5.1: Banking Transactions

Prepare bank reconciliation when you receive your bank statement every month. This is a very important part of your cash control procedures. It verifies the amount of cash you have in your cheque account.

The cash balance in your books will never agree with the balance shown on the bank statement because of the delay in cheques and deposits clearing the bank, automatic bank charges and credits you haven’t recorded, and errors you may have made in your books. After preparing the bank reconciliation, you can be comfortable that the account balance shown on your books is up-to-date.

Another important reason to do bank reconciliation is that it may uncover irregularities such as employee theft of funds.

Here are step-by-step instructions for preparing bank reconciliation.

1. Prepare a list of deposits in transit. Compare the deposits listed on your bank statement with the bank deposits shown in your cash receipts journal. List any deposits that have not yet cleared the bank statement on your bank reconciliation. Also, take a look at the bank reconciliation you prepared last month. Did all of last month’s deposits in transit clear on this month’s bank statement? If not, you should find out what happened to them.

2. Prepare a list of outstanding cheques. In your cash disbursements journal, mark each cheque that cleared the bank statement this month. On your bank reconciliation, list all the cheques from the cash disbursements journal that did not clear. Also, take a look at the bank reconciliation you prepared last month. Are there any cheques that were outstanding last month that still have not cleared the bank? If so, be sure they are on your list of outstanding cheques this month. If a cheque is several months old and still has not cleared the bank, you may want to investigate further.

3. Record any bank charges or credits. Take a close look at your bank statement. Are there any special charges made by the bank that you have not recorded in your books? If so, record them now just as you would have if you had written a cheque for that amount. By the same token, if there are any credits made to your account by the bank, those should be recorded as well. Post the entries to your general ledger.

4. Compute the cash balance per your books. Foot the general ledger cash account to arrive at your ending cash balance.

5. Enter bank balance on the reconciliation. At the top of the bank reconciliation, enter the ending balance from the bank statement.

6. Total the deposits in transit. Add up the deposits in transit, and enter the total on the reconciliation. Add the total deposits in transit to the bank balance to arrive at a subtotal.

7. Total the outstanding cheques. Add up the outstanding cheques and enter the total on the reconciliation.

 8. Compute book balance per the reconciliation. Subtract the total outstanding cheques from the subtotal in step 6 above. The result should equal the balance shown in your general ledger.

In the above example, if the general ledger cash account does not show a balance of R3 950.72, you will need to track down the cause of the difference.

If your bank reconciliation doesn‟t balance, you need to find the error or errors.

Here are the possible causes of a bank balance error:

Total outstanding cheques added incorrectly. Double check your addition of the total outstanding cheques.

Total deposits in transit added incorrectly. Double check your addition of deposits in transit.

Bank balance written down incorrectly. Did you start with the correct amount at the top of your reconciliation? Double check by comparing it to the month end balance on your bank statement.

Failed to record all items clearing the bank statement. Look at your bank statement carefully. Are there items such as miscellaneous bank charges or automatic deposits or withdrawals, which were not recorded in your books?

Journals added incorrectly. Double check your addition of cash receipts and cash disbursements.

Failed to record a cheque or deposit. Did you record all cheques and deposits in your journals? This should have been apparent when you were preparing your lists of deposits in transit and outstanding cheques.

Incorrectly recorded an amount. Compare each item on the bank statement with your journal entry for that item. Did you enter the correct amount?

Daily Cash Sheets

A cash sheet is a daily reconciliation of cash received and cash paid out. If a lot of your business is transacted in cash such as in a retail store, you should prepare a cash sheet at the end of each day. Deposit all cash receipts in your bank account daily. Your daily cash receipts should generally be the same amount as your daily bank deposit. If they are not the same, you should investigate and reconcile the two amounts. Any reasons for a difference should be apparent on your cash sheet, such as a small amount of cash paid out for a miscellaneous expense.

An important reason to do a cash sheet is to alert you to any shortage or surplus of cash for the day. Some businesses that do not prepare a cash sheet simply count the cash in the register at the end of the day. Without doing reconciliation, they don’t discover any shortages or overages. A shortage could be the result of theft, or it could simply result from your failure to record a special transaction, such as an expense you paid in cash.