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Lecture Week 8

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Ahmed El Hadidi
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18 views

Lecture Week 8

Uploaded by

Ahmed El Hadidi
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Principles of Accounting (2)

College of Management and Technology in Alexandria

1
Lecture Week
Bank Reconciliation

2
Bank Statement

Usually once a
month, the
bank sends
each depositor
a bank
statement
showing the
activity in the
account.
Bank Reconciliation
Reconcile balance per books and balance per bank
to their “correct” or “true” balance.
Reconciling Items:
1. Deposits in transit
2. Outstanding checks Time Lags
3. Bank memorandum
4. Errors
Bank Reconciliation
A bank reconciliation is prepared periodically to explain the
difference between cash reported on the bank statement and the
cash balance on company’s books.
Purpose of Bank Reconciliation
The balance of a checking account reported on the bank statement rarely
equals the balance in the depositor’s accounting records. This is usually due to
information that one party has that the other does not. We must therefore
prove the accuracy of both the depositor’s records and those of the bank.

This means we must reconcile the two balances and explain or account for any
differences in them. Among the factors causing the bank statement balance to
differ from the depositor’s book balance are these:

• Outstanding checks.
• Deposits in transit (also called outstanding deposits).
• Deductions for uncollectible items and for services.
• Additions for collections and for interest.
• Errors.
Outstanding checks
Outstanding checks are checks written (or drawn) by the
depositor, deducted on the depositor’s records, and sent to the
payees but not yet received by the bank for payment at the bank
statement date.
Deposits in transit
Are deposits made and recorded by the depositor but not yet
recorded on the bank statement.
For example, companies can make deposits (in the night
depository) at the end of a business day after the bank is closed. If
such a deposit occurred on a bank statement date, it would not
appear on this period’s statement.
The bank would record such a deposit on the next business day,
and it would appear on the next period’s bank statement. Deposits
mailed to the bank near the end of a period also can be in transit
and unrecorded when the statement is prepared.
Bank Memoranda
Bank includes with bank statement memoranda explaining other debits and
credits it made to depositor’s account

A debit memorandum “memo” represents a deduction by the bank to the


company’s bank account.

While, a credit memo represents an addition by the bank to the company’s


bank account.
Deductions for uncollectible items and for
services
A company sometimes deposits another party’s check that is
uncollectible (usually meaning the balance in that party’s account
is not large enough to cover the check).
This check is called a non-sufficient funds (NSF) check.
The bank would have initially credited the depositor’s account for
the amount of the check. When the bank learns the check is
uncollectible, it debits (reduces) the depositor’s account for the
amount of that check.
Deductions for uncollectible items and for
services
The bank may also charge the depositor a fee for processing an
uncollectible check and notify the depositor of the deduction by
sending a debit memorandum. The depositor should record each
deduction when a debit memorandum is received, but an entry is
sometimes not made until the bank reconciliation is prepared.

Other possible bank charges to a depositor’s account that are first


reported on a bank statement include printing new checks and
service fees.
Additions for collections and for interest
Banks sometimes act as collection agents for their depositors by
collecting notes and other items.
Banks can also receive electronic funds transfers to the
depositor’s account.
When a bank collects an item, it is added to the depositor’s
account, less any service fee.
The bank also sends a credit memorandum to notify the depositor
of the transaction. When the memorandum is received, the
depositor should record it; yet it sometimes remains unrecorded
until the bank reconciliation is prepared.
The bank statement also includes a credit for any interest earned.
Errors
Both banks and depositors can make errors. Bank errors might not
be discovered until the depositor prepares the bank reconciliation.
Also, depositor errors are sometimes discovered when the bank
balance is reconciled.

Error testing includes: (a) comparing deposits on the bank


statement with deposits in the accounting records and (b)
comparing canceled checks on the bank statement with checks
recorded in the accounting records.
Summary
The balance of a checking account reported on the bank
statement rarely equals the balance in the depositor’s
accounting records. Therefore, we need a reconciliation
statement to explain the differences.

Cash Balance per Bank Cash Balance per Book

+ Deposits in Transit + Collections & Interest

- Outstanding Checks - Uncollectible items

+/- Errors +/- Errors

Adjusted Cash Balance Adjusted Cash Balance


=
Application

The following information helps in preparing the bank reconciliation statement ;


1- Outstanding checks as of Junes 30 total $2,7889.
2- The June 30 bank statement included $20 debit memorandum for bank service charge.
3- A credit memorandum for $9 collected as interenst revenues was also incuded.
4- The june 30 cash receipts of $2,340 were placed in the bank’s night depository ater banking hours and were not recorded
On the june 30 bank statement.

Austin Clinic
Bank Reconciliation
June 30, 2010
Bank Statement Balance $14,707 Book Balance $14,269
Add: Add:
Deposit in transit 2,340 Interest revenue 9

Deduct: Deduct:
Outstanding Checks 2,789 Bank Service Charge 20

Adjusted Bank Balance $14,258 Adjusted Book Balance $14,258


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References
• Wild, J., Shaw, K., Chiappetta, B. and Samaha, K., 2017. Fundamental
Accounting Principles. 2nd ed. McGraw-Hill Education.
• Weygandt, J., Kimmel, P. and Kieso, D., 2019. Accounting Principles
IFRS Version. Global Edition. Wiley.

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