4.4 Accounts Payable, Cash & Bank Reconciliations

Accounts Payable, Cash & Bank Reconciliations

Cash is the most liquid asset in an enterprise and the most vulnerable to theft, misappropriation, and clerical error. Maintaining rigorous internal controls over cash receipts, cash disbursements, accounts payable, petty cash funds, and monthly bank reconciliations is a foundational responsibility of the certified bookkeeper.

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1. Internal Controls for Accounts Payable & The Voucher System

To safeguard cash disbursements, organizations implement a Voucher System—an internal control framework requiring written authorization and supporting documentation before any payment check or electronic transfer is executed.

+-----------------------------------------------------------------------------+
|                       THE 3-WAY MATCH VOUCHER SYSTEM                        |
|                                                                             |
|   1. PURCHASE ORDER (PO)          2. RECEIVING REPORT     3. VENDOR INVOICE |
|      - Created by Purchasing         - Created by Receiving  - Sent by      |
|      - Details items authorized,       Dock upon arrival       Supplier     |
|        quantities, agreed price      - Confirms goods &      - Bill for     |
|                                        quantities received     payment      |
|                                                                             |
|   ====> THREE-WAY MATCH AUDIT: Quantity, Description, Price Verified <====  |
|                                                                             |
|   4. APPROVED VOUCHER PACKET      5. CHECK DISBURSEMENT & CANCELLATION      |
|      - Prepared by AP Clerk          - Check signed by Authorized Officer   |
|      - Approved by AP Supervisor     - Voucher stamped "PAID" to prevent    |
|                                        duplicate submission                 |
+-----------------------------------------------------------------------------+

Essential Internal Control Principles for Disbursements:

• Segregation of Duties: The person who authorizes purchases, the person who receives goods, the person who records AP, and the authorized check signer must be separate individuals.
• Sequential Numbering: All purchase orders, receiving reports, vouchers, and checks must be pre-numbered consecutively to detect missing or unauthorized documents.
• Document Cancellation: Once paid, all supporting documents in the voucher packet are stamped "PAID" with the check number and date to prevent duplicate payments.

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2. Subsidiary Ledgers & General Ledger Control Reconciliation

To maintain transaction detail without cluttering the General Ledger, companies maintain Subsidiary Ledgers for individual customers and vendors.

+-----------------------------------------------------------------------------+
|                   CONTROL ACCOUNT VS. SUBSIDIARY LEDGER                     |
|                                                                             |
|   GENERAL LEDGER CONTROL ACCOUNT             SUBSIDIARY LEDGER              |
|   (e.g., Accounts Payable #201)              (Individual Vendor Accounts)   |
|   - Contains summary balance                 - Vendor A Balance:  $ 4,500   |
|   - Updated from monthly journal totals      - Vendor B Balance:    8,200   |
|   - Must EQUAL sum of subsidiary balances    - Vendor C Balance:    2,300   |
|     Total Control Balance: $15,000           - Total Subsidiary:  $15,000   |
+-----------------------------------------------------------------------------+

At month-end, the bookkeeper prepares a Schedule of Accounts Payable (listing all individual vendor balances) and verifies that the sum exactly matches the Accounts Payable General Ledger control balance. Any discrepancy indicates unposted invoices, posting to the wrong side of an account, or arithmetic errors.

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3. Imprest Petty Cash Fund Management

A Petty Cash Fund is an imprest cash fund maintained on-premises for small, immediate cash disbursements where writing a formal check is impractical (e.g., postage due, delivery tips, emergency office supplies).

Phase 1: Establishing the Fund

A check is drawn payable to "Petty Cash Custodian," cashed at the bank, and locked in a secure box under the sole custody of one individual:

GENERAL JOURNAL - ESTABLISHING PETTY CASH
Date        Account Titles and Explanation                Debit       Credit
Oct 1       Petty Cash ...............................     $300
                Cash .................................                  $300
            (To establish imprest petty cash fund under single custodian)

Phase 2: Petty Cash Disbursements

When cash is paid out, the custodian obtains a receipt and writes a Petty Cash Voucher detailing the date, amount, purpose, and recipient signature. No journal entry is made at the time cash is paid from the box.

Phase 3: Replenishing the Fund & Cash Short and Over

When cash runs low or at the end of the accounting period, the fund is replenished. The custodian tallies all vouchers and requests a reimbursement check for the exact total spent.

$\text{Reimbursement Check} = \text{Total Petty Cash Vouchers} \pm \text{Cash Short/Over}$

$\text{Cash Accountability Check: } \text{Actual Cash in Box} + \text{Total Vouchers} = \text{Fund Imprest Total}$

• If $\text{Actual Cash} + \text{Vouchers} < \text{Fund Total} \rightarrow$ Cash Short (Debited to Cash Short & Over as an expense).
• If $\text{Actual Cash} + \text{Vouchers} > \text{Fund Total} \rightarrow$ Cash Over (Credited to Cash Short & Over as miscellaneous revenue).

Worked Example: Petty Cash Replenishment

• Imprest Fund Size: $$300.00$
• Cash remaining in box: $$42.00$
• Vouchers in box: Postage Expense $$110.00$; Office Supplies $$85.00$; Delivery Expense $$60.00$ (Total Vouchers = $$255.00$).
• Accountability check: $$42.00 \text{ (Cash)} + $255.00 \text{ (Vouchers)} = $297.00$ ($-$3.00$ shortage).
• Reimbursement needed: $$300.00 - $42.00 = $258.00$.

GENERAL JOURNAL - REPLENISHING PETTY CASH
Date        Account Titles and Explanation                Debit       Credit
Oct 31      Postage Expense ..........................     $110
            Supplies Expense .........................      $85
            Delivery Expense .........................      $60
            Cash Short & Over ........................       $3
                Cash .................................                  $258
            (To replenish petty cash fund and record cash shortage)

[!WARNING] Golden Rule of Petty Cash: The Petty Cash account is never debited or credited during routine replenishment! It is debited only when the fund is originally established or permanently increased, and credited only if the fund is permanently reduced or closed.

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4. The 9-Step Bank Reconciliation Architecture

A Bank Reconciliation is a monthly schedule that reconciles the cash balance reported on the bank statement with the cash balance recorded in the company's general ledger cash account.

Why Bank Balance $\neq$ Book Balance:

Differences arise primarily from timing differences (items recorded on one set of books but not yet processed by the other) and errors.

+-----------------------------------------------------------------------------+
|                    THE 9-STEP BANK RECONCILIATION BLUEPRINT                 |
|                                                                             |
|   BANK STATEMENT SIDE                        COMPANY BOOK SIDE              |
|   ---------------------------------------    ----------------------------   |
|   Ending Bank Statement Balance              Ending General Ledger Cash Bal.|
|   [+] Step 1: Deposits in Transit            [+] Step 4: Bank Collections   |
|       (Recorded on books, not on bank)           (Notes collected + int.)   |
|   [-] Step 2: Outstanding Checks             [+] Step 5: Interest Earned    |
|       (Written by company, not cleared)      [-] Step 6: NSF Customer Checks|
|   [+/-] Step 3: Bank Errors                      (Bounced check + bank fee) |
|       (Corrected by notifying bank)          [-] Step 7: Bank Service Fees  |
|                                                  (Monthly fee, wire fees)   |
|                                              [+/-] Step 8: Company Errors   |
|                                                  (Transpositions, etc.)     |
|   ---------------------------------------    ----------------------------   |
|   = Step 9A: ADJUSTED BANK BALANCE       === = Step 9B: ADJUSTED BOOK BAL.  |
+-----------------------------------------------------------------------------+

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5. Comprehensive Worked Example & Required Adjusting Entries

On November 30, 20X6, Summit Enterprises prepares its monthly reconciliation:

• Bank Statement Ending Balance: $$22{,}450$
• General Ledger Cash Balance (Books): $$18{,}730$
• Reconciling Data:
  1. Deposit in transit from November 30: $$4{,}100$
  2. Outstanding checks: #412 ($$1{,}800$), #415 ($$950$), #418 ($$1{,}400$) (Total = $$4{,}150$)
  3. Bank collected a promissory note from a customer: Principal $$3{,}000$ plus Interest $$150$ (Total = $$3{,}150$ credit memo)
  4. Customer check from Bravo Co. returned by bank marked NSF (Non-Sufficient Funds): $$620$
  5. Bank monthly maintenance and wire service charge: $$40$
  6. Check #408 written for Utilities Expense ($$850$) was erroneously recorded in the cash disbursements journal as $$580$ ($$270$ transposition error understating cash disbursed).

The Bank Reconciliation Schedule

+-----------------------------------------------------------------------------+
|                             SUMMIT ENTERPRISES                              |
|                             BANK RECONCILIATION                             |
|                              NOVEMBER 30, 20X6                              |
|                                                                             |
|   BANK STATEMENT BALANCE:                                                   |
|   Ending balance per bank statement ............................   $22,450  |
|   Add: Deposit in transit (Nov 30) .............................     4,100  |
|   Deduct: Outstanding checks (#412, #415, #418) ................    (4,150) |
|   -----------------------------------------------------------------------   |
|   ADJUSTED BANK BALANCE ........................................   $22,400  |
|                                                                             |
|   BOOK BALANCE:                                                             |
|   Ending balance per general ledger ............................   $18,730  |
|   Add: Note receivable collected by bank ($3,000 + $150 int.) ..     3,150  |
|   Deduct: NSF customer check (Bravo Co.) ...........   ($ 620)              |
|   Deduct: Bank service charge ......................   (   40)              |
|   Deduct: Error on Check #408 ($850 - $580) ........   (  270)        (930) |
|   -----------------------------------------------------------------------   |
|   ADJUSTED BOOK BALANCE ........................................   $22,400  |
+-----------------------------------------------------------------------------+

Mandatory Adjusting Entries for Book Items

[!IMPORTANT] Rule for Adjusting Entries: Only items on the BOOK side of the reconciliation require journal entries. The company's general ledger has no record of these bank actions (or contains errors that must be corrected). Items on the BANK side (deposits in transit, outstanding checks) are already recorded on the books and will clear the bank in the normal course of business.

GENERAL JOURNAL - BANK RECONCILIATION ADJUSTING ENTRIES
Date        Account Titles and Explanation                Debit       Credit
20X6
Nov 30      Cash .....................................   $3,150
                Notes Receivable .....................                $3,000
                Interest Revenue .....................                  $150
            (To record bank collection of customer note and interest)

Nov 30      Accounts Receivable—Bravo Co. ............     $620
            Bank Service Charge Expense ..............      $40
            Utilities Expense ........................     $270
                Cash .................................                $930
            (To record NSF check, bank fee, and correction of Check #408 error)