Bank Reconciliation Lecture Notes

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 Learning Objectives

LO 1 Apply internal control principles to cash.

LO 2 Identify the control features of a bank account.
LO 3 Prepare bank reconciliation.
LO 4 Prepare proof of cash.

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Principles of Internal Control Activities (5 of 16)
Anatomy of a Fraud
Angela Bauer was an accounts payable clerk for Aggasiz Construction Company. She
prepared and issued checks to vendors and reconciled bank statements. She perpetrated
a fraud in this way: She wrote checks for costs that the company had not actually incurred
(e.g., fake taxes). A supervisor then approved and signed the checks. Before issuing the
check, though, she would “white-out” the payee line on the check and change it to
personal accounts that she controlled. She was able to conceal the theft because she also
reconciled the bank account. That is, nobody else ever saw that the checks had been
altered.
Total take: $570,000
The Missing Control
Segregation of duties. The Aggasiz Construction Company did not properly segregate
recordkeeping from physical custody. Angela had physical custody of the checks, which
essentially was control of the cash. She also had recordkeeping responsibility because she
prepared the bank reconciliation.

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Principles of Internal Control Activities (6 of 16)

Documentation Procedures
• Companies should use
prenumbered documents, and
all documents should be
accounted for
• Employees should promptly
forward source documents for
accounting entries to the
accounting department

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Principles of Internal Control Activities (7 of 16)
Anatomy of a Fraud
To support their reimbursement requests for travel costs incurred, employees at Mod
Fashions Corporation’s design center were required to submit receipts. The receipts
could include the detailed bill provided for a meal, the credit card receipt provided when
the credit card payment is made, or a copy of the employee’s monthly credit card bill
that listed the item. A number of the designers who frequently traveled together came
up with a fraud scheme: They submitted claims for the same expenses. For example, if
they had a meal together that cost $200, one person submitted the detailed meal bill,
another submitted the credit card receipt, and a third submitted a monthly credit card
bill showing the meal as a line item. Thus, all three received a $200 reimbursement.
Total take: $75,000
The Missing Control
Documentation procedures. Mod Fashions should require the original, detailed receipt. It
should not accept photocopies, and it should not accept credit card statements. In
addition, documentation procedures could be further improved by requiring the use of a
corporate credit card (rather than a personal credit card) for all business expenses.
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Principles of Internal Control Activities (8 of 16)

Physical Controls
• Safes, vaults, and safety deposit boxes
• Locked warehouses and storage cabinets
• Computer facilities with passkey access or fingerprint or
eyeball scans
• Alarms to prevent break-ins
• Television monitors and garment sensors
• Time clocks for recording time worked

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Principles of Internal Control Activities (9 of 16)
Anatomy of a Fraud
At Centerstone Health, a large insurance company, the mailroom each day received
insurance applications from prospective customers. Mailroom employees scanned the
applications into electronic documents before the applications were processed. Once the
applications were scanned they could be accessed online by authorized employees.
Insurance agents at Centerstone Health earn commissions based upon successful
applications. The sales agent’s name is listed on the application. However, roughly 15% of
the applications are from customers who did not work with a sales agent. Two friends—
Alex, an employee in record keeping, and Parviz, a sales agent—thought up a way to
perpetrate a fraud. Alex identified scanned applications that did not list a sales agent.
After business hours, he entered the mailroom and found the hardcopy applications that
did not show a sales agent. He wrote in Parviz’s name as the sales agent and then
rescanned the application for processing. Parviz received the commission, which the
friends then split.
Total take: $240,000
The Missing Control
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Principles of Internal Control Activities (10 of 16)
Total take: $240,000
The Missing Control
Physical controls. Centerstone Health lacked two basic physical controls that could have
prevented this fraud. First, the mailroom should have been locked during nonbusiness
hours, and access during business hours should have been tightly controlled. Second, the
scanned applications supposedly could be accessed only by authorized employees using
their passwords. However, the password for each employee was the same as the
employee’s user ID. Since employee user-ID numbers were available to all other
employees, all employees knew each other’s passwords. Thus, Alex could enter the
system using another employee’s password and access the scanned applications.

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Principles of Internal Control Activities (11 of 16)
Independent Internal Verification
• Records periodically verified by an employee who is independent
• Discrepancies reported to management

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Principles of Internal Control Activities (12 of 16)
Anatomy of a Fraud
Bobbi Jean Donnelly, the office manager for Mod Fashions Corporations design center,
was responsible for preparing the design center budget and reviewing expense reports
submitted by design center employees. Her desire to upgrade her wardrobe got the
better of her, and she enacted a fraud that involved filing expense-reimbursement
requests for her own personal clothing purchases. Bobbi Jean was able to conceal the
fraud because she was responsible for reviewing all expense reports, including her own.
In addition, she sometimes was given ultimate responsibility for signing off on the
expense reports when her boss was “too busy.” Also, because she controlled the budget,
when she submitted her expenses, she coded them to budget items that she knew were
running under budget, so that they would not catch anyone’s attention.
Total take: $275,000
The Missing Control

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Principles of Internal Control Activities (13 of 16)
Total take: $275,000
The Missing Control
Independent internal verification. Bobbi Jean’s boss should have verified her expense
reports. When asked what he thought her expenses for a year were, the boss said about
$10,000. At $115,000 per year, her actual expenses were more than 10 times what would
have been expected. However, because he was “too busy” to verify her expense reports
or to review the budget, he never noticed.

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Principles of Internal Control Activities (14 of 16)

Human Resource Controls

• Bond employees who handle
cash
• Rotate employees’ duties and
require employees to take
vacations
• Conduct thorough background
checks

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Cash Controls (3 of 7)
Cash Receipts Controls
• Independent Internal Verification
o Supervisors count cash receipts daily
o Assistant treasurer compares total receipts to bank
deposits daily
• Human Resource Controls
o Bond personnel who handle cash
o Require employees to take vacations
o Conduct background checks

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Over-the-Counter Receipts

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Cash Receipts Controls (1 of 3)
Mail Receipts
• Mail receipts should be opened by two clerks, a list
prepared, each check endorsed “For Deposit Only”
• Each clerk signs the list to establish responsibility
• Original copy of list, along with checks, is sent to
cashier’s department
• Copy of list is sent to accounting department for
recording. Clerks also keep a copy.

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Cash Receipts Controls (2 of 3)
Permitting only designated personnel to handle cash
receipts is an application of the principle of:
a. segregation of duties
b. establishment of responsibility
c. independent internal verification
d. human resource controls

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DO IT! 2a Control over Cash Receipts
L. R. Cortez is concerned about the control over cash receipts in his fast-food
restaurant, Big Cheese. The restaurant has two cash registers. At no time do
more than two employees take customer orders and enter sales. Work shifts for
employees range from 4 to 8 hours. Cortez asks your help in installing a good
system of internal control over cash receipts.
Solution
Cortez should assign a separate cash register drawer to each employee at the
start of each work shift, with register totals set at zero. Each employee should
have access to only the assigned register drawer to enter all sales. Each
customer should be given a receipt. At the end of the shift, the employee should
do a cash count. A separate employee should compare the cash count with the
register tape (or point-of-sale records) to be sure they agree. In addition, Cortez
should install an automated point-of-sale system that would enable the
company to compare orders entered in the register to orders processed by the
kitchen.
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Cash Disbursement Controls (1 of 5)
Generally, internal control over cash disbursements is
more effective when companies pay by check or
electronic funds transfer (EFT) rather than by cash.
One exception is payments for incidental amounts that
are paid out of petty cash.

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Cash Controls (2 of 5)
Cash Disbursements Controls
• Establishment of Responsibility
o Only designated personnel are authorized to sign checks
(treasurer) and approve vendors
• Segregation of Duties
o Different individuals approve and make payments
o Check-signers do not record disbursements

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Cash Controls (3 of 5)
Cash Disbursements Controls
• Documentation Procedures
o Use prenumbered checks and account for sequence
o Each check must have an approved invoice
o Require employees to use corporate credit cards for
reimbursable expenses
o Stamp invoices “paid”

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Cash Controls (4 of 5)
Cash Disbursements Controls
• Physical Controls
o Store blank checks in safes, with limited access
o Print check amounts by machine in indelible ink
• Independent Internal Verification
o Compare checks to invoices
o Reconcile bank statement monthly

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Cash Controls (5 of 5)
Cash Disbursements Controls
• Human Resource Controls:
o Bond personnel who handle cash
o Require employees to take vacations
o Conduct background checks

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Cash Disbursements Controls (1 of 2)
The use of prenumbered checks in disbursing cash is an
application of the principle of:
a. establishment of responsibility
b. segregation of duties
c. physical controls
d. documentation procedures

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Cash Disbursements Controls (2 of 2)
The use of prenumbered checks in disbursing cash is an
application of the principle of:
a. establishment of responsibility
b. segregation of duties
c. physical controls
d. documentation procedures

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Cash Disbursement Controls
Voucher System Controls
• A network of approvals by authorized individuals,
acting independently, to ensure all disbursements by
check are proper
• A voucher is an authorization form prepared for each
expenditure in a voucher system

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Control Features of a Bank Account
The use of a bank contributes significantly to good
internal control over cash.
• Minimizes the amount of currency on hand
• Creates a double record of bank transactions
• Bank reconciliation

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Making Bank Deposits
Authorized employee should make deposit.

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Writing Checks
Written order signed by depositor directing bank to pay a specified
sum of money to a designated recipient.

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Electronic Funds Transfer (EFT) System
• Disbursement systems that use wire, telephone, or
computers to transfer cash from one location to
another
• Use is quite common
• EFT transactions normally result in better internal
control since no cash or checks are handled by
company employees

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Bank Statements (1 of 2)
• Prepared from bank’s perspective
• 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
check was paid and its amount
• Bank 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)

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Bank Statements (2 of 2)

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Cash Disbursements Controls (1 of 2)
The control features of a bank account do not include:
a. having bank auditors verify the correctness of the bank
balance per books
b. minimizing the amount of cash that must be kept on
hand
c. providing a double record of all bank transactions
d. safeguarding cash by using a bank as a depository

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Reconciling the Bank Account (1 of 10)
Reconcile balance per books and balance per bank to
their “correct” or “true” balance.
Reconciling Items:
Time Lags
1. Deposits in transit
2. Outstanding checks
3. Bank memorandum
4. Errors

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Reconciling the Bank Account (2 of 10)
Reconciliation Procedure

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Bank Reconciliation Illustrated (3 of 10)
Presented is the bank statement for Laird Company which the
company accessed online. It shows a balance per bank of
$15,907.45 on April 30, 2020. On this date the balance of cash per
books is $11,709.45. From the foregoing steps, Laird determines
the following reconciling items for the bank.
Step 1. Deposits in transit (+): April 30
deposit (received by bank on May 1). $2,201.40
Step 2. Outstanding checks (−): No. 453,
$3,000.00; No. 457, $1,401.30; No. 460, $1,502.70. 5,904.00
Step 3. Bank errors (+/−): None.
Reconciling items per books are as follows:
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Bank Reconciliation Illustrated (4 of 10)
Reconciling items per books are as follows:
Step 1. Other deposits (+): Unrecorded electronic receipt
from customer on account on April 9 determined from the
bank statement. $1,035.00
Step 2. Other payments (−): The electronic payments on
April 3 and 7 were previously recorded by the company
when they were initiated. Unrecorded charges
determined from the bank statement are as follows:
Returned NSF check on April 29 425.60
Debit and credit card fees on April 30 120.00
Bank service charges on April 30 30.00
Step 3. Company errors (+): Check No. 443 was correctly written
by Laird for $1,226 and was correctly paid by the bank on April
12. However, it was recorded as $1,262 on Laird’s books. 36.00
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Bank Reconciliation Illustrated (5 of 10)

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Entries for Bank Reconciliation (6 of 10)
Collection of Electronic Funds Transfer: A payment of an
account by a customer is recorded in the same way,
whether the cash is received through the mail or
electronically. The entry is as follows.
Apr. 30 Cash 1,035.00
Accounts Receivable 1,035.00
(To record receipt of electronic
funds transfer)

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Entries for Bank Reconciliation (7 of 10)
Book Error: The cash disbursements journal shows that check no.
443 was a payment on account to Andrea Company, a supplier. The
correcting entry is:
Apr. 30 Cash 36.00
Accounts Receivable 36.00
(To correct error in recording check
No. 443)
NSF Check: As indicated earlier, an NSF check becomes an account
receivable to the depositor. The entry is:
Apr. 30 Accounts Payable 425.60
Cash 425.60
(To record NSF check)
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Entries for Bank Reconciliation (8 of 10)
Bank Charge Expense: Fees for processing debit and credit card
transactions ($120) and the bank service charges ($30) have been
combined in a single entry as follows:
Apr. 30 Bank Charge Expense 150.00
Cash 150.00
(To record charges for debit and credit card
fees of $120 and bank service charges of $30)

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Reconciling the Bank Account (10 of 10)
The reconciling item in a bank reconciliation that will
result in an adjusting entry by the depositor is:
a. outstanding checks
b. a bank error
c. deposit in transit
d. bank service charges

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Do It! 3: Bank Reconciliation
Sally Kist owns Linen Kist Fabrics. Sally asks you to explain how she
should treat the following reconciling items when reconciling the
company’s bank account: (1) a debit memorandum for an NSF
check, (2) a credit memorandum received by the bank for an
electronic funds transfer from one of the company’s customers, (3)
outstanding checks, and (4) a deposit in transit.
Sally should treat the reconciling items as follows.
1. NSF check: Deduct from balance per books
2. Electronic funds transfer received by bank: Add to balance
per books
3. Outstanding checks: Deduct from balance per bank
4. Deposit in transit: Add to balance per bank
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Bank reconciliation

Balance per books, end. xx Bal. per bank statement, end. xx

Add: Credit memos (CM) xx Add: Deposits in transit (DIT) xx
Less: Debit memos (DM) (xx) Less: Outstanding checks (OC) (xx)
Add/Less: Book errors xx Add/Less: Bank errors xx
Adjusted balance xx Adjusted balance xx

INTERMEDIATE ACCTG 1A (by: MILLAN)

Proof of cash - Per books
Nov. 30 Receipts Disbursements Dec. 31
Per books xx xx
CM
November xx (xx)
December xx xx
DM
November (xx) (xx)
December xx (xx)
Book errors:
November
December
Adjusted balances xx xx xx xx

INTERMEDIATE ACCTG 1A (by: MILLAN)

 General guidelines
The proof of cash is similar to a T-account.
PROOF OF CASH T – ACCOUNT

Nov. 30 + Receipts = Disbursements + Dec. 31

Per books 60 + 30 = 20 + 70
ADD: CM
November xx xx
December xx xx
LESS: DM Cash in bank
November xx xx
Nov. 30 60
December xx xx
Book errors: Receipts 30 20 Disbursements
November 70 Dec. 31
December
Adjusted bal. xx + xx = xx + xx
INTERMEDIATE ACCTG 1A (by: MILLAN)
General guidelines:
The “Nov. 30” and “Dec. 31” columns follow the regular
bank reconciliation format.

Nov. 30 Receipts Disbursements Dec. 31

Per books 60 xx xx 70
ADD: CM
November 25 xx
December xx 35
LESS: DM
November (65) xx
December xx (95)
Book errors:
November
December
Adjusted bal. 20 xx xx 10
INTERMEDIATE ACCTG 1A (by: MILLAN)
General guidelines:
The “Receipts” and “Disbursements” columns pertain to the
current month only - in this illustration, the month of December.
Nov. 30 Receipts Disbursements Dec. 31
Per books xx xx xx xx
ADD: CM
November xx xx
December xx xx
LESS: DM
November xx xx
December xx xx
Book errors:
November
December
Adjusted bal. xx xx xx xx
INTERMEDIATE ACCTG 1A (by: MILLAN)
 General guidelines:
CREDIT MEMO: LAST MONTH (November)
• The November credit memo is a collection last month. However,
it is only recorded this month (i.e., December).
• Therefore, it is deducted from the “Receipts” column because
only the receipts in December should be included in this column.
Nov. 30 + Receipts = Disbursements + Dec. 31
Per books 60 + 30 = 20 + 70
ADD: CM Notice that
EQUILIBRIUM is
November 25 + (25) = + maintained.
December xx xx
LESS: DM
November xx xx
December xx xx
Book errors:
November
December
Adjusted bal. xx + xx = xx + xx
INTERMEDIATE ACCTG 1A (by: MILLAN)
General guidelines:
CREDIT MEMO: THIS MONTH (December)
• The December credit memo is a collection this month. However,
it is not yet recorded this month (it will only be recorded next
month).
• Therefore, it is added in the “Receipts” column because it is an
unrecorded receipt in December.
Nov. 30 + Receipts = Disbursements + Dec. 31
Per books 60 + 30 = 20 + 70
ADD: CM
November 25 + (25) =
December + 35 = + 35
LESS: DM
November xx xx
December xx xx
Book errors:
November
December
Adjusted bal. xx +INTERMEDIATE
xx = 1A (by: MILLAN)
ACCTG xx + xx
General guidelines:
• The proof of cash is completed as follows:

Nov. 30 Receipts Disbursements Dec. 31

Per books 60 30 20 70
ADD: CM
November 25 (25)
December 35 35
LESS: DM
November (65) (65)
December 95 (95)
Book errors:
November
December
Adjusted bal. 20 40 50 10

INTERMEDIATE ACCTG 1A (by: MILLAN)

• Reference: Intermediate Accounting 1 Millan (2021)
With additional material from Kieso, Weygandt and Kimmel
Accounting Principles 13th Edition ( 2018)

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 APPLICATION OF
CONCEPTS

INTERMEDIATE ACCTG 1A (by: MILLAN)

• The December 31, 2019 bank statement for Giordano Corp. showed a balance of P199,925. Ori this date, the company's Cash
account reflected an overdraft of P32,560. In reconciling these amounts, the following information is discovered:
• Cash on hand for undeposited sales receipts, December 31, 2019, P13,025.
• Customer's NSF check returned with bank statement, P42,040.
• Cash sales of P64,025 for the week ended December 18, 2019 were recorded in the books. The cashier reports this amount missing,
and it was not deposited in the bank.
• Note receivable of P250,000 and interest of P2,500 were collected by the bank and not recorded in the books.
• Deposit in transit December 31, 2019, P35,000.
• A customer's check for P29,040 in payment of its account was recorded in the books at P94,020.
• Outstanding checks, P204,055, include a duplicate check of P7,085 to C. Santos, who notified Giordano that the original was lost.
Giordano stopped payment on the original check and has already adjusted the cash account in its accounting records for this
amount.
• The cash account includes petty cash fund in the amount of P5,000. When the fund is counted on December 31, it was found to
include paid petty cash vouchers totaling PI,800.

• REQUIRED:
• Prepare a bank reconciliation at December 31, 2019 that brings both the bank and book balances to a corrected figure.
• Prepare adjusting entries for the foregoing.

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 Giordano Corporation
Bank Reconciliation Statement
December 31, 2019

Balance per bank statement P 199,925

Add: Cash on hand for undeposited receipts P 13,025
Deposit in transit 35,000 48,025
Total 252,950
Deduct: Outstanding checks 204, 055
Adjusted cash balance P 43,895
=========

Balance per books P (32,560)

Add: Note receivable collected by bank, incl interest of P2,500 252,500
Total 219,940
Deduct: Customer’s NSF check returned by bank P 42,040
Customer’s check for P29,040 erroneously recorded as 64,980
94,020
Cash sales missing 64,025
Petty cash fund 5,000 176,045
P 43,895
Adjusted cash balance =========

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(b) Adjusting entries:

Cash in bank 252,500

Notes Receivable 250,000
Interest Revenue 2,500

Accounts Receivable (42,040 + 64,980) 107,020

Loss from Theft 64,025
Petty Cash Fund 5,000
Cash in bank 176,045

Miscellaneous Expenses 1,800

Petty Cash Fund 1,800

Total Cash on the statement of financial position:

Petty cash fund of P3,200 + Cash in bank of P43,895 P47,095

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 Assignment:
Answer exercises 1 - 7, pages 16 -139 Intermediate
Accounting 1 Millan (2021)
Submit your answers in our Moodle platform.

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