Presentation on theme: "Chapter 7 Bank Reconciliations Adapted from Financial Accounting 4e by Porter and Norton."— Presentation transcript:
Chapter 7 Bank Reconciliations Adapted from Financial Accounting 4e by Porter and Norton
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
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
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
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
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.
Example of Reconciliation Balance per statement, June 30$ 3, Add: Deposit in transit Bank Statement Adjustments: Deposits 7
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.
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,
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.
Example of Reconciliation Cash Account Adjustments: Credit Memoranda Balance per books,June 30 $ 2, Add: Note collected $ Interest on note Interest earned Recording error, #
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
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,
Bank Reconciliation - Step 5 Identify errors made by the bank or the company in recording transactions during the period.
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
Bank Reconciliation Adjusting Entries Bank Reconciliation Balance per bank$$$ : Adjusted balance$$$ Balance per books$$$ : Adjusted balance$$$ Book adjustments are the basis for adjusting entries
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.