Bank reconciliation — purpose and overviewPurpos ...
  • Info
    Click 'Save & Edit' to enable all features
    Export
    Study
    Edit
    Manage
Public
Save & Edit
Searching...
Flashcards in this deck (22)

  • What is the primary purpose of a bank reconciliation?

    To explain differences between the bank statement balance and the company ledger (book) balance and record any required journal entries.

    banking reconciliation

  • What is a 'deposit in transit' (DIT)?

    A deposit recorded by the company but not yet recorded by the bank.

    definitions dit

  • What is an 'outstanding check' (OC)?

    A check written by the company but not yet cleared by the bank.

    definitions oc

  • How is an NSF check treated in bank reconciliation?

    A customer check returned for insufficient funds; treated as a book-side deduction.

    definitions nsf

  • Which side (bank or book) requires journal entries for adjustments?

    Book-side adjustments require journal entries; bank-side adjustments do not.

    process journal

  • Name three bank-side adjustments that affect the bank statement balance.

    • Add: deposits in transit
    • Subtract: outstanding checks
    • Add/Subtract: bank errors
    bank-side adjustments

  • Name common book-side adjustments that require journal entries.

    • Subtract: NSF checks, bank service charges
    • Add: interest earned, EFT collections, note collections less fees
    • Correct: book errors with journal entry
    book-side adjustments

  • What journal entry records a bank service charge?

    Debit Bank Service Charge Expense; Credit Cash

    journal servicecharge

  • What journal entry records an NSF customer check of $410?

    Debit Accounts Receivable $410; Credit Cash $410

    journal nsf

  • What is the journal entry for interest earned of $20?

    Debit Cash $20; Credit Interest Revenue $20

    journal interest

  • How is a bank collection of a $1,500 note with $45 interest and $15 fee recorded?

    Debit Cash $1,530; Debit Collection Fee Expense $15; Credit Notes Receivable $1,500; Credit Interest Revenue $45

    journal notes

  • How do you correct a company deposit overstated by $36?

    Debit Cash Over and Short $36; Credit Cash $36

    journal correction

  • What are the concise steps to prepare a bank reconciliation?

    • Start with bank statement and book cash balances
    • Bank side: add DIT, subtract OCs, adjust bank errors
    • Book side: record JEs for NSF, fees, interest, EFTs, notes, correct book errors
    • Compute adjusted balances and verify they match
    • Post JEs to ledger
    process steps

  • Which items never need a journal entry?

    EFT collections and bank fees

    Interest earned and note collections

    Deposits in transit and outstanding checks

    NSF checks and bank service charges

    cheatsheet journal

  • Compute the adjusted bank balance given bank $9,200; DIT $1,100; outstanding checks $1,450.

    $9,200 + 1,100 - 1,450 = 8,850

    examples calculation

  • Compute the adjusted book balance given book $9,860; service charge $30; NSF $280; interest $20.

    $9,860 - 30 - 280 + 20 = 8,850

    examples calculation

  • What must be true after completing a bank reconciliation?

    The adjusted bank balance and the adjusted book balance must be equal.

    verification goal

  • What typical journal entry patterns should you memorize for bank reconciliations?

    • Bank fee
    • NSF (non-sufficient funds)
    • Interest
    • Note collection
    reconciliation journal

  • When preparing a bank reconciliation, how should you organize bank-side and book-side items?

    Keep bank-side and book-side lists separate, and only post journal entries for book-side adjustments.

    procedure reconciliation

  • Should you post journal entries for bank-side adjustments during reconciliation?

    No. Bank-side adjustments do not get journal entries.

    reconciliation bank

  • What arithmetic check must be true after recording reconciliation adjustments?

    Adjusted Bank Balance must equal Adjusted Book Balance.

    verification math

  • What is the 'one-step check' in bank reconciliation verification?

    After adjustments: Adjusted Bank Balance = Adjusted Book Balance.

    verification reconciliation
Study Notes

Bank reconciliation — Purpose & goal

  • Purpose: Explain differences between the bank statement balance and the company (book) cash balance and record any required journal entries.
  • Goal: Compute an adjusted bank balance and an adjusted book balance; after proper adjustments they must be equal.

Key concepts & definitions

  • Deposit in transit (DIT): Deposit recorded by the company but not yet processed by the bank (bank-side add).
  • Outstanding check (OC): Check written by the company not yet cleared by the bank (bank-side subtract).
  • NSF check: Customer check returned for insufficient funds; treated as a book-side deduction and requires a JE.
  • EFT (electronic funds transfer): Bank-processed cash transfer that usually requires book-side entries (collections or payments).
  • Cash Over and Short: Temporary account for recording company cash-record errors (used when company recorded a deposit/check amount incorrectly).

Which side to adjust (and whether a journal entry is needed)

  • Bank-side adjustments (no journal entry):
  • Add: deposits in transit (DIT)
  • Subtract: outstanding checks (OC)
  • Add/subtract: bank errors (depends on error direction)
  • Book-side adjustments (require journal entry):
  • Subtract: NSF checks, bank service charges
  • Add: interest earned, EFT collections, notes collected by bank (net of fees)
  • Book errors: correct with appropriate JE (use Cash Over and Short if needed)

Common journal-entry templates

  • Bank service charge:
  • Debit Bank Service Charge Expense; Credit Cash
  • NSF check (customer bounced):
  • Debit Accounts Receivable; Credit Cash
  • Interest earned:
  • Debit Cash; Credit Interest Revenue
  • EFT withdrawal (company payment):
  • Debit Expense or Accounts Payable; Credit Cash
  • EFT collection / note collected by bank (combined entry):
  • Debit Cash (net received)
  • Debit Collection Fee Expense (fee charged by bank)
  • Credit Notes Receivable (principal)
  • Credit Interest Revenue (interest portion)
  • Deposit recorded too high (company overstated cash):
  • Debit Cash Over and Short; Credit Cash
  • Deposit recorded too low (company understated cash):
  • Debit Cash; Credit Cash Over and Short
  • Check recorded for wrong amount (book error):
  • If recorded too low: Debit Accounts Payable; Credit Cash
  • If recorded too high: Debit Cash; Credit Accounts Payable

Steps to prepare a bank reconciliation (concise)

  1. Start with the bank statement balance and the book (ledger) cash balance.
  2. Adjust the bank side: add DIT, subtract outstanding checks, correct bank errors.
  3. Adjust the book side: record JEs for NSF, bank fees, interest, EFTs, note collections, and correct book errors.
  4. Compute Adjusted Bank Balance and Adjusted Book Balance; they must match.
  5. Post any required journal entries to update the general ledger.

Worked examples (short)

  • NSF check $410

  • JE: Debit Accounts Receivable $410; Credit Cash $410.

  • Bank collects note $1,500 with $45 interest and charges $15 fee

  • Net cash received = $1,500 + $45 - $15 = $1,530.

  • JE: Debit Cash $1,530; Debit Collection Fee Expense $15; Credit Notes Receivable $1,500; Credit Interest Revenue $45.

  • Company recorded deposit as $84 but bank shows $48 (company overstated by $36)

  • JE: Debit Cash Over and Short $36; Credit Cash $36.

  • Bank service charge $28

  • JE: Debit Bank Service Charge Expense $28; Credit Cash $28.

  • Interest earned $20

  • JE: Debit Cash $20; Credit Interest Revenue $20.

Numeric reconciliation example

  • Bank side:
  • Bank balance $9,200; DIT $1,100; Outstanding checks $1,450.
  • Adjusted bank balance:

\(\(9{,}200 + 1{,}100 - 1{,}450 = 8{,}850\)\)

  • Book side (given numbers):
  • Book balance $9,860; Service charge $30; NSF $280; Interest $20.
  • Adjusted book balance:

\(\(9{,}860 - 30 - 280 + 20 = 9{,}570\)\)

  • If adjusted balances do not match, investigate missing book entries or bank errors; after recording all required book-side JEs the adjusted balances should agree.

Quick cheat sheet

  • Items that never need a journal entry: deposits in transit, outstanding checks, bank-only errors.
  • Always make journal entries for book-side items: NSF, bank fees, interest, EFT collections/withdrawals, note collections, and correcting book errors.
  • Use Cash Over and Short for company recording mistakes or petty cash differences.

Practical tips for exams

  • Memorize standard JE patterns: bank fee, NSF, interest, note collection entries.
  • Keep bank-side and book-side adjustments listed separately; only post book-side JEs.
  • Verify arithmetic: final check is

\(\(\text{Adjusted Bank Balance} = \text{Adjusted Book Balance}\)\)

  • If balances differ, trace omitted book entries, arithmetic errors, or bank errors.

One-step verification

  • Final equality to confirm reconciliation:

\(\(\text{Adjusted Bank Balance} = \text{Adjusted Book Balance}\)\)

  • If true, the reconciliation is complete and you may post the book-side journal entries.