Section 2 - The Bank Reconciliation Flashcards
The companies Cash Ledger balance is $6,725
Given the following, what is the companies ending Cash Ledger balance:
- Deposits In Transit - $1,540
- Interest Earned on Bank account - $125
- Service charge - $35
- Certified Check Fee - $25
- Outstanding Checks - $900
- Note collected on behalf the company - $1,675
When reconciling the Companies Cash Ledger
Start with the end of Cash Ledger balance:
End of Month Balance: $6,725
Additions
Note collected 1,675
Interest Earned 125
Subtotal $8,525
Deductions:
Bank Service Charge (35)
Certified Check Fee (15)
Reconciled End of Cash Ledger Balance: $8,475
**The deposits in transit and outstanding checks are reconciled to the company’s bank statement balance.
If there is a separate Cash account for each bank account, a reconciliation must be done for each bank and corresponding cash ledger.
True or False
True.
Cash deposits are _____ for the company and ____ for the bank.
Assets for the company. Liabilities for the bank.
A bank service charge from the bank should be:
Added/Deducted from Bank Balance
Added/Deducted from Cash Ledger (Book Balance)
Deducted from the BOOK BALANCE
In a bank reconciliation, to adjust for a customer’s NSF check requires which of the following:
- a) increasing the bank balance by the amount
- b) decreasing the bank balance by the amount
- c) increasing the book balance by the amount
- d) decreasing the book balance by the amount
D - decreasing the book balance by the amount.
When there is an NSF, the bank issues a debit memo. An NSF takes place when a customer gives a company a check, however, the customer did not have enough funds to cover the check, causing an NSF - ‘Non sufficient funds’, often referred to as a ‘bounced check.’
Receipts and disbursements recorded on the company’s books, but not recorded on the most recent bank statements might include:
- Outstanding Checks
- Deposits in Transit and undeposited Cash
- Bank Errors, if any
When reconciling the Bank stament balance, remember to think of ODB - Old Dirty Banks
O - Outstanding Checks - (Subtracted)
D - Deposits in transit and cash on hand - (Added)
B - Bank errors, if any - (Added or subtracted, depending on the error)
The process of bringing the bank and Cash accounts into balance is called the:
Bank Reconciliation Process
What is the journal entry to record interest earned on a bank account?
Cash (DR.)
Interest Revenue or Interest Income (CR.)
When a company earns interest from their bank account, the journal entry is a debit to Cash to reflect an increase in Cash and a Credit to Interest Revenue to show the increase in Revenue.
Please note, in addition to preparing the bank reconciliation, it is also important to know how to prepare the journal entries to reconcile the cash ledger.
A night deposit made after the bank was closed on the last day of the month should be:
Added/Deducted from Bank Balance
Added/Deducted from Cash Ledger (Book Balance)
Added to the BANK BALANCE
When reconciling the Bank stament balance, remember to think of ODB - Old Dirty Banks
- O - Outstanding Checks - (Subtracted)
- D - Deposits in transit and cash on hand - (Added)
- B - Bank errors, if any - (Added or subtracted, depending on the error)
Receipts and disbursements recorded on the bank statement, but not recorded on the company’s Cash Ledger might include:
- Credit Memo - Additions to the company’s bank balance
- Debit Memo - Deductions from the company’s bank balance
- Authorized payments to a third party
Interest earned from the bank should be:
Added/Deducted from Bank Balance
Added/Deducted from Cash Ledger (Book Balance)
Added to the BOOK BALANCE
What is a debit memo?
A debit memo is an item on a company’s bank statement that decreases a company’s checking account balance.
The companies Cash Ledger balance is $2,970
Given the following, what is the companies ending Cash Ledger balance:
- Interest Earned - $225
- Outstanding Checks - $500
- Bank service charge - $15
- Note collected on behalf of the company - $1,700
- Safe Deposit Fee - $15
- Deposits in Transit - $420
When reconciling the Companies Cash Ledger
Start with the end of Cash Ledger balance:
End of Month Balance: $2,970
Additions
Note collected $1,700
Interest Earned 225
Subtotal $4,895
Deductions:
Bank Service Charge (15)
Safe Deposit Fee (15)
Reconciled End of Cash Ledger Balance: $4,865
**The deposits in transit and outstanding checks are reconciled to the company’s bank statement balance.
Additions to the company’s bank balance such as interest earned, wired funds and notes collected are examples of:
A credit memo.
A credit memo is an item on a company’s bank statement that increases the company’s checking or savings account balance.
The companies Cash Ledger balance is $3,650
Given the following, what is the companies ending Cash Ledger balance:
- Safe Deposit Fee - $20
- Deposits In Transit - $2,950
- Service charge - $35
- Note collected on behalf the company - $1,600
- Outstanding Checks - $1,500
When reconciling the Companies Cash Ledger
Start with the end of Cash Ledger balance:
End of Month Balance: $3,650
Additions (Credit Memos)
Note collected $1,600
Subtotal 5250
Deductions: (Debit Memos)
Bank Service Charge (35)
Safe Deposit Fee (20)
Reconciled End of Cash Ledger Balance: $5,195
**Deposits in transit and outstanding checks are accounted for when reconciling the Bank Statement Balance.
An NSF check from a customer should be:
Added/Deducted from Bank Balance
Added/Deducted from Cash Ledger (Book Balance)
Deducted from the BOOK BALANCE
When there is an NSF, the bank issues a debit memo. An NSF takes place when a customer gives a company a check, however, the customer did not have enough funds to cover the check, causing an NSF - ‘Non sufficient funds’, often referred to as a ‘bounced check.’
Checks written by the company and recorded in the Cash ledger but not yet cleared by the bank are referred to as:
Outstanding checks
Outstanding checks are deducted from the bank balance.
The bank erroneously charged $275 against your account for the payment of another company.
How is this amount reconciled?
Since the bank charge of $275 to your account was not incurred by your company, after the bank has been called and notified of the error, a credit memo will be issued and the $275 is added back, increasing the company’s end of month bank balance.
What is an outstanding check?
An outstanding check are checks written by the company and recorded in the Cash ledger and checkbook, but not yet paid by the bank. Therefore, outstanding checks, are usually not reflected as a deduction on the current bank statement.
A company issued a check for $325, however, it was recorded as $352.
During the bank reconciliation process, you would:
This is a book error, therefore the amount would be adjusted to the cash ledger. Since the ledger Cash Balance is $27 lower than it should be, $27 must be added back.
The company deducted $352, when it should’ve been $325, they deducted ($352- $325 = $27) $27 too much.
The companies bank statement balance is $7,200
Given the following, what is the companies ending bank balance:
- Outstanding Checks - $3,100
- NSF - $525
- Bank Charge - $35
- Deposits In Transit - $4,450
- Note collected on behalf the company - $1,110
When reconciling the Companies Bank Account:
Start with the end of month Bank balance:
End of Month Balance: $7,200
Additions
Deposits in Transit $4,450
Subtotal $11,650
Deductions:
Outstanding Checks (3,100)
Reconciled End of Month Bank Balance: $8,550
**The note collected, NSF and bank charge are reconciled to the company’s cash ledger.
Deductions from a company’s bank balance such as NSF fees and bank service charges are an example of:
Debit memos
A debit memo is an item on a company’s bank statement that decreases the company’s checking or savings account balance.
Deposits made by mail or in a night deposit lockbox are:
Deposits in Transit - Deposits in Transit and other cash on hand are added to the bank statement balance.
When reconciling the Bank stament balance, remember to think of ODB - Old Dirty Banks
- O - Outstanding Checks - (Subtracted)
- D - Deposits in transit and cash on hand - (Added)
- B - Bank errors, if any - (Added or subtracted, depending on the error)
What are the three major purposes a bank reconciliation serves?
- to review information needed to bring company accounting records up to date at the end of the month or another period
- to verify that the ledger Cash account balance at the end of the month or other period is accurate and to correct any errors if any.
- to verify that the checking account balance at the end of the month or other period is accurate and to alert the bank of any errors if any.
