Companies incorporate a variety of internal controls to manage their cash balance and ensure that the amount is reported accurately. Bank reconciliations provide a method for ensuring that the cash balance reported in the company’s financial records communicates the correct amount of cash. The bank reconciliation process includes recognizing outstanding checks, deposits in transit, note collections, interest revenue and errors.
Bank Reconciliation Process
Bank reconciliations require the business to compare the ending cash balance reported by the bank to the cash balance reported in the company’s financial records. The company adjusts the bank cash balance by adding any deposits in transit, or deposits made by the company and not recorded by the bank before the end of the period. The company subtracts any outstanding checks, or checks written that have not cleared the bank yet, from the bank balance. This calculates an adjusted cash balance. The company compares transactions recorded by the bank to those recorded in the cash account and identifies transactions from the bank statement not included in the cash account. Some transactions, such as collection of a note or interest paid, increase the cash balance for the company. Other transactions, such as service fees or a customer check returned for insufficient funds, reduce the cash balance. The company adjusts the cash balance by these amounts and calculates a second adjusted cash balance. Both adjusted cash balances need to equal.
Note Collection Process
Many banks serve as collection sites for customer payments. Customers send their payment directly to the bank, which then deposits the money into the company’s account. These payments may include both a principal and interest portion. The bank receives these payments and sends a statement to the company identifying the payments received and the interest and principal portions of those payments.
The company needs to adjust the company cash balance for the note and interest collected. The bank statement mailed to the company includes the customer payment information. The company adjusts the company cash balance on the bank reconciliation by the payments collected. The company adds a line in the bank reconciliation to recognize the principal portion of the note collected to the company cash balance. The company adds a second line in the bank reconciliation to recognize the interest collected on the note.
The company needs to record every adjustment to the company cash balance in the company’s financial records. For a note collected, the company increases the cash account and decreases the note receivable account. To record the interest earned, the company increases cash and increases interest revenue.