12 Questions
What is the main purpose of a bank reconciliation in accounting?
To ensure the company's general ledger Cash account is accurate
Why should a company establish internal controls over its cash?
To safeguard its critical asset and ensure accuracy in accounting
What is one of the tasks involved in the bank reconciliation process?
Detecting potential errors in the bank's records
How does a bank reconciliation help prevent overdrawing a company's checking account?
By ensuring the general ledger Cash account is accurate
What does the term 'bank reconciliation' refer to in accounting?
Ensuring the company's general ledger Cash account is accurate
Which role does an independent person play in relation to a bank reconciliation?
Prepare a bank reconciliation routinely
When does a company typically prepare a bank reconciliation with online banking?
Throughout the month and at the end of the month
How does a company record receiving money in its Cash account?
Debit the Cash account and credit another account on the date money was received
How is a company's general ledger Cash account affected when a check is written?
Debit the Cash account using the date of check issuance
What happens to a bank's liability when a customer deposits $900 into their checking account?
Bank's liability increases
What would be recorded in a company's accounts if they receive $900 on Saturday, June 29?
$900 debit to Cash and credit another account on June 29
How often can a company verify its checking account balance with online banking?
Throughout the month and at the end of the month
Study Notes
Introduction to Bank Reconciliation
- A company's cash includes the money in its checking account(s) and requires internal controls to safeguard this critical asset.
- Internal controls include separating accounting duties, depositing all receipts into the company's checking account, paying all bills through the checking account, and having an independent person routinely prepare a bank reconciliation.
- The purpose of the bank reconciliation is to ensure the company's general ledger Cash account is complete and accurate.
- The bank reconciliation also provides a way to detect potential errors in the bank's records.
The Bank Reconciliation Process
- The bank reconciliation process requires adjustments based on differences between the company's and bank's records.
- These adjustments are added or subtracted from the company's general ledger Cash account or the bank's checking account balance.
- With online banking, a company can prepare a bank reconciliation throughout the month and verify its checking account balance more frequently.
Accounting for Cash at the Company
- A company should have a separate general ledger Cash account for each of its checking accounts.
- The balances in asset accounts are increased with a debit entry, and when a company receives money, it debits its general ledger asset account Cash and credits another account.
- When a company writes a check, it credits its general ledger Cash account and debits another account.
Accounting at the Bank
- When a bank customer deposits money into its bank checking account, the bank's asset Cash is increased with a debit entry, and the bank's liability Customers' Deposits is increased with a credit entry.
- The bank's liability has increased because the bank has the liability/obligation to return the customer's checking account balance to the customer on demand.
- When the bank increases a customer's/depositor's checking account balance, the banker might say that the depositor's account has been credited.
Learn about the process of bank reconciliation, internal controls for safeguarding company cash, and comparing accounting practices between the company and the bank.
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