Presentation on theme: "Chapter 7 Bank Reconciliations"— Presentation transcript:
1 Chapter 7 Bank Reconciliations Adapted from Financial Accounting 4e by Porter and Norton
2 CashCurrency and coins on handChecks and money orders from customersDeposits in checking and savings accountsCompensating balance – the minimum amount a bank requires the company keep in their bank account as part of a credit-grant arrangement
3 Cash Equivalents Readily convertible to cash Original maturity to investor of 3 months or less12345678910111213141516171819202122232425262829303127Commercial paperU.S. Treasury billsCertain money market funds
4 Cash ManagementNecessary to ensure company has neither too little nor too much cash on handTools:Cash Flows StatementBank ReconciliationsPetty Cash Funds
5 Bank Statements Cash balance, beginning of period + = Cash balance, end of periodDepositsCustomer notes and interest collected by bankInterest earnedCanceled checksNSF checksService charges
6 Bank Reconciliation - Step 1 Trace deposits on bank statement to books. Identify deposits in transit. Add to bank balance.Deposits in Transit: Late period deposits not yet reflected on bank statement
7 Example of Reconciliation Bank Statement Adjustments: DepositsBalance per statement, June 30 $ 3,308.59Add: Deposit in transit71
8 Bank Reconciliation - Step 2 Trace checks cleared by bank to books. Identify outstanding checks. Subtract from bank balance.Outstanding checks: Checks written but not yet presented to bankABC Co.Pay to the order of:XYZ Co.
9 Example of Reconciliation Bank Statement Adjustments:Checks OutstandingBalance per statement, June 30 $3,308.59Add: Deposit in transitDeduct: Outstanding checks:Check No. 496 $Check NoCheck No (717.84)Adjusted balance, June 30 $3,233.0591
10 Bank Reconciliation - Step 3 List all other additions (credit memoranda) shown on the bank statement. Add to book balance.Credit memoranda: Interest earned, customer notes collected
11 Example of Reconciliation Cash Account Adjustments:Credit MemorandaBalance per books,June 30 $ 2,895.82Add:Note collected $500.00Interest on noteInterest earnedRecording error, #112
12 Bank Reconciliation - Step 4 List all other subtractions (debit memoranda) shown on the bank statement. Subtract from book balance.DateNon-Sufficient FundsDebit memoranda: NSF checks, service charges, etc.
13 Example of Reconciliation Cash Account Adjustments:Debit MemorandaBalance per books, June $ 2,895.82Add: Note collected $500.00Interest on noteInterest earnedRecording error, #619.45Deduct: NSF check $245.72Collection fee – noteService charge (282.22)Adjusted balance, June $ 3,233.05132
14 Bank Reconciliation - Step 5 Identify errors made by the bank or the company in recording transactions during the period.
15 Bank Reconciliation - Step 6 Use the information collected in Steps to prepare the bank reconciliation.Bank ReconciliationBalance per bank $$$:Adjusted balance $$$Balance per books $$$Adjusted balances for book and bank must agree
16 Bank Reconciliation Adjusting Entries Balance per bank $$$:Adjusted balance $$$Balance per books $$$Book adjustments are the basis for adjusting entries
17 Bank Reconciliation Adjusting Entries Dr. Cr.Accounts ReceivableCollection Fee ExpenseRent Expense - LockboxCashNotes ReceivableInterest revenueSuppliesTo record bank reconciliation adjustments.
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