Bank Reconciliations

Question 1

When a business is dealing with a large number of transactions over the course of a year, it is inevitable that a few errors will occur. To help spot such errors, accountants have a servers of ‘___’ that they can perform which should highlight if a mistake has been made.

One example of this is the ___ balance. Another check is the ___ ___.

Answer 1

• Checks
• Trial
• Bank reconciliations

Question 2

Why is the cash figure very important in our financial statements?

Answer 2

• It is a current asset or liability on our SFP.
• It is also an account which will generally have a large volume of transactions posted to it and so there is risk errors may be made.

Question 3

Describe bank reconciliations

Answer 3

• We compare the figure in our cash account to the figure on the bank statement.
• This is useful because we are agreeing our figures to the figures of an Independent third party (the bank) and it is unlikely that both our records and the banks records would contain the same error.
• Once we have performed a bank rec and adjusted for any errors/omissions we can be fairly comfortable that the bank/cash balance shown in our financial statements is accurate.

Question 4

What are 2 timing differences that can occur during bank reconciliations?

Answer 4

1. Unpresented cheques
2. Outstanding lodgements

Question 5

Describe the timing difference of unpresented cheques

Answer 5

• When we have written a cheque (perhaps to a supplier) but it hasn’t been presented to the bank yet.
• As soon as the cheque is written it will be recorded in our books/records and therefore reflected in our general ledger as a credit to the cash account.
• Before the cheque will appear on the bank statement it will need to be posted to the supplier, received by our supplier, then they deposit it at their bank and it can take time to clear in the bank system so perhaps our period end bank statement will not yet reflect it.

Question 6

Describe the timing difference of Outstanding Lodgements

Answer 6

• This is where we have received a cheque (perhaps from a credit customer) and we have paid it into the bank but it has not yet been ‘cleared’ into our account.
• We have posted the transaction to cash account in our general ledger as we have received the cheque but we may only take our deposits to the bank on Wednesdays and Fridays, it can take several days for a cheque to go through the bank clearing system so the bank statement balance will not yet include it.

Question 7

What’s another difference that may occur (not a timing one)

Answer 7

Unrecorded transactions

Question 8

Describe unrecorded transactions

Answer 8

• Will need us to make adjustments or amendments to our records.
• These are transactions that have gone through the bank account that we were unaware of or forgot about, e.g., bank charges.
• The bank statement will therefore include these but our general ledger will not.

Question 9

Where is the adjustment made to for unpresented cheques and outstanding lodgements?

Answer 9

Bank statement balance

Question 10

Where is the adjustment made to for unrecorded transactions?

Answer 10

Our general ledger is wrong so our cash account balance

Question 11

When performing a bank rec we first…

Answer 11

• Identify the balance on the bank statement and the balance on the cash account and compare the two.
• If they don’t agree we adjust the bank statement balance by deducting any unpresented cheques and adding any outstanding lodgements.
• Then we take the cash account balance and adjust for any missing items, or if anything was incorrectly recorded we make necessary adjustments by adding receipts and deducting expenses.