Chapter 7

Bank Reconciliations

Adapted from Financial Accounting 4e by Porter and Norton

Cash

Currency and coins on hand Checks and money orders from

customers Deposits in checking and savings

accounts Compensating balance – the

minimum amount a bank requires the company keep in their bank account as part of a credit-grant arrangement

Cash Equivalents

Commercial paper U.S. Treasury bills Certain money market funds

A

FEDERAL RESERVE NOTE

THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA

L70744629F

12

1212

12

L70744629F

ONE DOLLARONE DOLLAR

WASHINGTON, D.C.

THIS NOTE IS LEGAL TENDER

FOR ALL DEBTS, PUBLIC AND PRIVATE

SERIES

1985

H 293

1 2 3

4 5 6 7 8 9 10

11 12 13 14 15 16 17

18 19 20 21 22 23 24

25 26 28 29 30 3127

1 2 3

4 5 6 7 8 9 10

11 12 13 14 15 16 17

18 19 20 21 22 23 24

25 26 28 29 30 3127

1 2 3

4 5 6 7 8 9 10

11 12 13 14 15 16 17

18 19 20 21 22 23 24

25 26 28 29 30 3127

Readily convertible to cash

Original maturity to investor of 3 months or less

Cash Management

Necessary to ensure company has neither too little nor too much cash on hand

Tools: Cash Flows Statement Bank Reconciliations Petty Cash Funds

Cash balance, beginning of period +

= Cash balance, end of period

Bank Statements

Deposits Customer notes

and interest collected by bank

Interest earned

Canceled checks

NSF checks Service

charges

Bank Reconciliation - Step 1

Deposits in Transit: Late period deposits not yet reflected on

bank statement

Trace deposits on bank statement to books. Identify deposits in transit. Add to bank balance.

Example of Reconciliation

Balance per statement, June 30$ 3,308.59Add: Deposit in transit

642.30

Bank Statement Adjustments: Deposits

7

Bank Reconciliation - Step 2

Outstanding checks: Checks written but not yet presented to

bank

Trace checks cleared by bank to books. Identify outstanding checks. Subtract from bank balance.

Pay to

the o

rder o

f:

XYZ Co

.ABC

Co.

Example of Reconciliation

Bank Statement Adjustments:Checks Outstanding

Balance per statement, June 30 $3,308.59Add: Deposit in transit 642.30Deduct: Outstanding checks:

Check No. 496 $ 79.89Check No. 501 213.20Check No. 502 424.75 (717.84)

Adjusted balance, June 30 $3,233.05

9

Bank Reconciliation - Step 3

Credit memoranda: Interest earned,

customer notes collected

List all other additions (credit memoranda) shown on the bank statement. Add to book balance.

Example of Reconciliation

Cash Account Adjustments:Credit Memoranda

Balance per books,June 30 $ 2,895.82Add:

Note collected $500.00 Interest on note 50.00Interest earned 15.45Recording error, #498 54.00 619.45

11

List all other subtractions (debit memoranda) shown on the bank statement. Subtract from book balance.

Bank Reconciliation - Step 4

Debit memoranda: NSF checks, service

charges, etc.

Date

Non-Sufficient Funds

Example of ReconciliationCash Account Adjustments:Debit Memoranda

Balance per books, June 30 $ 2,895.82Add: Note collected $500.00

Interest on note 50.00 Interest earned 15.45 Recording error, #498 54.00

619.45Deduct: NSF check $245.72

Collection fee – note 16.50 Service charge 20.00 (282.22)

Adjusted balance, June 30 $ 3,233.05

13

Bank Reconciliation - Step 5

Identify errors made by the bank or the company in recording transactions during the period.

Bank Reconciliation - Step 6

Use the information collected in Steps 1 - 5 to prepare the bank reconciliation.

Bank Reconciliation

Balance per bank $$$:

Adjusted balance $$$

Balance per books $$$:

Adjusted balance $$$

Adjusted balances for book and bank

must agree

Bank Reconciliation Adjusting Entries

Bank Reconciliation

Balance per bank $$$:

Adjusted balance $$$

Balance per books $$$:

Adjusted balance $$$

Book adjustments are the basis

for adjusting

entries

Bank Reconciliation Adjusting Entries Dr. Cr.

Accounts Receivable 245.72Collection Fee Expense 16.50Rent Expense - Lockbox 20.00Cash 337.23

Notes Receivable 500.00Interest revenue 65.45Supplies 54.00

To record bank reconciliation adjustments.