7.4 Bank Accounts Flashcards
Bank Reconciliation
A bank reconciliation compares the bank’s balance with the company’s balance and explains any differences.
Bank Deposits vs Bank Cheques
- bank deposits = increase bank account balance
- cheques = decrease bank account balance
What is a Cheque and what are the 3 parts?
A cheque is a written order instructing the bank to pay a specific sum of money to a designated recipient
the maker (or drawer) = who issues the cheque
the bank (or payer) = on which the cheque is drawn
the payee = to whom the cheque is payable.
What is Clearing?
Clearing is what occurs when a cheque or deposit is accepted by the maker’s bank. It results in a transfer of funds from the maker’s bank to the payee’s bank.
What does a Bank Statement show?
- Cheques paid and other debits that reduce the balance in the bank account
- Deposits and other credits that increase the balance in the bank account
- The account balance after each day’s transactions
Bank Debits and Credits
Bank shows deposits as credits =
when you deposit money in your bank account, the bank’s liability to you increases.
Bank shows cheques as debits =
when you write a cheque on your account, the bank pays out this amount and decreases (debits) its liability to you.
Debit Memorandum (DM) vs Credit Memoranda (CM)
DM = when additional information is needed to explain a charge on the bank statement.
CM = identifies and explains miscellaneous amounts added to the bank account for items such as interest earned on the bank account, and electronic funds transfer into the depositor’s account.
Balance per Books vs Balance per Bank
Balance per Books = the balance recorded in a company’s general ledger cash account
Balance per Bank = the balance recorded on the bank statement
Reconciling the Bank Account.
making the balance per books agree with the balance per bank
Outstanding Cheques vs Deposits in Transit
Outstanding Cheques = Cheques recorded by a company that has not yet cleared the bank
Deposits in Transit = deposits recorded by the company that have not yet been recorded by the bank
Reconciliation Procedure
Must Reconcile:
Balance per books = Cash account in the general ledger
Balance per bank = in the bank statement provided by the bank
to their adjusted (correct) cash balances.
Reconciling Items per Bank
- Deposits in transit
- Outstanding cheques
- Bank errors
Reconciling Items per Bank Procedure
Step 1: Deposits in Transit
Compare the individual deposits on the bank statement with:
- deposits in transit
- current month’s deposits recorded in the company’s books.
Add these deposits to the balance per the bank.
Step 2: Outstanding Cheques
Compare the paid cheques shown on bank statement or returned with the bank statement with:
- Outstanding cheques
- Issued cheques this month
Deduct outstanding cheques from the balance per the bank.
Step 3: Bank Errors
Include only errors made by the bank as reconciling items when calculating the adjusted cash balance per bank
Reconciling Items per Books
Adjustments from any unrecorded:
- Credit memoranda (amounts added)
- Debit memoranda (amounts deducted)
- Company errors
Reconciling Items per Books Procedure
Step 1: Credit Memoranda and Other Deposits
Compare the credit memoranda and other deposits on the bank statement with the company records.
Add amounts to the balance per books that ARN’T recorded
Step 2: Debit Memoranda and Other Payments
any unrecorded debit memoranda should be deducted from the balance per books.
Step 3: Company Errors
Only include errors made by the company as reconciling items when calculating the adjusted cash balance per books.
