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Chapter 7 Bank Reconciliations Adapted from Financial Accounting 4e by Porter and Norton.

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Presentation on theme: "Chapter 7 Bank Reconciliations Adapted from Financial Accounting 4e by Porter and Norton."— Presentation transcript:

1 Chapter 7 Bank Reconciliations Adapted from Financial Accounting 4e by Porter and Norton

2 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

3 Cash Equivalents Commercial paper U.S. Treasury bills Certain money market funds  Readily convertible to cash  Original maturity to investor of 3 months or less

4 Cash Management Necessary to ensure company has neither too little nor too much cash on hand l Tools: Õ Cash Flows Statement Õ Bank Reconciliations Õ Petty Cash Funds

5 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

6 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.

7 Example of Reconciliation Balance per statement, June 30$ 3, Add: Deposit in transit Bank Statement Adjustments: Deposits 7

8 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 order of: XYZ Co. ABC Co.

9 Example of Reconciliation Bank Statement Adjustments: Checks Outstanding Balance per statement, June 30 $3, Add: Deposit in transit Deduct: Outstanding checks: Check No. 496$ Check No Check No (717.84) Adjusted balance, June 30 $3,

10 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.

11 Example of Reconciliation Cash Account Adjustments: Credit Memoranda Balance per books,June 30 $ 2, Add: Note collected $ Interest on note Interest earned Recording error, #

12 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

13 Example of Reconciliation Cash Account Adjustments:Debit M emoranda Balance per books, June 30 $ 2, Add: Note collected $ Interest on note Interest earned Recording error, # Deduct: NSF check $ Collection fee – note Service charge (282.22) Adjusted balance, June 30 $ 3,

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 Reconciliation Balance per bank$$$ : Adjusted balance$$$ Balance per books$$$ : Adjusted balance$$$ Adjusted balances for book and bank must agree

16 Bank Reconciliation Adjusting Entries Bank Reconciliation Balance per bank$$$ : Adjusted balance$$$ Balance per books$$$ : Adjusted balance$$$ Book adjustments are the basis for adjusting entries

17 Bank Reconciliation Adjusting Entries Dr.Cr. Accounts Receivable Collection Fee Expense Rent Expense - Lockbox Cash Notes Receivable Interest revenue Supplies To record bank reconciliation adjustments.


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