Bank account as a control device:

Keeping cash in a bank account is part of internal control because banks have established ??? for safeguarding cash. Thus all cash receipts should be deposited and cash payments done through it via cheques.

Cash is the most tempting asset for theft. Therefore, internal controls for cash are more elaborate than those for most other assets.

Cash = Cheques = Money orders = Bank deposits

All of the above are included in the internal controls for cash.

Bank reconciliation:

There are 2 records of the business's cash: The ledger for Bank rarely equals the balance from the bank statement.

Good internal control means knowing where a company's money is.

The accountant explains the reasons for the difference through a prepared document called the Bank reconciliation.

All bank reconciliation items not yet recorded by the company require journal entries. It is important to prepare the bank reconciliation on the BS date in order to be assured that the ledgers are brought up to date for timely & accurate presentation of financial data.
 

Cash Control:

The ledger account for bank does not match the value on the monthly Bank Statement. Thus, every month a Bank Reconciliation is prepared to reconcile the ledger for cash. The items that are not allowing the 2 values to balance are as follows: Cheques that are written but not yet cashed by the payee. Info not yet recorded in our company books. Charges taken out by the financial institution. Many notes receivables, plus interest, are collected on the company's behalf & deposited. Any errors with respect to cheques written, cashed or withdrawals & deposits made in error. Customers wrote our company a cheque that bounced (customers did not have the money to pay). Deposits rec'd & cash register's receipts that have not yet been received by the bank.

Bob's Merchandise Co.

Bank Reconciliation

May 31, 1998


 
Book balance May 31 $ 5,000
Add: Bank collections $ 1,000
Interest earned 50 1,050
$ 6,050
Less: Service charges $ 10
NSF cheques, W. Dole 200
NSF fee 20 (230)
Adjusted book balance $ 5,820
Bank statement balance May 31 $ 4,000
Add: Deposits in transit 2,000
$ 6,000
Less: Outstanding cheques #10 $ 100
#15 80 (180)
Adjusted bank balance $ 5,820

 

Once completed, journal entries are required to update the ledger for Bank with the info given in the Bank statement.