Generally, when I prepare year end financial statements for my clients, I perform either of these 3 tasks:
1) I prepare everything and write up the books at the time of preparation of the company’s year end financial statements
2) I do the monthly accounting throughout the year, and then do the year end financial statements before continuing with a new fiscal year
3) The client has internal or part-time bookkeepers who do the monthly accounting and then I just perform the year end from information supplied to me.
One of these part-time bookkeepers on task 3) just couldn’t understand the concept of reconciling a bank and that brings back memories for me, because I used to work with people who had the exact same attitude, and always created problems with their short-cuts.
Here are a couple of posts I did back in 2006 regarding this topic if you want a refresher course:
IMAGINE THE FOLLOWING FACTS
* June 30, 2009 you receive your bank statement and it shows $1,680.00 ending balance
* June 30, 2009 you cheque book balance claims you should have $1,800.00 ending balance
THIS IS NOT RECONCILING YOUR BANK
* Adjust your cheque book balance to $1,680.00 to “reconcile” and agree to the bank balance
* Complaining to your bank manager that the bank balance should be $1,800.00 and to please put back $120.00 bank error immediately.
WHAT IS RECONCILING THEN?
Reconciling your bank is when you take each balance you want to “reconcile” to .. and come to the same and usually different balance. It is rarely one balance or the other balance and often in between the balances.
In this case, the “reconciled” bank balance is the final general ledger balance of “Bank” that we would want to see on our monthly statements or year end financial statements.
If you were to make a flow chart – it would look like this:
BANK BALANCE (bank statement)
RECONCILED BALANCE (financial statements – adjusted balance)
OUR BALANCE (cheque book register – unadjusted balance)
EXAMPLE – RECONCILIATION OF THIS BANK
Our Cheque Book Balance: $1,800.00
LESS: June Service Charges: ($20.00)
EQUALS: Adjusted Cheque Book Balance: $1,780.00
Bank Statement Balance: $1,680.00
LESS: Outstanding Cheque – not yet cleared
Property Tax payment June 30th ($500.00)
ADD: Oustanding Deposit – cleared in July
Instant Teller Deposit after hours + $600.00
EQUALS: Adjusted Bank Statement Balance: $1,780.00
* Both the adjusted bank statement balance and adjusted cheque book balance agree (this is the “reconciled balance”)
* You do not adjust your cheque book balance to the bank statement balance (you only adjust for items that you do not have recorded already)
* You do not claim your bank statement balance is in error and complain to your bank manager to put money back (otherwise you will look like a fool)
AND THAT’S HOW YOU RECONCILE YOUR BANK!
The only journal entry that the bookkeeper would make in this situation, is
DR: Bank Charges – $20.00
CR: Bank – ($20.00)
DR: Cash Shortages – $120.00
CR: Bank – ($120.00)
OR WORSE YET:
(no journal entry – but instead a letter is written and delivered to the attention of the Bank Manager to inform them of theft by their tellers or computer)
And, the final G/L Balance at the June 30, 2009 would be: $1,780.00 – a balance inbetween the unadjusted cheque book balance and the ending bank statement balance
I hope that makes sense .. it’s one of the little things that irks me in my ‘dayjob’ ..