Recording Transactions; Bank Reconciliation

 

Recording Transactions

With sophisticated accounting software and inexpensive computers, it is no longer practical for most businesses to manually enter transactions into journals and then to post to the general ledger accounts and subsidiary ledger accounts. Today, software such as QuickBooks* will update the relevant accounts and provide more information with a minimum of data entry.

*QuickBooks is a registered trademark of Intuit Inc. AccountingCoach LLC is not affiliated with Intuit Inc. and does not receive any affiliate marketing commissions from Intuit.

In this section we will highlight how the accounting software will capture financial transactions and then automatically update the general ledger and store the information for management's future use.

Accounts payable
When accounting software is used to enter the invoices received from suppliers (vendor invoices), the software will update Accounts Payable and will require that the account or accounts that should be debited be entered as well. The accounting software's vendor files also allow a company to prepare purchase orders, receiving tickets and to pay the vendors' invoices.

A company should have internal controls so that only legitimate invoices are recorded and paid.

Check writing
When the accounting software is used to write checks, the software will automatically credit the Cash account and will require that another account be designated for the debit. An additional benefit is that the amounts will move electronically and the account balances will be automatically calculated with speed and accuracy.

Again, a company should have internal controls to ensure that only legitimate payments are processed.

Sales on credit
When the accounting software is used to prepare a sales invoice for a customer who purchased on credit, the customer's detail will be updated, the general ledger account Sales will be credited and the general ledger account Accounts Receivable will be debited. Statements for each customer and an aging of all of the accounts receivable can be printed with the click of a button.

Payroll
Another source of financial transactions is the company's payroll. While many companies process payroll on their accounting software, others opt to outsource payroll to companies such as ADP, Paychex, Intuit, or local firms.

(AccountingCoach is not affiliated with any of these companies and it does not receive affiliate marketing commissions from any of them.)

To learn more about payroll use any of the following links:

• Explanation
• Quiz
• Questions and Answers (Q&A)
• Crossword Puzzles

Bank Reconciliation

The purpose of the bank reconciliation is to be certain that the financial statements are reporting the correct amount of cash and the proper amounts for any related accounts (since every transaction affects a minimum of two accounts).

The bank reconciliation process involves:

1. Comparing the following amounts
   • The balance on the bank statement
   • The balance in the company's general ledger account. (The account title might be Cash - checking.)
2. Determining the reasons for the difference in the amounts shown in 1.

The common reasons for a difference between the bank balance and the general ledger book balance are:

• Outstanding checks (checks written but not yet clearing the bank)
• Deposits in transit (company receipts that are not yet deposited in the bank)
• Bank service charges and other bank fees
• Check printing charges
• Errors in entering amounts in the company's general ledger

The outstanding checks and deposits in transit do not involve errors by either the company or the bank. Since these items are already recorded in the company's accounts, no additional entries to the company's general ledger accounts will be needed.

Bank charges, check printing fees and errors in the company's accounts do require the company to make accounting entries. The company should make the entries before the financial statements are prepared since a minimum of two accounts have the incorrect balances (due to double-entry accounting). Here is an entry for a bank service charge that was listed on the bank statement:

If the reconciliation reveals that an incorrect amount has been recorded in the company's Cash account, perhaps the easiest way to correct the error is to remove the incorrect amount and then enter the correct amount.

Accounting software is likely to include a feature for reconciling the bank statement.