Reconciling Accounts & Electronic Funds Transfer (EFT)

67.. 7. Bank Accounts: reconciling accounts & Electronic Funds Transfer (EFT) Tuesday, May 30, 2017 - 2:00pm - 4:00pm Banking relations have changed considerably, largely with the growth of online banking capabilities. This session will explore management of banking functions from setting up the accounts to reconciling the accounts and discuss the issues that surround Electronic Funds. Banking Session • Bank reconciliation • Electronic Funds Transfer 2 “Reconciling the bank statement is a crucial step. It's very unlikely that someone is going to steal from you and run away forever. Reconciling the bank statement means that embezzlement can't go on for very long. Ideally someone other than the bookkeeper (or whoever handles the money) reconciles the bank account from an unopened statement. That's a strong check on the person who handles the money. But in a small nonprofit there may not be a bookkeeper, and there may be only one person who does everything. In these instances someone else, such as a board member, should receive the unopened bank statement, and look it over before giving it to the bookkeeper or the sole staff person.” Carl Ho, CPA January 6, 2010 at Blue Avocado 3 Bank Reconciliation • What is a Bank Reconciliation? • Who does it, and why? • What does it look like? • What does it have to do with Internal Financial Controls? • Best Practices for the board of a nonprofit organization .... 4 What is a Bank Reconciliation? • An internal control on your revenues and expenditures • A comparison of your accounting records with the records of your bank • One way to check on how much cash is flowing through your organization 5 Who does it and why? • Usually your bookkeeper, but rightly, a person who can knowledgeably check on the book keeper’s work • Often the treasurer • Occasionally, an auditor, if you have one • To look for errors, omissions or fraud 6 What does it look like? Example Bank Reconciliation March 31, 2011 Balance per bank statement $ 4,672.98 Deposits in Transit • Short, or long, the bank Date Amount reconciliation is a ‘tally’ 3/30 $ 500.25 3/31 $ 1,890.33 $ 2,390.58 and should balance at the Subtotal $ 7,063.56 bottom of the sheet Outstanding Cheques Cheque Number Amount 1656 $ 22.50 1693 $ 150.00 • Verify balances and 1696 $ 32.00 1697 $ 1,902.00 explain discrepancies 1698 $ 1,105.80 $ 3,212.30 Balance per books $ 3,851.26 7 8 Step 1. Balance per Bank Statement on Aug. 31, 2010 $ 3,490 Adjustments: Deposits in transit + 1,450 Outstanding cheques – 3,221 Bank errors 0 Adjusted/Corrected Balance per Bank $ 1,719 Step 2. Balance per Books on Aug. 31, 2010 $ 967 Adjustments: Bank service charges – 35 NSF cheques & fees – 110 Cheque printing charges – 80 Interest earned + 8 Note Receivable collected by bank + 960 Errors in company's Cash account + 9 Adjusted/Corrected Balance per Books $ 1,719 9 What does it have to do with Internal Financial Controls? • Preparation of bank reconciliation helps in the identification of errors in the accounting records of the company or the bank. • Cash is the most vulnerable asset of an entity. Bank reconciliations provide the necessary control mechanism to help protect the valuable resource through uncovering irregularities such as unauthorized bank withdrawals. • If the bank balance appearing in the accounting records can be confirmed to be correct by comparing it with the bank statement balance, it provides added comfort that the bank transactions have been recorded correctly in the company records. 10 Why Hassle With Bank Reconciliation? • Without bank reconciliation, you may not have a clear idea of how much cash is available in your account. • You might bounce cheques and incur overdraft charges. With electronic cheque clearing, you don’t have much time to get funds into your account when you write cheques. • Reconciling your account ensures you the opportunity to spot inappropriate cheques, withdrawals or transfers that are unsupported by authorization. 11 Best Practices for the board of a nonprofit organization • Have accounting procedures which require a monthly bank reconciliation on your account(s). (i.e., do on a timely basis) • Spot check bank ‘recs’ if you cannot always segregate this job from regular bookkeeping. (i.e., segregate the duties) • Do bank recs more often if you are handling large sums of cash, such as proceeds from fundraising events or ticket sales. • Keep bank ‘recs’ on file for review purposes. • Always attach source documentation for occasional reviews. 12 Electronic Funds Transfer (EFT) • Electronic banking, also known as electronic fund transfer (EFT), uses computer and electronic technology as a substitute for cheques and other paper transactions. • EFTs simplify the payment process to vendors, etc. • Benefits include increased efficiency and security, and immediate access and availability of funds to vendors • Two types of EFT payments: bank-to-bank wire transfers and direct deposits • Wire transfers are for domestic or international transactions where no cash or cheque exchange is involved 13 Internal Control and EFT • Separate individuals are authorized to perform the incompatible duties of initiating and reviewing/approving wire transfers. • Bank account reconciliations selected for review: were completed timely and reviewed and approved by an appropriate level of management. • Wire transfer application security measures employ not only physical and user access controls but also digital certificates installed on computer equipment used by authorized employees. • Preventing fraud or unauthorized activity requires cautious management of physical and logical security components of the computing equipment and operating systems, network, and banking application used for wire transfers. 14 Internal Control and EFT (cont’d) • Internal control is a process designed to provide reasonable, but not absolute, assurance regarding the achievement of objectives in the following categories: – effectiveness and efficiency of operations – reliability of financial reporting – compliance with applicable laws and regulations • Must have well documented and understood Policies and Procedures • Transaction amount limits and appropriate management approval requirements are implemented in accordance with policy and procedures 15 Example of use • Direct deposits are the electronic transfers of funds to payees through the ACH Network (a highly reliable and efficient nationwide batch-oriented electronic funds transfer system) • Compared to wire transfers, ACH payments are typically for smaller dollar amounts, payee-payment records are sent in batches, and settlements do not occur until the next business day. • Direct deposits usually set up to pay salaries, expense reimbursements, etc.; not used to pay vendors. 16 Some final thoughts • Online banking access for some volunteers, should be restricted to “read-only” • Emails from your bank confirming transactions should be directed to someone other than the initiator of a payment 17 Session Handouts • Payments Canada Overview of Canadian Payment System • Accounting Coach – Bank Rec. Example 18 Bank Reconciliation (Explanation) Introduction to Bank Reconciliation A company's general ledger account Cash contains a record of the transactions (checks written, receipts from customers, etc.) that involve its checking account. The bank also creates a record of the company's checking account when it processes the company's checks, deposits, service charges, and other items. Soon after each month ends the bank usually mails a bank statement to the company. The bank statement lists the activity in the bank account during the recent month as well as the balance in the bank account. When the company receives its bank statement, the company should verify that the amounts on the bank statement are consistent or compatible with the amounts in the company's Cash account in its general ledger and vice versa. This process of confirming the amounts is referred to as reconciling the bank statement, bank statement reconciliation, bank reconciliation, or doing a "bank rec." The benefit of reconciling the bank statement is knowing that the amount of Cash reported by the company (company's books) is consistent with the amount of cash shown in the bank's records. Because most companies write hundreds of checks each month and make many deposits, reconciling the amounts on the company's books with the amounts on the bank statement can be time consuming. The process is complicated because some items appear in the company's Cash account in one month, but appear on the bank statement in a different month. For example, checks written near the end of August are deducted immediately on the company's books, but those checks will likely clear the bank account in early September. Sometimes the bank decreases the company's bank account without informing the company of the amount. For example, a bank service charge might be deducted on the bank statement on August 31, but the company will not learn of the amount until the company receives the bank statement in early September. From these two examples, you can understand why there will likely be a difference in the balance on the bank statement vs. the balance in the Cash account on the company's books. It is also possible (perhaps likely) that neither balance is the true balance. Both balances may need adjustment in order to report the true amount of cash. After you adjust the balance per bank to be the true balance and after you adjust the balance per books to also be the same true balance, you have reconciled the bank statement. Most accountants would simply say that you have done the bank reconciliation or the bank rec. Bank Reconciliation Process Step 1. Adjusting the Balance per Bank We will demonstrate the bank reconciliation process in several steps. The first step is to adjust the balance on the bank statement to the true, adjusted, or corrected balance. The items necessary for this step are listed in the following schedule: Deposits in transit are amounts already received and recorded by the company, but are not yet recorded by the bank.

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