger accounts. The balance on the cash at bank account will be reported as a current asset, or in the case of an overdraft, a current liability in the statement of financial position.
How are bank transactions that a computerised accounting system cannot automatically match with accounting transactions treated?
Unmatched transactions are posted to a temporary account (called a suspense account) and are reported on an exception report for the accountant to investigate.
Once identified, journal entries are prepared to clear the suspense account and post the transactions to the correct accounts.
How does the computerised accounting system compare the cash at bank account to the bank statement and why?
Some computerised accounting systems are now integrated with a business’s electronic banking system in such a way that the bank transactions are matched to known transactions and are therefore automatically recorded in the business’ accounting system.
In other computerised systems, a bookkeeper will regularly (most likely daily) extract the bank transaction report which details all deposits and withdrawals into the business’ bank account during period.
Information from the bank transaction report will then be uploaded into the business’s computerised accounting system and, the deposits and withdrawals are then automatically matched to known transactions and recorded in the appropriate nominal ledger accounts.
Most deposits and withdrawals that are made by electronic funds transfer will include a unique reference number which helps with the matching process.
What is a bank statement?
A record of transactions on the business’s bank account maintained by the bank in its own accounting records.
How are deposits shown in the accounts of businesses and banks?
The bank statement is the mirror image of the business’ cash at bank account.
Cash at bank is an asset (a debit balance) in the business’ ledger accounts. From the perspective of the bank, the amounts deposited by a business represent money that the bank owes to that business. Thus, every item recorded as a debit in the business’ books - a positive bank balance, and any receipts of cash - will be shown as a credit on the bank statement.
How are overdrafts shown in the accounts of business’ and banks?
When there is a bank overdraft, which is a liability (a credit balance) in the business’ ledger accounts, as far as the bank is concerned it is owed money from the business. Thus, every credit entry in the business’ cash at bank account - a negative bank balance (an overdraft), and any payments of cash - will be shown as debit on the bank statement.
What is a bank reconciliation?
A bank reconciliation is a comparison of a bank statement (usually daily but perhaps weekly or monthly for a smaller business) with the cash at bank account.
Differences between the balance on the bank statement and the cash at bank account should be identified and satisfactorily reconciled. The cash at bank account should be updated accordingly, usually by posting a journal entry.
What kind of errors may a reconciliation with the bank account reveal?
The reconciliation of the bank statement to the cash at bank account may identify the following errors and omissions:
- Errors in recording transactions in the cash at bank account, such as transposition errors (e.g. a payment received from £360 is manually recorded in the cash at bank account as £630).
- Corrections and adjustments to the cash at bank account
Deposits into or withdrawals from the bank account by way of debit card, digital wallet payment, standing order, direct debit or online transfer which have not yet been entered in the cash at bank account.
Bank interest and bank charges not yet entered in the cash at bank account.
Dishonoured cheques not yet entered in the cash at bank account. - Errors in the bank statement such as transposition errors, payments or receipts recorded twice or interest and fees deducted incorrectly. The correct amount appears in the cash at bank account and the balance per the bank statement must be corrected by notifying the bank of the error. There is no need to record anything in the accounting records in respect pf bank errors.
- Items reconciling the correct cash at bank account balance to the bank statement.
Payments made by the business which have been credited to the cash at bank account but which have not yet cleared the bank statement. Some electronic payments do not instantly clear the bank statement and there may be some occasions when cheques are paid out by the business and credited in the cash at bank account which do not yet appear on the bank statement. These are known as uncleared payments or unpresented cheques.
Payments received by the business and debited to the cash at bank account, but which have not yet been ‘cleared’ by the bank and so do not appear on the bank statement. These are known as uncleared lodgements.
