Notesale: Turn your study into money

Document Preview

Extracts from the notes are below, to see the PDF you'll receive please use the links above

---

Bank Reconciliation
Introduction to Bank Reconciliation
A company's general ledger account Cash contains a record of the transactions (checks written,
receipts from customers, etc
...
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
...
The bank statement lists the activity in the bank account during the recent month
as well as the balance in the bank account
...
This process of confirming the amounts is referred to as
reconciling the bank statement, bank statement reconciliation, bank reconciliation, or doing a
"bank rec
...

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
...
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
...
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
...
the balance in the Cash account on the company's books
...
Both balances may need
adjustment in order to report the true amount of cash
...
Most
accountants would simply say that you have done the bank reconciliation or the bank rec
...
They are
part of AccountingCoach PRO
...
Adjusting the Balance per Bank
We will demonstrate the bank reconciliation process in several steps
...
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
...
m
...
The bank will process this deposit on the
morning of September 1
...

Because deposits in transit are already included in the company's Cash account, there is no need
to adjust the company's records
...

Therefore, they need to be listed on the bank reconciliation as an increase to the balance per
bank in order to report the true amount of cash
...
" A deposit in transit is on the company's
books, but it isn't on the bank statement
...


Outstanding checks are checks that have been written and recorded in the company's Cash
account, but have not yet cleared the bank account
...

Because all checks that have been written are immediately recorded in the company's Cash
account, there is no need to adjust the company's records for the outstanding checks
...
Therefore,
outstanding checks are listed on the bank reconciliation as a decrease in the balance per bank
...
" An outstanding check is on the company's
books, but it isn't on the bank statement
...


Bank errors are mistakes made by the bank
...
The company should notify the bank of its
errors
...
(Since the company did not make the error, the company's records are not
changed
...
Adjusting the Balance per Books
The second step of the bank reconciliation is to adjust the balance in the company's Cash account
so that it is the true, adjusted, or corrected balance
...
)
Other types of bank service charges include the fee charged when a company overdraws its
checking account and the bank fee for processing a stop payment order on a company's check
...
When that occurs the company usually learns of the amounts only after receiving its
bank statement
...
However, the service charges will have to be entered as an
adjustment to the company's books
...

•

Recall the helpful tip "put it where it isn't
...
Put it where it isn't: as an adjustment
to the Cash account on the company's books
...
As a result, the check is returned
without being honored or paid
...
Often the bank
describes the returned check as a return item
...
) When the NSF check
comes back to the bank in which it was deposited, the bank will decrease the checking account of
the company that had deposited the check
...

Because the NSF check and the related bank fee have already been deducted on the bank
statement, there is no need to adjust the balance per the bank
...

Check printing charges occur when a company arranges for its bank to handle the reordering of
its checks
...

Because the check printing charges have already been deducted on the bank statement, there is
no adjustment to the balance per bank
...
They will be a deduction to the company's Cash account
...
" A check printing charge is on the bank
statement, but it isn't on the company's books
...


Interest earned will appear on the bank statement when a bank gives a company interest on its
account balances
...
Hence there is no need to adjust the balance per the bank statement
...

•

Recall "put it where it isn't
...
Put it where it isn't: as an adjustment to the Cash account
on the company's books
...
When notes come due, the company might ask its
bank to collect the notes receivable
...
The bank will
increase the company's checking account for the amount it collected (principal and interest) and
will decrease the account by the collection fee it charges
...

•

Recall the tip "put it where it isn't
...
Put them where
they aren't: as adjustments to the Cash account on the company's books
...
Since the company made these errors, the correction of the error will be either an
increase or a decrease to the balance in the Cash account on the company's books
...
Comparing the Adjusted Balances
After adjusting the balance per bank (Step 1) and after adjusting the balance per books (Step 2),
the two adjusted amounts should be equal
...
The balances should be the true, correct amount of cash as of the date
of the bank reconciliation
...
Preparing Journal Entries
Journal entries must be prepared for the adjustments to the balance per books (Step 2)
...
Adjustments to decrease the cash balance will require a credit to Cash and a
debit to another account
...

We will assume that a company has the following items:
Item
The bank statement for August 2014 shows an ending balance of $3,490
...

Item On August 31 the bank statement shows charges of $35 for the service charge for maintaining the

#2
...

Item On August 28 the bank statement shows a return item of $100 plus a related bank fee of $10
...
return item is a customer's check that was returned because of insufficient funds
...
"
Item
The bank statement shows a charge of $80 for check printing on August 20
...

Item The bank statement shows that $8 was added to the checking account on August 31 for interest
#5
...

Item The bank statement shows that a note receivable of $1,000 was collected by the bank on August 29
#6
...
On the same day, the bank withdrew $40 from the
company's account as a fee for collecting the note receivable
...

#7
...
As of August
#8
...

Item The $1,450 of cash received by the company on August 31 was recorded on the company's books
#9
...
However, the $1,450 of cash receipts was deposited at the bank on the morning of
September 1
...
The bank statement shows
#10
...
The company reviewed the transactions and found that
$154 was the correct amount
...

Here's a Tip
Put it where it isn't
...


If an item is already in the company's Cash account, but has not yet appeared on the bank statement, the
item is probably an adjustment to the balance per the bank statement
...
The first schedule begins with the
ending balance on the bank statement
...
The second schedule begins
with the ending Cash account balance in the general ledger
...


Items 1 through 10 above have been sorted into the following schedules labeled Step 1 and Step 2
...


Step 1 Amounts
Let's review the schedule for Step 1
...
The bank reconciliation process is to list the
items that will adjust the bank statement balance to become the true cash balance
...
Also, the
amount of checks that have been written, but not yet appearing on a bank statement, must be subtracted
from the bank statement's balance
...
(The company does not report deposits in transit and/or outstanding checks to the
bank
...
The bank
reconciliation process includes listing the items that will adjust the Cash account balance to become the
true cash balance
...
Remember that any adjustment to the company's Cash account requires a journal entry
...


Item #2 Bank service charges
...


(If the annual amount of service charges is small, debit Miscellaneous Expense
...
Since the bank deducted these legitimate amounts from the company's
bank account, the company will need to deduct these amounts from its Cash account
...
Therefore, the company will likely undo the reduction to
Accounts Receivable that took place when the company originally processed the $100 check
...
The journal entry might look like this:

(If the amount cannot be recovered from the customer, charge an expense
...
Because this expense is not yet entered on the company's books, but the
amount has been deducted from its bank account, the company will make the following journal entry
...
The bank increased the checking account balance by $8 on August 31
...


Item #6 Notes receivable collected
...
It was determined that the company had not yet made an entry to its
Cash account for this transaction
...


Item #10 Company error
...
The transaction involved the cash sales for the day
...
The company believes that all items involving cash have been included in the schedules
...




---