How to Adjust the Cash Book balance, and reconciliation Advantages

The adjusted cash balance is calculated by taking the ending cash balance from the bank statement and adding any outstanding deposits while deducting outstanding cheques.

The adjusted cash balance formula is:

 Adjusted Cash Balance = Ending Bank Statement Balance + Outstanding Deposits – Outstanding Cheques.

To adjust a cash book balance, you can follow these steps:

1. Note the bank balance. Enter the ending cash balance per the bank statement.  Record the bank balance as it appears in the cash book.

 2. If any difference between the bank balance and the closing balance in the cashbook correct these errors by below procedures.

3. Enter transactions

Add transactions that are in the passbook’s credit but not the cash book’s, and subtract transactions that are in the passbook’s debit but not the cash book’s.

 4. Calculate the adjusted cash balance

Use the formula: Adjusted Cash Balance = Ending Bank Statement Balance + Outstanding Deposits – Outstanding Checks.

This formula accounts for transactions in transit to ensure the available cash is accurately represented.

 Some common adjustments that may be included in a bank reconciliation statement are:

Cheques deposited in the bank but not yet credited to the bank (uncleared cheques), Cheques in hand but not yet deposited to the bank, service fees and other bank charges not yet recorded, and other errors.

Advantages of reconciliation:

Ensuring compliance

Bank reconciliation helps ensure that a company’s financial records comply with relevant laws and regulations.  

Fraud detection:

Fraud detection

Unexplained discrepancies between records can indicate fraud. For example, a deposit in transit that remains on the reconciliation for much longer than it should could be a sign of fraud.  An employee pays personal bills and credit card accounts with organization funds using valid business names as vendors, but the irregular transactions never have official business purposes. Regularly reconciling accounts helps detect and prevent fraudulent activities by identifying any unusual transactions or inconsistencies.

Financial control

The process of bank reconciliation tightens internal controls by instituting a routine check and balance system that reduces the probability of fraud and error within the organization. Bank reconciliation helps companies better control cash and manage their finances by ensuring all transactions are accurately recorded. 

Tracking receivables

Insufficient funds in the account may cause bounced cheque that may damage the reputation of the company and lead to an unsavoury relationship between the company and its customers. Bank reconciliation helps companies confirm their receipts and identify the ones they have not deposited.

Detects Errors

A bank reconciliation statement helps to locate errors. After locating errors, firms can easily remove them.

Preparing for audits

Bank reconciliation helps prepare a business for audits by ensuring that records are accurate and up-to-date.

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