Question

Generally, we do not expect the amount in the client’s accounting system for a cash account (e.g., operating cash balance as of 12/31/18 = $508,219.33) to match the amount that the financial institution confirms (e.g., “our records show that your client’s 12/31/18 bank account was $478,921.54). Why do we generally not expect the financial institutions to confirm the exact amount reported in the client’s accounting system? Another way of asking this question is: Why are there reconciling differences between the client and financial institution’s records?

Answer 1

• The cash account in the books and the bank balance as per financial institution’s record often do not tally and there exist some differences that are to be reconciled. Some of the reasons for such differences are:

--Not Sufficient Checks (NSF). When customers checks are returned due to NSF, the bank balances decrease, but the cash account in the bookds remains unaffected.

--Checks outstanding. Checks deposited in the banks when received from customers increase the cash balance in own’s book, BUT the bank balance will increase when these checks are cleared.

--Charges deducted by the banks. Bank deducts certain charges which decreases bank balance. Unless the same gets communicated and those charges are recorded in books of account, the cash account and bank balance will not match.

--Direct deposits by the customers in the bank.

--Interest charged or Interest paid by the bank, and no intimation received and recorded in the books of account.