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Bank Reconciliation (Final) Important Terms
Terms in this set (20)
-To obtains accurate cash records, a company must update its cash account after the company receives it bank statement. A banks reconciliation is used to carry out the updating process. The bank reconciliation explain all differences between the company cash records and the banks records of the company cash records and the banks records of the company balances.
Bank Reconciliation- compares and explained the differences between cash on the company books and cash according to the banks records on a specific date. There are two records of a business cash.
- A document explaining the reasons for the difference between a depositors cash records and the depositors cash balance in its bank account.
1. The cash account in the company general ledger. Aprils cash T-account for smart touch learning is shown.
2. The bank statement which shows the cash receipts and payments transacted through the bank. The banks shows an ending balance of 12,720.
-The books and the bank statement usually show different cash balances. Differences may arise because of a time lag in recording transactions called timing differences. Three examples of timing differences follow:
- When a business writes a check it immediately deducts the amount in its checkbook and cash accounts. The banks however does not subtract the check from the company account until the bank pays the check a few days later.
- EFT cash payments and EFT cash receipts are often recorded by the bank before a company learns of them.
Preparing the Banks side of the bank reconciliation
- They all cause differences between the banks balance and the book balance.
- The bank side contains items not yet recorded by the bank but recorded by the company or errors by the banks.
1. Deposit In Transit(Outstanding Deposits):
Deposit in Transit:
A deposit of 2,610.47, representing cash receipts of October 31, did not appear on the bank statement.
1. Deposit In Transit(Outstanding Deposits)- A deposit in transit has been recorded and has already been added to the company book balance, but the bank has not yet recorded it. These are shown as "Add: Deposits in transit" on the bank side because when the bank does record these deposits, it will increases the bank balance.
-Made the deposit but did not reach the bank.
- Deposits recorded by the company but not yet recorded by its bank. So these are deposits we know we have made, we put them in the bank, but the bank has not processed them, we have increased are accounts by the deposit, but they have not cleared the bank.
1. Deposit in Transit- Smart ouch learning reviewed the bank statement and the cash account to determine whether any cash deposits made by the business have not yet been recorded by the bank. Smart touch learning identifies that the deposit made on April 24th for 9,000 has not been recorded by the bank. This amount is a dded to the bank balance.
-A deposit in transit is cash (currency, coins, checks, electronic transfers) that a company has received and is rightfully reported as Cash on its balance sheet, but does not appear on the bank statement until a later date.
-Deposits recorded by the company not yet recorded by its bank.
-For example, a retailer might receive $5,000 on Saturday (June 29) and $3,000 on Sunday (June 30). The money is deposited each evening in the bank's night depository. The store's Cash should be debited on each of those days for the respective amounts. However, the bank statement will report the $8,000 as a deposit on Monday, July 1, when the bank processed the items from the night depository.
2. Outstanding Check:
Outstanding checks totaled 1,968.40:
2. Outstanding Check- A check issued by a company and recorded on its books but not yet paid by its bank
- An outstanding is a check that has been recorded and has already been deducted from the company book balance, but the bank has not yet paid (deducted it.
-Checks written and recorded by the depositor but not yet paid by the bank at the bank statement date. Checks we have written on our books, we have them decreasing the amount in our checking amount balance. They have not cleared the bank.
- Such checks are shown as "Less Outstanding checks" on the banks side because when the bank does make payments for the checks, it will decrease the banks balance.
2. Outstanding check- The business reviews the canceled checks included with the statement to determine whether any checks written by the business have not yet cleared the bank. Smart touch learning identifies check number 204 for 2,000 as outstanding. This amounts is subtracted from the bank balance
- after all items affecting the bank side have been identified, the adjusted bank balance is determined.
-An outstanding check is a check that has been written by a company (and deducted from the appropriate general ledger cash account) but it has not yet cleared the bank account on which it is drawn. Hence, outstanding checks will mean that the balance in the bank account will be greater than the balance in the general ledger account (or in an individual's check register).
-Checks written and recorded by the depositor by not yet paid by the bank at the bank statement date.
-In the bank reconciliation process, the total amount of outstanding checks is subtracted from the ending balance on the bank statement when computing the adjusted balance per bank.
3. Bank Errors:
-The bank mistakenly charged to the company account a check for 425.00 drawn by another company.
3. Bank Errors- Banks errors are posting errors made by the bank that either incorrectly increase or decrease the bank balance.
ADD or Subtract
- All bank errors are corrected on the the banks side of the reconciliation by reversing the effects of the errors.
Errors are always recorded on the side of the reconciliation of the parts that made the error, it is recorded on the bank side. If the business made the error, it is recorded on the book side
A check for 960 returned with the statement was recored incorrectly in the check register as 690. The check was made for a cash purchase of merchandise.
correction of error+690
correction of error-690
Preparing the book side of the bank reconciliation:
-The book side contains items not yet recorded by the company on its book but have been recorded by the bank or errors made by the company.
- Items to shows on the books side include the following.
1. Bank Collections (Book Side)
1. Bank Collections-Bank collections are cash receipts the banks has received and recorded for a company account but have the company has not recorded yet on its books.
- An examples of a banks collection would occur when business has its customers use lock bow system. Another examples is a bank collecting on a note receivable for a business. A bank collection is often referred to as a credit memorandum.
- A credit memorandum- indicates that the customers account has been increased. A banks collection which increases the bank balance) that appears on the banks statement will shows as ADD banks collection on the book side of the reconciliation because its represents cash receipts not yet recorded by the company.
2.Electronic Funds Transfers (EFT)
Electronic Funds Transfers- the bank may receive or pay cash on a company behalf.
An EFT may be a cash receipt or cash payments.
These will either show up on the book side or the reconciliation as ADD EFT for receipts not yet added to the company books or LESS EFT for payments to yet deducted on the company books.
(Either Add or Subtract)
- In reviewing the bank statement, Smart touch learning identifies an EFT receipt from a customer in the amount of 100 . The company has not recorded this receipt in the cash account, therefore it will need to be added to the book balance.
-Electronic Funds transfer(EFT)- Listed in the other deduction section on the bank statement, Smart touch learning identified an EFT payment to water works for 40. This payment has not been recorded in the company cash account. Smart touch learning will subtract this amount from the book balance.
3.Service Charge (Book Side)
Bank service charges for October amounted to 12.50
Service Charge- This cash payment is the banks fee for processing a company transactions. service charges can also include the cost of printed checks and other bank fees such as ATM fees.
-A service charge is often referred to as a debit memorandum and represents a decrease in the banks accounts.
This will shows as less service charges on the books side of the reconciliations because it represents a cash payment not yet subtracted from the company cash balance.
-The bank statement shows a 20 service charge. Smart touch learning has not recorded this charge in the company cash account and will, therefore need to subtract this amount from the book balance.
4. Interest Revenue on a checking account-
The bank collected for Maneul Suarez Company 6,120.00 on a note. The face value of the notes was 6,000.00.
-The bank interest for the month was 170.
4. Interest Revenue- A BUSINESS will sometimes earn interest if its keeps enough cash in its account. The banks estaminet tells the company of this cash receipt.
-This will shows as ADD interest revenue on the book side of the reconciliation because it represents cash receipts not yet added in the company cash balance.
- Smart touch learning identified a 30 deposit on the bank statement for interest earned that has not been recorded in the cash account. This deposit will be added to the book balance.
5. Non-sufficient Funds (NSF) Checks
An NSF check for 91.78 from a client liz Fahll came back with the statement.
5. Non-sufficient Funds (NSF) Checks- A check for which the makers banks account has insufficient money to pay the check.
- Represents checks received from customers for payment of services rendered or merchandise sold that have turned out to be worthless.
- NSF checks sometimes called hot checks or bad checks are treated as subtractions on a company's bank reconciliations.
- NSF checkare custoemr checks the company has received and deposited for which the customer doesn't have money in his or her bank account to cover.
- NSF checks will shows as "less NSF checks" on the book side of the reconciliation, as the company previously recorded this receipt as an increase in cash, which now has to be deducted as the funs were not actually received.
-Non-sufficient funds (NSF) check- smart touch learning identifies an NSF check from a customer on the bank statement. The company has recorded the receipt of this check as an increase to cash originally. The banks has now communicated that the customers check did not clear and that the customers payment was never deposited into the business account. Smart touch learning must subtract this amount fro the book balance.
-Not sufficient funds (NSF) is a condition where a bank does not honor a check, because the checking account on which it was drawn does not contain sufficient funds. The term can also be applied to a situation where an individual attempts to make a purchase with a debit card, and there are not sufficient funds in the underlying bank account to pay for the transaction.
-For example, Mr. Jones writes a check to Mr. Smith for $500, which Mr. Smith deposits. Upon presentation of the check, Mr. Jones' bank refuses to honor it on the grounds that there are only $300 in his checking account. This is a not sufficient funds check.
6. Book Erros
6. Book Erros- Book Errors are erros made on the books of the company that either incorrectly increase or decrease the cash balance the company general ledger. All book errors are corrected on the book side of the reconciliation by reversing the effect of the errors.
- ADD Deposits
- Subtract outstanding checks
- Add or subtract corrections of bank errors.
BOOK Balance- Always
-Add bank collections, interest revenue, and EFT RECEIPTS
- Subtract service charges, NSF checks, and EFT PAYMENTS
- add or subtract corrections of book errors.
Journalizing Transactions From The Bank Reconciliation)
- The bank reconciliation is an accountants tool separate from the journals and ledgers.
- It does not account for transaction in the journal
- To get the transactions into the accounts, we must make journal entries and post to the ledger.
All items on the book side of the bank reconciliation require journal entries/ We must make no journal entires fro the items on the bank side because we have already recorded these items in the businesses cash account
To record account receivable collected by bank.
DR: Cash 100
CR: Accounts receivable 100
To record interest earned on bank balance
DR: Cash 30
CR: Interest Revenue 30
To record bank service charges incurred.
DR: Bank Expense 20
CR: Cash 20
To record payment of water bill by EFT
DR: Utilities Expense 40
CR: Cash 40
NSF check returned by bank
DR: Accounts receivable
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