Expanded Discussion: Four-Column Bank Reconciliation

Prepare a proof of cash (four-column bank reconciliation).



Reconciliation of Receipts and Disbursements
Exercises

Reconciliation of Receipts and Disbursements

The bank reconciliation presented in Appendix 8A of Fundamentals of Intermediate Accounting illustrates one of the common techniques to control cash. We extend that example to show an expanded version of the bank reconciliation. We begin by reviewing the reconciliation shown in Appendix 8A.

Nugget Mining Company's books show a cash balance at the Denver National Bank on November 30 of $20,502. The bank statement covering the month of November shows and ending balance of $22,190. An examination of Nugget's accounting records and November bank statement identified the following reconciling items:

A deposit of $3,680 was mailed November 30 but does not appear on the bank statement.
Checks written in November but not charged to the November bank statement are:
Check #7327 $ 150
  #7348 4820
  #7349 31
Nugget has not yet recorded the $600 of interest collected by the bank Nov. 20 on Sequoia Co. bonds held by the bank for Nugget.
Bank service charges of $18 are not yet recorded on Nugget's books.
One of the Nugget's Customer's checks for $220 was returned with bank statement and marked "NSF." The bank treated this bad check as a disbursement.
Nugget discovered that check #7322, written in November for $131 in payment of an account payable, had been recorded in their books as $311.
A check for Nugent Oil Co. in the amount of $175 accompanied the bank statement that had been incorrectly charged to Nugget Mining.

The reconciliation of the bank and book balances to the correct cash balance of $21,044 would appear as follows:

Illustration 1:

Sample Bank Reconciliation

Another form of reconciliation is frequently used by auditors (and typically illustrated in auditing textbooks). That is the so-called proof of cash or four-column bank reconciliation. It is an expanded version of the bank reconciliation shown in Illustration 1.

The proof-of-cash form of reconciliation is actually four reconciliations in one (see Illustration 2):

Reconciliation of the beginning-of-the-period cash balances per the bank statement and the books (first column).
Reconciliation of the current period cash receipts(deposits) per the bank statement to receipts recorded in the books (second column).
Reconciliation of the current period cash disbursements per the bank statement to disbursements recorded in the books (third column).
Reconciliation of the end-of-the-period cash balances per the bank statement and the books (fourth column).

The top row ("per bank statement") is a summary of transactions for the period as taken from the bank statement. The beginning and ending bank balances are shown on the bank statement as are the bank receipts (as shown in the "deposits" column) and the bank disbursements (as shown in the "charges" or "checks cashed" column).

The "per books" line is a summary of the cash transactions as recorded in the books. These totals should be taken directly from the books, preferably from the cash account itself, which should, of course, show receipts and disbursements as debit and credit entries and the beginning and ending cash balances.

The left-hand and right-hand columns are simply end-of-the-prior-period and end-of-the-current-period reconciliations, the preparation of which was shown in Illustration 1. The two center columns, receipts and disbursements, tie the left-hand column and right-hand column reconciliations together. With few exceptions, the amounts needed to complete these center columns may be found in the figures included in either the top or bottom rows or in the left- and right-hand columns; no new data need be added.

The four-column proof of cash is preferred by auditors as a means of identifying all differences between the books and the bank statement during the period covered by the reconciliation. It is generally prepared by auditors when a company has weak internal control over cash; it assists in identifying unauthorized and unrecorded transfers of cash.

To illustrate the four-column reconciliation, the data provided for the Nugget Mining Company at November 30 in Illustration 1 will be used, along with the following information:

The cash balance as of October 31 per the bank statement (the beginning of November balance) was $17,520.
The cash balance as of October 31 per Nugget's books was $18,020.
The total cash receipts (deposits) per the November bank statement are $96,450. These receipts include a deposit in transit of $4,200 at October 31.
The total cash receipts per Nugget's books during November are $95,330.
The total cash disbursements per the bank statement for November are $91,780. These disbursements include $3,700 of checks outstanding at October 31.
The total cash disbursements per the books during November are $92,848.

Illustration 2:

Four-Column Bank Reconciliation Bank and Book Balance to Corrected Balance Form

The completed reconciliation, reconciling to the corrected balance, is shown in Illustration 2.

An alternative procedure for preparing a proof-of-cash reconciliation involves reconciling from the bank balance to the book balance rather than reconciling both amounts to a correct cash balance. This alternative is shown in Illustration 3.

Illustration 3:

Four-column Bank Reconciliation & Bank to Book Form.

The "bank to book" reconciliation form in Illustration 3 is generally illustrated in auditing textbooks. Auditors frequently use this form because their main objective is to identify all of the items that make up the difference between the bank's records and the depositor's records. Preparation of the adjusting entries is secondary. This form is usually more difficult to prepare because each of the reconciling items must be analyzed carefully to determine whether an addition or subtraction from the top of the column "per bank" amount is the correct reconciliation treatment.

An exception would be a customer's check deposited, returned NSF, and redeposited without entry in the same period. In this situation, receipts and disbursements per bank would be higher than the receipts and disbursements per books. Deposits would have been reported twice in the bank statement but only recorded once for books' purposes. Also, the bank would have shown a disbursement when the check bounced. No disbursement has been recorded in the accounting records.


Prepare a proof of cash (four-column bank reconciliation). The proof of cash reconciles four items per the bank statement to four items per the company's books: (1) the beginning-of-the-period cash balances, (2) the current period cash receipts, (3) the current period cash disbursements, and (4) the end-of-the-period cash balances.


Exercises

Exercise 1 (Proof of Cash)

Following is the general format of a four-column bank reconciliation with the various categories and operations numbered (1) through (8):

Instructions

  1. For each of the following items indicate in which columns the reconciling items would appear. Question 1 is an example.
    __6__ __7__ November service charge of $25 is included on bank statement.
    _____ _____ The bank collected a $1,000 note receivable for the firm in November plus $40 interest. The firm has not yet recorded this receipt.
    _____ _____ An "NSF" check in the amount of $357 was returned with the November bank statement. This check will be redeposited in December. The firm has not yet made an entry for this "NSF" check.
    _____ _____ All $9,200 of checks written in October, which had not cleared the bank at October 31, cleared the bank in November.
    _____ _____ October service charge of $23 is included in book disbursements for November.
    _____ _____ A $5,100 deposit in transit is included in book receipts for November.
    _____ _____ The bank, in error, credited the firm's account for $420 in November for another firm's deposit.
    _____ _____ A check written in December for $670 was written in the check register in error in the amount of $760. This check cleared the bank in November for $670. Both the debit to Rent Expense and the credit were overstated as a result of this error in the books.
    _____ _____ The initial $4,700 deposit shown on the November bank statement was included in October's book receipts.
    _____ _____ $8,220 of checks written in November have not cleared the bank by November 30.
  2. Prepare the entries that should be recorded to make the books complete and accurate at November 30.

Exercise 2 (Proof of Cash)

You have been hired as the new assistant controller of Falcons, Inc. and assigned the task of proving the cash account balance. As of December 31, you have obtained the following information relative to the December cash operations.

Balance per bank
11/30 $138,300
12/31 115,716
Balance per books
11/30 $101,162
12/31 105,046
Receipts for the month of December
per bank 714,330
per books 742,415
Outstanding checks
11/30 37,958
12/31 45,297
Dishonored checks returned by the bank and recorded by Falcons, Inc. amounted to $3,125 during the month of December, and according to the books $2,500 was redeposited. Dishonored checks, recorded on the bank statement but not on the books until the following months, amounted to $820 at November 30, and $1,150 at December 31.
On December 31, a $1,162 check of the Cougars Company was charged to Falcons, Inc. account by the bank in error.
Proceeds of a note of Golden Bears Company collected by the bank for Flacons on December 10, were not entered on the books:
Principal $2,000
Interest 80
  2,080
Less: Collection charge 15
  $2,065
Interest on a bank loan for the month of December charged by the bank but not recorded on the books amounted to $4,230.
Deposit in transit:
12/31 $30,150

Instructions

Prepare bank reconciliations as of November 30, and December 31, using a four-column "proof of cash" with following column headings for amounts:

11/30 Beginning Reconcilation Receipts Disbursements 12/31 Ending Reconcilation

Proceed from "balance per bank statement" to "balance per books."

Exercise 3 (Proof of Cash)

Using the data given in Exercise 2, prepare (a) a bank reconciliation proceeding from "balance per bank statement" to "correct balance" and "balance per books" to "correct balance," and (b) accompanying entries to adjust the books at December 31.

Exercise 4 (Proof of Cash)

You have been hired by Algiers Manufacturing Company as an internal auditor. One of your first assignments is to reconcile the bank account for the Dresden Division.

The bank statement shows the following:

Beginning Balance, August 1 $ 90,425
Deposits-(20) 915,176
Checks-(64) plus debit memos ( 851,715 )
Service charges- new checks ( 44 )
Ending Balance, August 31 $ 153,842

The cash account on the books of the Dresden Division is as follows:

Cash

July 1 64,192   July 31-Cash Disbursement 665,441
July 31-Cash Receipts 682,429     August 1-Bank Reconciliation 375
August 31-Cash Receipts 919,872     August 31-Cash Disbursement 856,446

Your review of last month's bank reconcilation and the current bank statement reveals the following:

Outstanding checks
July 31 $26,042
August 31 33,561
Deposits in transit
July 31 16,422
August 31 21,118
Check #216 for office furniture was written for $695 but recorded in the cash disbursements journal as $965. The bank deducted the check as $695.
A check written on the account of Algiers Manufacturing Co. for $583 was deducted by the bank from the Dresden Division account.
Included with the bank statement was a debit memorandum dated August 31 for $2,475 for interest on a note taken out by the Dresden Division on July 30.
The service charge for new checks has not been recorded.
The July 31 bank reconciliation (prior month) showed as reconciling items a service charge of $26 and an NSF check for $349.

Instructions

  1. Prepare a four-column "proof of cash" reconciling the "balance per bank" to the "balance per book."
  2. Prepare a four-column "proof of cash" reconciling "balance per bank" to the "correct balance" and "balance per books" to the "correct balance."
  3. Prepare any adjusting journal entries necessary to correct the cash account per the books of the Dresden Division