Chapter7 1||Fraud,

Chapter Accounting in Control,

Internal Action and Cash (Limited Sections)

Learning Objectives:
1. Prepare Bank Reconciliation.
Bank Account and Bank Statement
Use of a bank contributes significantly to good internal control over cash.

▪ Creates a double record of cash transactions

Bank Statement, prepared from bank’s perspective, is a copy of the bank’s records sent to
the customer or made available online for review.
Every deposit bank receives is an increase in bank’s liabilities (an Account Payable to the
depositor).
Lists in numerical sequence all paid checks along with date, the check was paid and its
amount.
Includes with bank statement memoranda explaining other debits and credits it made to
depositor’s account.
A check that is not paid by a bank because of insufficient funds in a bank account is called
an NSF check (not sufficient funds)
Prepared by Saira Rizwan for LUMS undergrad course ACCT-100
 Bank Statement

Each month, the

company receives
from the bank a
bank statement
showing its bank
transactions and
balances.

Prepared by Saira Rizwan for LUMS undergrad course ACCT-100

Bank Statement
1. Checks paid and other debits that reduce the balance
▪ Debit card transactions ▪ Electronic funds transfers for bill payments
▪ ATM Withdrawals
2. Deposits and other credits that increase the (bank) balance
▪ Direct deposit ▪ Electronic funds transfer (EFT Receipts) ▪ ATM Deposits

3. Debit Memorandum
▪ Bank Service Charges ▪ N S F (Not Sufficient Funds)
4. Credit Memorandum
▪ Collection of Notes Receivable ▪ Interest Earned

Prepared by Saira Rizwan for LUMS undergrad course ACCT-100

Reconciling the Bank Account
Reconcile balance per books and balance per bank to their “correct or true” balance.

Reconciling Items:
1. Time Lags
▪ Deposits in transit
▪ Outstanding checks
▪ Bank memoranda
2. Errors

Prepared by Saira Rizwan for LUMS undergrad course ACCT-100

Bank Reconciliation Unadjusted Balance

Cash Balance Per Bank Statement Cash Balance Per Books

+ Deposits in transit + EFT collections and
NSF are
- Outstanding checks other deposits
Dishonored chqs
- NSF (bounced) checks as the Co.’s
+/- Bank errors O/S checks are the unpresented
customer /debtor
chqs that are issued by the Co. - Service charges and doesn’t have
but not yet presented for other Payments balance in his
payment or cleared by the bank.
account.
+/- Company errors

Corrected Balance Corrected Balance

Adjusted Balance

Prepared by Saira Rizwan for LUMS undergrad course ACCT-100

 The bank statement for Gourmet showed a balance per bank of $15,907 on April 30, 2020.
On this date the balance of cash per books is $11,709. Gourmet determined the following
reconciling items for the bank.
Reconciling items per Co. books are as follows:
Reconciling items per Bank Statement: Step 1. Other deposits (+): Unrecorded electronic receipt
from customer on account on April 9 determined from
Step 1. Deposits in transit (+):
the bank statement. $1,035
April 30 deposit $2,201
Step 2. Other payments (-): The electronic payments on
(received by bank on May 1).
April 3 and 7 were previously recorded by the company
Step 2. Outstanding checks (-): $5,904 when they were initiated. Unrecorded charges
No. 453, $3,000 determined from the bank statement are:
No. 457, $1,402 ▪ Returned NSF check on April 29 426
No. 460, $1,502 ▪ Debit and credit card fees 120
Step 3. Bank errors (+/−): None ▪ Bank service charges 30
Step 3. Company errors (+/−):
Check No. 443 was correctly written by Gourmet for
$1,226 and was correctly paid by the bank on April 12.
However, it was recorded as $1,262 on Gourmet’s
books. 36
Prepared by Saira Rizwan for LUMS undergrad course ACCT-100
 The bank statement for Gourmet showed a balance per bank of $15,907 on April 30, 2020.
On this date the balance of cash per books is $11,709. Gourmet determined the following
reconciling items for the bank.

Deposits in transit Other payments: The electronic payments on April 3 and

April 30 deposit $2,201 7 were previously recorded by the company when they
(received by bank on May 1). were initiated. Unrecorded charges determined from the
bank statement are:
Outstanding checks: $5,904
▪ Returned NSF check on April 29 426
No. 453, $3,000 ▪ Debit and credit card fees 120
No. 457, $1,402 ▪ Bank service charges 30
No. 460, $1,502
Company errors:
Bank errors (+/−): None Check No. 443 was correctly written by Gourmet for
$1,226 and was correctly paid by the bank on April 12.
However, it was recorded as $1,262 on Gourmet’s
books. 36
Other deposits: Unrecorded electronic receipt from customer on account on April 9
determined from the bank statement. $1,035

Prepared by Saira Rizwan for LUMS undergrad course ACCT-100

 Bank Reconciliation
April 30, 2020
Cash balance per bank statement (Unadjusted) $15,907
Add: Deposits in transit 2,201
Less: Outstanding checks
No. 453 3,000
No. 457 1,401
No. 460 1,502 5,904
Adjusted cash balance per bank $12,204

Cash balance per books (Unadjusted) $11,709

Add: Electronic funds transfer received $1,035
Error in recording check No. 443 36 1,071
Less: NSF check 426
Debit and credit card fees 120
Bank service charge 30 576
Adjusted cash balance per books $12,204
Prepared by Saira Rizwan for LUMS undergrad course ACCT-100
Journal Entries of reconciling items in Cash ledger (Company’s books)
The entries which are done by the bank but not yet recorded in Co. books are to be
updated in Co.’s record. They include:
1. Direct Credits in the banks (Receipt from customer / ETF)
Cash 1,035
Accounts Receivable 1,035
2. Company Error: Check # 443 was correctly written by Gourmet for $1,226 and
was correctly paid by the bank on April 12. However, it was recorded as $1,262 on
Gourmet’s books. The correcting entry would be:
Cash 36
Accounts Payable 36

3. Returned NSF Check on April 29. (Dishonored check) amounting $426:

Accounts Receivable 426

Cash 426
Prepared by Saira Rizwan for LUMS undergrad course ACCT-100
Journal Entries of reconciling items in Cash ledger (Company’s books)
4. Recording Bank charges $150
Bank Charges Expense 150
Cash 150

5. Recording Interest earned on bank deposit $75

Cash 75
Interest Income 75

Prepared by Saira Rizwan for LUMS undergrad course ACCT-100

Wynn Ltd. developed the following reconciling info. in preparing its Sep. bank reconciliation:
▪ Cash balance per bank statement, 9/30 $9,000 ▪ Deposits in transit 3,000
▪ Note receivable collected by bank 4,000 ▪ Bank service charge 50
▪ Outstanding checks 6,000 ▪ NSF check 800
Determine the cash balance per books (before adjustments) for Wynn Ltd.

Deduct from bank as

it is not recorded in Balance per bank statement $9,000
cash ledger yet
Less: Note receivable collected by bank (4,000)
Less: O/S Checks (6,000)

Add back into bank bal. as Add: Deposits in transit 3,000

the company cash ledger has
accounted for the deposit.
Add: NSF Check 800
Add: Bank Charges 50
Add back in bank bal. as the
company’s cash ledger has Unadjusted balance as per Co. books $2,850
not yet charged expense.

Prepared by Saira Rizwan for LUMS undergrad course ACCT-100

Thank You for your attention!