Cash and bank reconciliation
Cash and Cash Controls
Cash on the balance sheet includes currency and coins on hand for cash registers and petty cash, amounts in checking and savings accounts, and checks and money orders received from customers. For the most part, a company’s cash is maintained in savings and checking accounts. A bank account is a safeguard for cash. This reduces the amount of cash on hand, and the bank maintains a separate set of records that can be compared to the company’s records to deter theft. Bank records are presented to the company in a monthly bank statement.
The Bank Reconciliation
Using a bank account is one of the most important controls over cash. Due to timing differences, the balance in the cash account on the depositor's books (the book balance) rarely equals the balance on the bank's books (the bank balance). A bank reconciliation must be prepared to ensure that the accounting records of both the bank and the company are accurate. This process will also determine the actual amount of cash. A bank reconciliation has two parts: reconciliation of the bank’s records and reconciliation of the company’s records. When the bank account is reconciled, the adjusted balance will be the same for both parties.
The bank’s records are reported to the company on the bank statement. Adjustments are made to the bank balance for deposits in transit, outstanding checks, and bank errors.
Complete the table:
|Balance per bank statement:|
| ||Deposits in transit|
| ||Outstanding checks|
| ||Bank errors|
The company records its transactions for cash in the ledger. Adjustments are made to the book balance for credit memos, debit memos, NSF checks, and errors in the ledger.
Complete the table:
|Balance per ledger:|
| ||Credit memos|
| ||Debit memos|
| ||NSF checks|
| ||Book errors|
|If a balance sheet was prepared immediately after the bank reconciliation, what|
|amount would be reported for Cash? |
The adjusted balance on the reconciliation is rarely equal to the ending bank balance or the ending book balance. As the deposits in transit and outstanding checks clear the bank, the bank's records will be updated. However, adjustments must be made to the company's records to bring its book balance to the adjusted balance. Only two kinds of items appearing on a bank reconciliation require journal entries: (1) errors in the depositor's books and (2) bank additions and deductions that do not already appear in the books. The company did not know about these transactions until it received the bank statement.
Each adjusting entry depends on the reconciling item. Keep in mind that Cash will be either debited or credited in each entry, because we are adjusting the Cash account.
Using the dropdown lists, select the accounts to be debited and credited for each reconciling item.
|Reconciling item||Account to be debited||Account to be credited|
|Receivable collected by the bank|| || |
|Interest paid by the bank|| || |
|Bank service charges|| || |
|Automatic payment to the company's gas and electric provider|| || |
|NSF checks|| || |
APPLY THE CONCEPTS: Prepare a bank reconciliation
On June 10, Skiles Co. received its statement from Hometown Bank for its checking account. The statement showed all transactions recorded by the bank for the period of May 1 through May 31. The bank reconciliation can now be prepared. The accountant confirms that all transactions have been posted from the journal to the ledger. (This tells us that the Cash account balance reflects all transactions involving cash.) Comparing the bank statement to the Cash account in the general ledger reveals several items to be reconciled. Review each item below and determine which balance will need to be adjusted by the item and whether it is to be added or deducted from that balance.
| ||Reconciling item||Balance to be adjusted||Effect on balance|
|1.||A deposit in the amount of $15100 made on May 31 was not reported on the bank statement.|| || |
|2.||A deposit of $2700 was made on June 4. Because the deposit was made after the statement date of May 31 it is not reported on the bank statement.|| || |
|3.||Check number 1012 was written on May 26 in the amount of $4500 and is not listed on the bank statement.|| || |
|4.||Check number 1015 was written on May 28 in the amount of $6800 and is not listed on the bank statement.|| || |
|5.||Check number 1019 was written on May 30 in the amount of $7900. The amount reported on the statement for that check was $3400.|| || |
|6.||Check number 1017 was written on May 31 in the amount of $10050 and is not listed on the bank statement.|| || |
|7.||One of Skiles's customers deposited $7400 directly to Skiles's bank account for payment of its amount due. This appeared on the bank statement as a credit memo.|| || |
|8.||Check number 1012 was written for $4500 to a supplier in payment on the amount due. The check cleared the bank for the written amount, $4500. However, the check was recorded in the journal and posted to Skiles Co.'s ledger in the amount of $4950. (The journal entry was a debit to Accounts Payable and a credit to Cash for $4950.)|| || |
|9.||Skiles Co. had received and deposited a check from one of its customers as payment on account. The check was returned for nonsufficient funds. The amount of the check was $2500.|| || |
|10.||Skiles Co. has its payment for gas and electricity taken directly from its checking account. $5150 appeared as a debit memo for May's payment.|| || |
|11.||A debit memo appeared on the bank statement in the amount of $250. This is the bank's monthly service charge to its customers.|| || |
Based on the 11 items above, prepare the bank reconciliation. The beginning book and bank balances are provided.
APPLY THE CONCEPTS: Prepare the adjusting entries and determine their effect
Prepare the journal entries required to update the accounting records after preparing the bank reconciliation. The date for each adjusting entry is June 10, but in this problem the Date column has been replaced with the reconciling item number.
If an amount box does not require an entry, leave it blank.