Day 10 Cash and Bank Account

1. CASH AND CASH 2. BANK ACCOUNT 3. BANK

EQUIVALENT RECONCILIATION

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Roadmap

1. Cash and cash equivalent

2. Bank account

3. Bank reconciliation

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Cash and Cash Equivalent
Cash is a medium of exchange which a bank will accept for
deposit (e. g., currency, deposits in bank account).

Cash-equivalent assets are very secure (value is certain, i.e.

fixed rate of return) liquid (easily convertible to cash)
investments that have a short maturity (typically 90 days or
less).
• Government of Canada treasury bills
• Guaranteed Investment Certificates (GICs)

Company A spent $50,000 to purchase Company B’s common shares, and plan to
hold this investment for 30 days.
For company A, is this $50,000 investment part of the cash-equivalent assets?

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Exercise: Spot the Cash
Which of the following items would be considered part of
Cash on December 31, Year 1?
1. Balance in chequing account: $24,000

2. Cheque from customer, dated December 28, Yr 1

3. Cheque from customer, dated January 3, Yr 2

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Exercise: Spot the Cash
Which of the following items would be considered part of
Cash on December 31, Year 1?

4. Utility deposit paid to Manitoba Hydro

5. Cash advance received from customer

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Roadmap

1. Cash and cash equivalent

2. Bank account

3. Bank reconciliation

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Bank Account-a key control activity for cash
• Safeguards cash by using a bank as a depository
and clearinghouse for cheques received and
written.
• Minimizes amount of currency that must be kept on
hand.
• Provides a second record of transactions: one by
the company and one by the bank.
• The company book and the bank statement need to be
reconciled.

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Bank Statement

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Roadmap

1. Cash and cash equivalent

2. Bank account

3. Bank reconciliation

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Bank Reconciliation
Why reconcile?
❖Timing differences that result in one of the parties (bank
or company) recording the transaction before the other is
aware of it.
o Deposits in transit: deposits recorded by the company that have
not yet been recorded by the bank
o Outstanding cheques: cheques written and mailed out by a
company that have not yet been deducted from the company’s
bank account
o EFT collection or payment made by the bank, but was not
noticed by the company.

❖Errors by either party in recording transactions.

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 Bank Reconciliation
Reconciling Items
Recorded by both bank No need of
and company reconciliation

Recorded by bank but not Adjust company’s

recorded by company book
Items
Recorded by company but
not recorded by bank Adjust bank statement

Company’s or Bank’s Adjust the party who

error made the error

After reconciliation, we should have cash balance from the bank statement
equals cash balance from the company’s book

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Bank Reconciliation per bank
Reconciling items to cash balance per bank:
Bank balance before reconciliation
+ Deposits in transit at end of period
- Outstanding cheques at end of period
+/- Bank errors
= Reconciled/Adjusted bank balance

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Bank Reconciliation per book

Reconciling items to cash balance per books:

Book balance before reconciliation
+ EFT collections by bank but not recorded by company (i.e.
interest revenue, and other direct deposit)
- EFT payments by bank but not recorded by company (i.e.
service charges and NSF cheques)
+/- Book errors
= Reconciled/Adjusted book balance

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Journal Entries during Bank Reconciliation

❖Company’s Books
• Prepare journal entry for each reconciling item in
determining the adjusted cash balance per books.
❖Bank
• Do not journalize any entries on bank side. As we
are preparing financial statements for the company
not for the bank.

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Bank Reconciliation Example
The cash balance of Apex Limited was 81,852 as at May 31, 2020. The
balance of bank statement on the same day was $80,522. Following
summarizes the differences between bank and books:
1. Deposits in transit as at May 1 was $926.
2. Deposits recorded in the books and bank during May were 3,690 and
$2,580.
3. Outstanding cheques as at May 31 amounted to $426.
4. Electronic receipts from credit customers totaled $1,013, but these
receipts have not yet been recorded by Apex in May.
5. The bank returned an NSF cheque in the amount of $522 that
deposited on May 22. The cheque was a payment on a customer’s
account.
6. The bank charged Apex $121 for services in May, including $96 for
bank service charges and $25 for processing the NSF cheque.
7. Apex made a mistake in recording a payment to supplier. The
accountant recorded (credited) the payment as $1,018, when it should
have been $1,108.
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 Bank Reconciliation Example
Required:
1. Prepare a bank reconciliation for both cash balance
per book and per bank.
Reconcile items per bank Reconcile items per book
Balance before reconciliation Balance before reconciliation
80,522 81,852

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 Bank Reconciliation Example
2. Prepare any necessary journal entries for bank
reconciliation as at May 31, 2020.

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