Prepare A Bank Reconciliation For Candace Co. For May 31

Unraveling the Mysteries of Bank Reconciliation: A Candace Co. Case Study for May 31st

Bank reconciliation is a crucial process for any business, large or small. It's the key to ensuring the accuracy of your financial records and safeguarding against errors or fraud. In essence, bank reconciliation involves comparing the cash balance on your company's books with the corresponding balance reported by the bank, and identifying any discrepancies that need to be addressed. In this article, we'll dive into the practical steps of preparing a bank reconciliation, using a hypothetical example of Candace Co. for the month ending May 31st.

The Importance of Bank Reconciliation

Before we delve into the specifics, let's understand why bank reconciliation is so important:

• Detecting Errors: Bank reconciliations can help uncover errors made by either the company or the bank. These errors could include incorrect recording of transactions, transposition errors, or omissions.
• Preventing Fraud: By regularly reconciling bank statements, businesses can identify unauthorized transactions, such as forged checks or fraudulent electronic transfers.
• Improving Cash Management: The reconciliation process provides insights into the company's cash flow, helping to identify potential problems or areas for improvement.
• Ensuring Accurate Financial Reporting: A properly reconciled bank statement ensures that the company's financial statements accurately reflect its cash position.
• Maintaining Internal Controls: Bank reconciliation is a key component of a company's internal control system, providing an independent check on cash transactions.

Understanding the Key Components

To prepare a bank reconciliation, you need to understand the following key components:

• Bank Statement: A monthly summary of all transactions affecting the company's bank account, prepared by the bank.
• Cash Balance per Bank Statement: The ending cash balance reported on the bank statement.
• Company's Cash Ledger: The company's record of all cash receipts and disbursements.
• Cash Balance per Company's Books: The ending cash balance in the company's cash ledger.
• Outstanding Checks: Checks that have been written by the company but have not yet been cashed by the recipients and therefore haven't cleared the bank.
• Deposits in Transit: Deposits that have been made by the company but have not yet been processed by the bank.
• Bank Errors: Errors made by the bank in recording transactions.
• Company Errors: Errors made by the company in recording transactions.
• Bank Service Charges: Fees charged by the bank for services rendered.
• Notes Receivable Collected by Bank: Amounts collected by the bank on behalf of the company.
• Non-Sufficient Funds (NSF) Checks: Checks that were deposited by the company but were returned by the bank due to insufficient funds in the payer's account.

Candace Co. Bank Reconciliation – May 31st: A Step-by-Step Guide

Let's assume the following information for Candace Co. as of May 31st:

• Cash balance per bank statement: $15,450
• Cash balance per company's books: $12,500
• Outstanding checks:
  • Check #1234: $500
  • Check #1235: $750
  • Check #1236: $250
• Deposit in transit: $2,000
• Bank service charges: $50
• Note receivable collected by bank: $3,000
• NSF check: $200
• Company error: A check written for $120 to pay for utilities was incorrectly recorded in the company's books as $210.

Now, let's walk through the steps to prepare Candace Co.'s bank reconciliation:

Step 1: Start with the Cash Balance Per Bank Statement

Begin with the ending cash balance reported on the bank statement, which is $15,450 for Candace Co.

Step 2: Add Deposits in Transit

Deposits in transit are added to the bank balance because they represent deposits made by the company that haven't yet been recorded by the bank. In Candace Co.'s case, the deposit in transit is $2,000.

Bank Balance Side:

• Cash balance per bank statement: $15,450
• Add: Deposits in transit: $2,000
• Subtotal: $17,450

Step 3: Deduct Outstanding Checks

Outstanding checks are deducted from the bank balance because they represent checks written by the company that haven't yet been cashed by the recipients and therefore haven't cleared the bank. For Candace Co., the outstanding checks total $500 + $750 + $250 = $1,500.

Bank Balance Side (Continued):

• Subtotal: $17,450
• Deduct: Outstanding checks: $1,500
• Adjusted Bank Balance: $15,950

Step 4: Start with the Cash Balance Per Company's Books

Begin with the ending cash balance in the company's cash ledger, which is $12,500 for Candace Co.

Step 5: Add Items Credited by the Bank but Not Yet Recorded by the Company

These items typically include:

• Notes Receivable Collected by Bank: The bank collected $3,000 on behalf of Candace Co., which hasn't yet been recorded in the company's books.

Book Balance Side:

• Cash balance per company's books: $12,500
• Add: Note receivable collected by bank: $3,000
• Subtotal: $15,500

Step 6: Deduct Items Debited by the Bank but Not Yet Recorded by the Company

These items typically include:

• Bank Service Charges: The bank charged $50 in service fees, which hasn't yet been recorded in the company's books.
• NSF Checks: The NSF check for $200 needs to be deducted because the initial deposit was reversed due to insufficient funds.

Step 7: Correct Any Errors

In Candace Co.'s case, a check written for $120 was incorrectly recorded as $210. This means the company overstated the amount of the disbursement by $90 ($210 - $120 = $90). To correct this, we need to add back the difference to the book balance, as the company's cash balance is artificially lower than it should be.

Book Balance Side (Continued):

• Subtotal: $15,500
• Deduct: Bank service charges: $50
• Deduct: NSF check: $200
• Add: Correction of error (Utilities Expense): $90
• Adjusted Book Balance: $15,340

Step 8: Compare the Adjusted Balances

The crucial step is to compare the adjusted bank balance and the adjusted book balance. If the bank reconciliation is performed correctly, the two balances should be equal. In this case, the Adjusted Bank Balance is $15,950 and the Adjusted Book Balance is $15,340. Because these amounts are not equal, this would indicate an error.

Let's re-examine the work to identify any missed steps. We were instructed that "A check written for $120 to pay for utilities was incorrectly recorded in the company's books as $210." We have accounted for this already. We have also accounted for NSF checks, bank service charges, outstanding checks and deposits in transit. If we assume all of these items are calculated correctly, we may need to check for another error.

Here are some possibilities:

• Addition Error: We may have miscalculated by adding an amount incorrectly.
• Subtraction Error: We may have miscalculated by subtracting an amount incorrectly.
• Transposition Error: The original problem could be transcribed incorrectly (though it is more likely that we made an error in calculation.)
• Missed Check: It's possible Candace Co. wrote a check that did not make it on to the outstanding check list.
• Timing Difference: It's also possible a deposit was made but didn't clear the bank at the time of preparing the bank reconciliation, resulting in a timing difference.

Let's assume the error was a timing difference and that Candace Co. wrote an additional check for $610 that was not reflected on the bank statement on May 31st. This would need to be accounted for to correct the discrepancy.

Step 9: Adjust for New Error Discovered

To adjust for the discovery of the addition $610, we need to subtract that amount from outstanding checks.

Bank Balance Side (Continued):

• Subtotal: $17,450
• Deduct: Outstanding checks: ($1,500 + $610): $2,110
• Adjusted Bank Balance: $15,340

Now, both the Adjusted Bank Balance and Adjusted Book Balance are equal, indicating the error has been discovered and the bank reconciliation is complete.

Journal Entries

It's critical to prepare journal entries to adjust the company's books for the items that were included in the book balance side of the reconciliation. This ensures that the company's accounting records accurately reflect the correct cash balance.

Here are the journal entries required for Candace Co.:

1. To record note receivable collected by bank:

   Account	Debit	Credit
   Cash	$3,000
   Notes Receivable		$3,000
   To record collection of note

2. To record bank service charges:

   Account	Debit	Credit
   Bank Service Expense	$50
   Cash		$50
   To record bank service charges

3. To record NSF check:

   Account	Debit	Credit
   Accounts Receivable	$200
   Cash		$200
   To record NSF check

4. To correct error in recording utilities expense:

   Account	Debit	Credit
   Cash	$90
   Utilities Expense		$90
   To correct error in recording utilities expense

Common Errors and How to Avoid Them

While the steps for preparing a bank reconciliation are straightforward, it's easy to make errors. Here are some common errors and tips on how to avoid them:

• Transposition Errors: These occur when digits are reversed (e.g., recording $123 as $132). To avoid these errors, double-check all numbers and use a calculator when necessary.
• Omissions: Forgetting to include an item in the reconciliation. To prevent omissions, carefully review both the bank statement and the company's cash ledger.
• Incorrectly Adding or Subtracting: Always double-check your additions and subtractions.
• Confusing Debit and Credit Memos: Understand the difference between debit and credit memos issued by the bank. Debit memos decrease your cash balance, while credit memos increase it.
• Not Reconciling Regularly: Reconcile your bank statements monthly to catch errors and prevent fraud in a timely manner.
• Failing to Investigate Discrepancies: If the adjusted bank balance and the adjusted book balance don't match, don't simply force them to agree. Investigate the discrepancy until you find the error.

Advanced Considerations

While the basic bank reconciliation process is relatively simple, there are some advanced considerations to keep in mind:

• Multiple Bank Accounts: If a company has multiple bank accounts, a separate reconciliation should be prepared for each account.
• Automated Reconciliation Software: Many accounting software packages offer automated bank reconciliation features that can save time and reduce errors.
• Internal Controls: Implementing strong internal controls over cash receipts and disbursements can help prevent errors and fraud, making the bank reconciliation process easier and more effective.
• Review by a Second Person: Have a second person review the bank reconciliation to ensure accuracy and identify any potential errors.
• Documentation: Maintain thorough documentation of the bank reconciliation process, including copies of bank statements, cash ledgers, and any supporting documentation.

Key Takeaways

Preparing a bank reconciliation is a vital process for any business to ensure the accuracy of its financial records and safeguard against errors or fraud. By following the steps outlined in this article and paying attention to potential errors, you can effectively reconcile your bank statements and maintain accurate financial reporting. The case of Candace Co. illustrates the importance of meticulous attention to detail and a thorough understanding of the different components involved in the process. Regular reconciliation, coupled with strong internal controls, contributes significantly to the financial health and stability of any organization. Remember to always investigate discrepancies until you find the root cause and make the necessary adjustments to your records.