Lesson on a Bank Reconciliation Throughout the period, a company records cash receipts and cash disbursements in its Cash account in the general ledger. At the end of a period, a company will receive a bank statement. The ending balance for Cash in the general ledger will not equal the balance on the bank statement. While this seems strange, there are some basic reasons why NEITHER the general ledger balance nor the bank statement balance are correct. Let’s start with why the bank statement is not correct. There are two items that the bank does not know about, but the company does. This means the company has recorded these amounts in the general ledger for Cash, but that the bank has not. The first item is deposits-in-transit, which are payments the company received from customers that have not been deposited in the bank by the period end. Checks are considered Cash for accounting purposes when we receive them, so even though they have not been deposited, they are still considered cash. Therefore, these cash receipts were recorded in the general ledger, but not on the bank statement. The second item the bank does not know about, but that the company does, is outstanding checks. These are checks the company has written, but that have not been cashed by the recipients. Once a check is written, the cash is considered gone for accounting purposes and cash in the general ledger is reduced. But the bank does not know these checks were written since the recipients have not cashed them; therefore, the bank statement does not reflect these outstanding checks. Lastly, the bank can make errors and erroneously increase or decrease a customer’s bank account. These need to be reversed when found. The ending balance in the general ledger is also generally not correct. Just as there are items the bank does not know about, but the company does, there are items that the company does not know about, but that the bank does. This includes cash collected by the bank on behalf of the company that the company does not know it has received until it gets its bank statement. Therefore, these cash receipts have not been included in the general ledger yet. The two main reductions that are reported on the bank statement are bank service charges and not-sufficient-funds (NSF) checks. The company does not know about these items until it gets its bank statement. The NSF checks are checks from customers that bounced (i.e., customers did not have enough money in their bank account). With NSF checks, the company debited Cash and credit A/R to record the receipt of the customer’s check as it did not know the customer’s check was not good. Lastly, the company can make an error when recording payments or cash receipts in the general ledger. The most common errors are transposition errors where someone switches the order of numbers. For example, a cash receipt should be $64, but the accountant types $46. In this case, cash has been under-reported by $18. The ending balance on the general ledger is what is reported as Cash on the balance sheet. Therefore, the items described in the paragraph directly above, must be recorded with journal entries to get the adjusted ending general ledger balance to the correct amount of cash.

The following provides a nice visual summary of the above:

These items require journal entries to get the ending general ledger balance to equal the correct cash balance. Also note that when going from the bank balance to the correct balance or from the book balance to the correct balance, that you end up in the same place. These need to be equal or you have made a mistake!

1. BANK RECONCILIATION Calculate the correct cash balance? Balance per the Gen. Led $35,276.00.

Here we start with the unadjusted balance of cash in the general ledger. Then find the things the bank knew about, but that we didn’t. Plus, identify errors any errors we made in recording cash payments or receipts. Items that the bank knew about, but that we didn’t until we got our bank statement: $80.00 Bank Service Charge – we need to reduce the G/L balance for this $2,187 NSF returned check – the check we received from a customer was not any good so we need to reduce our G/L balance by this amount (recall that we would have debited cash and credit A/R when we received the check) Errors: We wrote a rent check for $180, but then recorded the payment as $300. Therefore, cash was erroneously reduced by $120 too much. The reconciliation would be as follows: Balance Per Books 35,276 Less: Bank Service Charge -80 NSF Check -2,187 Fix Error: Rent +120 Corrected Balance 33,129

2. BANK RECONCILIATION Calculate the correct cash balance. Balance per Bank Statement $34,680.00.

in addition, you are given the following information

34,680.00

80.00 bank service charge

120.00

check #4217 which was for RentExpense,was recorded as $300 when it was actually written for $180

3,985.00 Deposit in transit

2,187.00 NSF returned check

5,536.00 Outstanding checks

Here we are starting with the balance per the bank statement. Therefore, we need to identify the items the company knew about and recorded, but that the bank didn’t. These are deposits-in-transit and outstanding checks. Plus, we need to identify any bank errors. In this problem, there are no errors made by the bank. Balance Per Bank Statement 34,680 Add: Deposits-in-Transit 3,985 Less: Outstanding Checks -5,536 No bank errors 0 Corrected Balance 33,129 . 3. Bank Reconciliation Given the information in the two previous problems, prepare

the entry you would need to make as a result of the bank reconciliation. The journal entry required is to get from the balance per books to the corrected balance. The balance per books is what the G/L cash balance currently is and the corrected balance is where it needs to end up. Thus, the journal entry needs to record the increases and decreases to cash in #1. I will show these as 3 separate entries, but they can be combined. Dr. Bank Service Expense 80 Cr. Cash 80 To record bank fees. Dr. A/R 2,187 Cr. Cash 2,187 To fix NSF check received from customer (just undoing entry that company recorded when they received the check from the customer.

Dr. Cash 120 Cr. Rent Expense 120 Fixing error where too much rent expense was recorded. The following t-account (G/L) summarizes the transactions:

Cash

Balance per Books 35,276

80

Bank Service Charge

2,187

NSF Check Returned

Error on recording rent check 120

33,129