Bank Reconciliations

A. The format for the bank reconciliation

Cash per bank statement XXX | Cash per books XXX | Plus: | Plus: Deposits in transit XXX | Note and interest Bank errors XXX | collections by ----- | the bank XXX Subtotal XXX | Interest income XXX | Depositer errors XXX Less: | ----- Outstanding checks (XXX) | Subtotal XXX Bank errors (XXX) | ----- | Less: | Non-sufficient fund | checks (XXX) | Bank charges (XXX) | Depositor errors (XXX) | ----- Adjusted cash balance XXX | Adjusted cash balance XXX ===== | ===== Note: The adjusted cash balance on both sides must match. In addition, adjusting journal entries are required on the books for any items shown to reconcile the cash per books to the adjusted cash balance.

B. Terminology on the bank reconciliation

1. Deposits in transit
These are deposits that are in the cash per books but not in the cash per bank statement. The reason is that there is delay between when the cash gets recorded on the books and when the bank records the deposit. Deposits in transit are determined by comparing the deposits listed on the books with the deposits listed on the bank statement.

2. Outstanding checks
These are checks that have been deducted from the cash per the books but not the cash per the bank statement. The reason is that there is a delay between when the check gets recorded on the books and when the bank records the check. Outstanding checks are determined by comparing the check disbursements on the books with the checks listed on the bank statement.

3. Bank charges
An expense for bank services that is listed on the bank statement but is not recorded on the company's books.

4. Non-sufficient fund checks (NSF checks)
A customer payment by check that has been recorded as a deposit on the books but was not collectible because of insufficient funds in the account of the customer.

C. A Sample Problem

Gamecock Company's cash account has a year end balance of $30,530. Outstanding checks as of year end totaled $2,050. Deposits in transit totaled $5,340 at year end. An NSF check of $500 is included in the year end cash balance on the books. The bank has deducted this amount on the bank statement. The bank incorrectly recorded a deposit as $270 that was correctly recorded by the Gamecock Company as $720. The Gamecock Company incorrectly recorded a check disbursement on their books for $350 that correctly cleared the bank for $325. The amount was originally posted to Adverting Expense. The bank statement also shows a service charge of $35 on the account. The bank collected on note on behalf of the Gamecock Company that included $3,000 in principal and $200 in interest. This is included on the bank statement but is not yet on the books of the Gamecock Company. The balance per the bank statement is $29,480.

1. Prepare the bank reconciliation

Cash per bank statement 29,480 | Cash per books 30,530 | Plus: | Plus: Deposits in transit 5,340 | Note and interest Bank errors 450 | collections by ----- | the bank 3,200 Subtotal 35,270 | Error on posting | check 25 | Less: | ----- Outstanding checks (2,050) | Subtotal 33,755 ------- | | Less: | Non-sufficient fund | checks (500) | Bank charges ( 35) | ----- Adjusted cash balance 33,220 | Adjusted cash balance 33,220 ====== | ======

2. Prepare any required journal entries for the Gamecock Company.

Debits Credits -------- -------- 1. Cash 3,200 Notes Receivable 3,000 Interest Income 200 (To record collection of note and interest by bank) 2. Cash 25 Advertising Expense 25 (To correct error in posting check) 3. Accounts receivable 500 Cash 500 (To put NSF check back into receivables) 4. Bank Changes Expense 35 Cash 35 (To record bank charges)