Questions on bank reconciliation

[whatisaccounting]

I am new to auditing and my client does not have bank reconciliation.

1) The company's bank statement ties to general ledger.

2) Upon inquiry, the accountant told me that cheques were issued before year end date but not recorded in the books as the cheques was not cleared. So the accountant will only record in the GL when the cheque is cleared.

Is this type of accounting acceptable?

Companies should use accrual accounting instead on cash accounting. Therefore, the scenario that I have mentioned above relates to cash accounting. Can someone correct me if I am wrong.

 

[josephteh]

Yes, you are right.

 

[whatisaccounting]

Thanks for the reply.

From what my friend said, accrual accounting is not determined by when receipts and payments are received and recorded in their cash book. So cheque or payment receipts has no impact to revenue recognition, so it doesnt really affect much.

Comments for the above statement? Thanks in advance!

 

[kirby]

Timeout. You better investigate this further. Yes in cash basis you do not have income until you get the cash. But if you write and mail a check then you have to record an expense at that time - not when it clears the bank. That is what I am used to - so I ask that you check on that part further.

 

[Counterofbeans]

Timeout. You better investigate this further. Yes in cash basis you do not have income until you get the cash. But if you write and mail a check then you have to record an expense at that time - not when it clears the bank. That is what I am used to - so I ask that you check on that part further.

I tend to think that this is the correct way to account for a cash-basis accounting system, but I have seen people take it to the extreme and not record an expense until the check clears the bank. It's like another way to defer expenses...

I don't understand that though. I would prefer to track outstanding checks directly in the G/L, so I'd record these as soon as the checks are issued