Chapter 10
Cash Controls
294
Bank Reconciliations
A simple internal control is comparing and reconciling the items in the company’s cash records
with the items shown on the bank statements.This is done by preparing a schedule called a
bank
reconciliation.
A bank reconciliation compares, reconciles, and explains the difference between a
company’s bank statement and their own cash accounting records. This is usually done at the end
of a statement period.
The bank statement balance and the cash ledger balance at the end of the month may not be the
same. The bank reconciliation is prepared to reconcile these two balances and to ensure no errors
have been made by either the bank or the company bookkeeper. If an error has been made, it must
be corrected.
In the process of comparing the items in your records with the items shown on the bank statement,
you may notice that some items shown correctly on the bank statement may not appear in your
records.Similarly, some items shown correctly in your records may not appear on the bank statement.
Typical reasons for the bank making additional deductions from the company’s cash account
include
• loan interest charges
• repayment of a bank loan
• bank charges
• electronic fund transfers (EFTs): automatic cash payments to other accounts
• non-sufficient funds (NSF) cheques
Typical reasons for the bank making additional deposits to the company’s cash account include
• interest deposited directly into the account
• payment from a customer deposited directly into the account
• EFTs: automatic cash receipts from other accounts
A bank reconciliation addresses all of the differences between the bank statement and the cash
ledger account. In the following sections, each reason will be analyzed individually for the purpose
of illustration. A complete bank reconciliation statement will be presented at the end of the
discussion.
Unrecorded Deposits from the Bank Statement
From time to time, the bank may automatically record a deposit in the company’s bank account.
The company would be unaware of the amount until it receives the bank statement. For example,
compare the bank statement for HR Clothing Company to the company’s cash ledger entries.
