Cash, bank reconciliation, and control

Learning goals

• Reconcile bank and ledger cash to one corrected balance.
• Record only book-side reconciling items and investigate exceptions.
• Design controls that create reviewable evidence without blocking operations.

Prerequisite check

An outstanding cheque is already in the company's books but not the bank statement; it reduces the bank side of the reconciliation and needs no new entry. A bank service charge appears first at the bank and requires a company entry.

Vocabulary

• Deposit in transit: recorded receipt not yet processed by the bank.
• Outstanding payment: recorded disbursement not yet cleared by the bank.
• Book-side item: bank-originated or accounting error requiring a ledger entry.
• Segregation of duties: separating authorization, custody, recording, and review.
• Positive pay: bank control matching presented payments to an approved file.

Core idea

A bank reconciliation is both a measurement schedule and a detective control. It explains every difference, posts valid book corrections, identifies stale or unusual items, and leaves evidence of independent review.

Why this treatment makes sense

Bank and company records are updated from different information at different times. Reconciling them to one amount tests completeness, accuracy, timing, and possible misappropriation. Repeated “timing” items may signal process failure rather than normal delay.

A repeatable method

1. Agree opening balance to the prior signed reconciliation.
2. Tick bank transactions to the cash ledger and examine unmatched items.
3. Adjust bank balance for deposits in transit, outstanding payments, and bank errors.
4. Adjust book balance for fees, interest, electronic items, returned deposits, and book errors.
5. Record book adjustments; never journalize normal bank timing items again.
6. Confirm both adjusted balances agree.
7. Age exceptions, attach evidence, and obtain independent approval.

Worked example

At April 30, Maple Current Design's bank statement shows $42,680 and ledger cash shows $38,915. A $6,200 deposit is in transit; payments of $3,480 are outstanding. The bank collected a $1,500 customer note plus $30 interest, charged a $45 fee, and returned a $440 customer payment. A $720 supplier payment was entered in the ledger as $270, overstating cash by $450.

Adjusted bank = $42,680 + $6,200 − $3,480 = $45,400.

Adjusted books = $38,915 + $1,530 − $45 − $440 − $450 = $39,510. The sides do not agree; the $5,890 gap means at least one fact is missing or misstated. Investigation finds the ledger balance was transcribed incorrectly: it is $44,805. Corrected books = $44,805 + $1,530 − $935 = $45,400.

Entries include debit Cash $1,530/credit Notes Receivable $1,500 and Interest Revenue $30; debit Bank Expense $45/credit Cash; debit Accounts Receivable $440/credit Cash; and debit Accounts Payable $450/credit Cash for the recording error correction.

Journal, ledger, and statement connection

Book entries update the cash ledger to $45,400. The reconciliation supports the statement of financial position, while the returned receipt restores a customer balance. Outstanding items remain on an exception list until cleared or formally resolved.

Common mistakes

• Forcing agreement with an unexplained “miscellaneous” amount.
• Recording deposits in transit or outstanding payments twice.
• Correcting the bank's error in the company's ledger.
• Allowing the cash custodian to prepare and approve the reconciliation.

Guided practice

Bank $20,000; deposit in transit $2,500; outstanding payments $1,800. Adjusted bank is $20,700. Books $20,760; fee $60. Adjusted books are also $20,700. Record debit Bank Expense $60 and credit Cash $60.

Independent practice

Level 1 — reconcile: Bank $31,400; deposit in transit $4,100; outstanding payments $2,250. Find adjusted bank.

Level 2 — entry: Books are $33,180 before $25 interest income, a $55 fee, and a $300 returned receipt. Find adjusted books and entries.

Level 3 — control: One employee receives e-transfers, records cash, prepares the reconciliation, and clears exceptions. Recommend two feasible control changes.

Self-check and solutions

Level 1: $31,400 + $4,100 − $2,250 = $33,250.

Level 2: $33,180 + $25 − $55 − $300 = $32,850. Debit Cash/credit Interest Revenue $25; debit Bank Expense/credit Cash $55; debit Accounts Receivable/credit Cash $300.

Level 3: Assign reconciliation and exception approval to someone without cash custody; require independent daily review of electronic-receipt reports to deposits. Preserve bank export, ledger, exception notes, and sign-off.

Retrieval practice

1. Which side receives a deposit in transit?
2. Which items create journal entries?
3. What must happen when adjusted balances disagree?

Answers: bank side; valid book-side items; investigate rather than plug.

Exam-style application

Complete a reconciliation from raw items, identify one planted book error, prepare entries, and write a control memo naming risk, control owner, frequency, evidence, and exception escalation.

Lesson summary

A strong reconciliation reaches one evidenced cash balance, posts only valid book corrections, and turns unexplained or stale items into investigated exceptions.