Accounting, Financial, Taxation

This “Bank Reconciliation Procedure” may help those who is an accounts payable clerk to compare his or her internal cash records to those of the bank and reconcile any differences between the two. Have a look at the “Bank Reconciliation Form example” at the end of this post for better understanding.

Bank Reconciliation Procedure

Responsibilities: Accounts Payable Clerk

Entries Procedure:

During the month, enter each lockbox or deposit amount in its entirety, print the batch total, and store the batch total report with the lockbox or deposit record. Take the following steps to apply cash:

1. Go to the accounting computer system’s cash application module.
2. Call up the account of the customer for whom a payment has been received.
3. Log in the amount received, the date of the payment, and the identifying number of the check. Repeat the process until all cash has been applied for all the invoices paid by each customer.
4. Use a journal entry to record cash receipts for items not related to invoices.

Manual Checks Procedure:

During the month, enter manual checks into the computer system as soon as they are issued.

Journal Entries Procedure:

1. Make a journal entry to record all expenditures associated with each payroll as soon as the payroll is generated.
2. Make a separate journal entry for each wire transfer noted on the bank statement, unless these cash flows are already accounted for through the accounts payable or accounts receivable systems.

Reconcile the General Ledger Balance:

Once the month-end bank statement arrives, reconcile the general ledger to the bank balance with the following steps:

1. Go to the accounting computer system and access the bank reconciliation module.
2. Check off all issued checks listed in the bank reconciliation module that are listed as having cleared the bank on the bank statement. If any check amounts listed by the bank differ from the amounts listed in the module, make a journal entry to correct to the bank balance.
3. Check off all deposits listed in the bank reconciliation module that are listed has having been received by the bank on the bank statement. If any deposit amounts listed by the bank differ from the amounts listed in the module, make a journal entry to correct to the bank balance.
4. Make a separate journal entry for each special expense or revenue item on the bank statement, such as a monthly account processing fee.
5. Record in the accounting system any manual checks not previously recorded, but which are listed on the bank statement as having cleared the bank.
6. If all items reconcile and the bank statement still does not match, then the only remaining possible solution is that the beginning bank reconciliation was incorrect.
7. When the reconciliation is complete, print the Bank Reconciliation and store it with the bank statement in a bank statement file for the current year, sorted by month.

And here is an example of Bank Reconciliation form for better understanding

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To eliminate the necessity of writing checks in very small amounts, it is customary to maintain a petty cash fund from which small disbursements are made. Examples are postage, delivery expense, telegrams, and so on. Each disbursement from the petty cash fund should be accounted for by a receipt. If no bill is presented, the one responsible for the fund should prepare a receipt and have the payee sign it. This is known as a petty cash voucher (as shown below).

The face of the petty cash voucher should contain the following data:

1. Receipt number
2. Date of Disbursement
3. Name of employee/payee (who receive the petty cash)
4. Amount of the expenditure
5. Purpose for which the expenditure was made
6. Account affected by the expenditure
7. Signature of employee/payee (the budgetary official)
8. Authorized Signature (who approve the petty cash disbursement)

Under the imprest system, a fund is established for a fixed petty cash amount, and this fund is periodically reimbursed by a single check for amounts expended.

There is nothing much to say about petty cash, but let’s go a bit deeper with how to set up and maintain the petty cash. It may be useful to you, who in touch with petty cash for the first time.

How To Set-Up and Maintain Petty Cash

The steps in setting up and maintaining the petty cash fund are as follows:

1. An estimate is made of the total of the small amounts likely to be disbursed over a short period, usually a month. A check is drawn for the estimated total and put into the fund. The only time an entry is made in the petty cash account is to establish the fund initially, unless at some later time it is determined that this fund must be increased or decreased.
2. The individual in charge of petty cash usually keeps the money in a locked box along with petty cash vouchers. The petty cash voucher, when signed by the recipient, acts as a receipt and provides information concerning the transaction. As each payment is made, the voucher is entered in the petty cash record under the heading, “Payments”.
3. The amount paid is then distributed to the account affected.
4. The columns are totaled in order to determine the amount chargeable to each account.
5. A check is then drawn in an amount equaling the total amount disbursed.
6. When the check is cashed, the money is replaced in the fund to restore it to the original amount.
7. Each amount listed in the distribution section of the petty cash fund is entered as a debit to the individual expense. The total amount of the check is credited to Cash.
8. Proof of petty cash is obtained by counting the currency and adding the amounts of all the vouchers in the box. The total should agree with the amount in the ledger for the petty cash fund. If it does not, the entry in the cash disbursements journal recording the reimbursement of the petty cash fund will have to include an account known as Cash Short and Cash Over. A cash shortage is debited and a cash overage is credited to this account. Cash Short and Over is closed out at the end of the year in to the Income Summary account and is treated as a general expense or miscellaneous income.

An evaluation should be made of who the payees are and to what degree time limits may be stretched. Approaches to delay cash payments include:

[1]. Centralize the payables operation so that debt may be paid at the most opportune time and so that the amount of disbursement float may be determined. Never pay vendors early.

[2]. Establish zero balance accounts for all disbursing units. These accounts are in the same concentration bank. Checks are drawn against these accounts, with the balance in each account never exceeding $0. Divisional disbursing authority is maintained at the local management level. The benefits of zero balance accounts are enhanced control over cash payments, reduction in excess cash balances maintained in regional banks, and a possible increase in disbursing float. Under the zero balance account (ZBA) arrangement, the company only deposits funds into its payroll and payables checking accounts when it anticipates checks will clear. This strategy is aggressive.

Caution: Be on guard against overdrafts and service charges. In a ZBA arrangement, the bank automatically transfers money from a master (concentration) account as checks are presented against the payroll and payables accounts. Hence, payroll and payable accounts are retained at zero balances. Under ZBA, the you do not have to anticipate clearing times on each account.

[3]. Use controlled disbursing in which checks are drawn against a bank that has the capability to inform the issuer early enough each day to allow funding in an exact amount the same day.

[4]. Make partial payments and/or postdate checks.

[5]. Request additional information about an invoice before paying it.

[6]. Use payment drafts, where payment is not made on demand. Instead, the draft is presented for collection to the bank, which in turn goes to the issuer to accept it. A draft may be used to allow for inspection before payment. When approved, the company deposits the funds. Net result: Less of a checking balance is required.

Note: The use of drafts involves bank charges (e.g., fixed monthly fee) and the inconveniences of always having to formally approve the draft before paying it.

[7]. Draw checks on remote banks (e.g., a New York company using a Texas bank).

[8]. Mail from post offices with limited service or where mail has to go through numerous handling points.

Tip: If you use float properly, you can maintain higher bank balances than the actual lower book balances. For example, if you write checks averaging $200,000 each day and three days are needed for them to clear, you will have a $600,000 checking balance less than the bank’s records.

[9]. Use remote mailing, that is, mailing checks from a location far removed from both the payee and drawee bank. A company having a centralized processing of accounts payable can install remote check printers in their plants and offices around the country. The central computer determines from which banks to draw the check and which check printer to use to maximize delay time.

[10]. Use probability analysis to determine the expected date for checks to clear.

Suggestion: Have separate checking accounts (e.g., payroll, dividends) and monitor check clearing dates. Payroll checks are not all cashed on the payroll date, so funds can be deposited later to earn a return.

[11]. Use a computer terminal to transfer funds between various bank accounts at opportune times.

[12]. Use a charge account to lengthen the time between buying goods and paying for them.

[13]. Stretch payments as long as there is no associated finance charge or impairment in credit. Prepare a priority list of who should get paid first and who should get paid last.

[14]. Do not pay bills before they are due.

[15]. Avoid making prepaid expenses. For example, if you are going to prepay insurance, do it for one year, not three years.

[16]. Compensate others with non-cash consideration, such as stock or notes.

[17]. Delay the frequency of payments to employees (e.g., expense account reimbursements, payrolls). Avoid giving employees cash advances, such as for travel and entertainment or loans. Have a monthly payroll rather than a weekly payroll. In recession, the employer may eliminate or delay payroll payments to employees. Employees may be asked to take furloughs (e.g., two weeks off without pay) or give up current pay to be paid at a later date (e.g., postponing one week’s pay to a later year or at retirement).

[18]. Pay commissions on sales when the receivables are collected instead of when the sales are made.

[17]. Mail payments late in the day or on Fridays.

[18]. Engage in barter arrangements to avoid a cash payment.

However, barter transactions are reportable for tax purposes based on the fair market value of what has been exchanged.

Case Example:

Every two weeks the company issues checks that average $500,000 and take three days to clear. You want to find out how much money can be saved annually if the transfer of funds is delayed from an interest-bearing account that pays 0.0384 percent per day (annual rate of 14%) for those three days:

$500, 000 × (0.000384 × 3) = $576
The savings per year is $576 × 26 (yearly payrolls) = $14,976.

Have you read: Cash Management System: Acceleration of Cash Inflow