Financial Accounting: An Integrated Statements Approach, 2nd Edition

BANK RECONCILIATION

For effective control, the reasons for the difference between the cash balance on the

bank statement and the cash balance in the accounting records should be analyzed by

preparing a bank reconciliation. A bank reconciliationis an analysis of the items and

amounts that cause the cash balance reported in the bank statement to differ from the

balance of the cash account in the ledger in order to determine the adjusted cash

balance.

A bank reconciliation is usually divided into two sections. The first section, re-

ferred to as the bank section, begins with the cash balance according to the bank state-

ment and ends with the adjusted balance. The second section, referred to as the

company section, begins with the cash balance according to the company’s records and

ends with the adjusted balance. The two amounts designated as the adjusted balance

must be equal. The content of the bank reconciliation is shown on the next page.

The following steps are useful in finding the reconciling items and determining the

adjusted balance of Cash:

1. Compare each deposit listed on the bank statement with unrecorded deposits ap-
   pearing in the preceding period’s reconciliation and with the current period’s

322 Chapter 7 Sarbanes-Oxley, Internal Control, and Cash

Power Networking should deter-

mine the reason for the difference

in these two amounts.

Exhibit 6

Power Networking’s

Records and Bank

Statement

Check Fraud

Check fraud involves counterfeiting, altering, or otherwise

manipulating the information on checks in order to fraudulently

cash a check. According to the National Check Fraud

Center, check fraud and counterfeiting are among the fastest

growing problems affecting the financial system, generating

over $10 billion in losses annually. Criminals perpetrate the

fraud by taking blank checks from your checkbook, finding a

canceled check in the garbage, or removing a check you have

mailed to pay bills. Consumers can prevent check fraud by

carefully storing blank checks, placing outgoing mail in postal

mailboxes, and shredding canceled checks.

INTEGRITY, OBJECTIVITY, AND ETHICS IN BUSINESS

Describe and illustrate the

use of a bank reconcilia-

tion in controlling cash.

5

Bank Statement

Beginning Balance $ 4,218.60

Additions:

Deposits $13,749.75

Miscellaneous 408.00 14,157.75

Deductions:

Checks $14,698.57

NSF Check 300

Service Charge 18 15,016.57

Ending Balance $ 3,359.78

Power Networking Records

Beginning Balance $ 4,227.60

Deposits 14,565.95

Checks 16,243.56

Ending Balance $ 2,549.99