INTERMIDIATE ACCOUNTING 1

Internal Control on cash: Imprest system

Bank Reconciliation Statement and Proof of Cash

An entity shall classify an asset as current when… Objectives:

1. Define what bank reconciliation is.

2. Define and explain different terminologies

related to bank reconciliation.
Cash Items 3. Prepare a bank reconciliation statement using
adjusted balance method, bank-to-book
method, and book-to-bank method.

4. Prepare a four-column bank reconciliation

statement (proof of cash).

Cash in bank

 Cash receipts > deposited altogether

 Cash payments > made through checks

Cash Equivalents
Bank statement >increase in entity’s cash >credit

>decrease in entity’s cash >debit

Ledger >increase in cash >debit

>decrease in cash >credit

Bank Reconciliation Statement

Temporary investments of cash A bank reconciliation statement is prepared by
an entity to reconcile the cash-in-bank account
balance in the entity’s books versus the balance
as reported by the bank in the bank statement.

Bank Balance reconciling items

Deposits in transit (DIT)

>Cash that has been received by an entity and was
recorded in the cash-in-bank account balance as a
deposit. However, this deposit that has been sent to the
Compensating Balances
bank is not yet processed and posted by the bank, thus
not reflecting in the bank statement.

Outstanding checks
>Checks that the company has issued and was recorded
as a credit entry in the entity’s cash-in-bank account.
However, these checks were not yet presented for
POSDATED CHECKS payment and has not yet cleared from the bank account
from which it is drawn.
 Shall be reverted back to cash as at the end of
the reporting period Bank Errors
>Erroneous debits and credits by the bank in the entity’s
account.

Cash short or over Ledger Balance reconciling items

Credit Memos
>Items credited by the bank to the bank account of the
Problem:
entity not yet recorded by the firm in their books. These
include notes receivable collected by the bank in behalf
of the entity and interest earned in putting their cash in
the bank. Bank to Book Method

Debit Memos
>Items charged against the company’s bank account not
yet recorded in the company’s ledger. These includes
NSF (not sufficient funds) check which are checks
deposited but were returned by the bank because the
source account has insufficient balance. It also includes
bank service charges.

Book Errors
>Erroneous debits and credits of cash in the entity’s
ledger

Adjusted balance method

Bank Balance
+ Deposit in Transit
-Outstanding Checks
+/- Bank Error
=ADJUSTED BALANCE

Ledger balance
+Notes collected by the bank
+Interest earned
-NSF Checks-Service charge
+/-Book error
=ADJUSTED BALANCE

BANK-TO-BOOK METHOD

Bank Balance
+Deposit in transit
-Outstanding checks
+/-Bank error
-Collections by the bank
-Interest earned
+Service charge
+NSF checks
+/-Book error

BOOK-TO-BANK METHOD

Ledger balance
+Collections by the bank
+Interest earned
-NSF Checks
-Service charge
+/- Book error
-Deposit in Transit
+Outstanding checks
+/- Bank error
=Bank balance
 Cash in Bank - Bank of the Islands 100678988781
Dec-01 100,000.00 Dec-04 Chk 101 5,000.00
Dec-21 50,000.00 Dec-06 Chk 102 15,000.00
Dec-27 10,000.00 Dec-08 Chk 103 40,000.00
Dec-31 80,000.00 Dec-08 Chk 104 10,000.00
Dec-10 Chk 105 30,000.00
Dec-14 Chk 106 25,000.00
Dec-28 Chk 107 50,000.00

Dec-14 Chk 106 25,000.00

Dec-28 Chk 107 50,000.00

Apr-30 Receipts Disbursements May-31

Ledger Balance 2,352,000 4,065,000 3,232,000 3,185,000
Notes collected by the bank
April 30 382,000 - 382,000
May 31 356,000 356,000
Interest Earned
April 30 30,000 - 30,000
May 31 16,000 16,000
NSF Checks
April 30 - 40,000 - 40,000
May 31 25,000 - 25,000