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Chapter 7

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

uriel-woodard
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Chapter 7

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  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. Readily convertible to cash • Original maturity to investor of 3 months or less 1 2 3 4 5 6 7 8 9 10 1 2 3 11 12 13 14 15 16 17 4 5 6 7 8 9 10 1 2 3 18 19 20 21 22 23 24 11 12 13 14 15 16 17 4 5 6 7 8 9 10 25 26 27 28 29 30 31 18 19 20 21 22 23 24 11 12 13 14 15 16 17 25 26 27 28 29 30 31 18 19 20 21 22 23 24 25 26 27 28 29 30 31 Cash Equivalents • Commercial paper • U.S. Treasury bills • Certain money market funds

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

  5. Deposits Customer notes and interest collected by bank Interest earned Canceled checks NSF checks Service charges Bank Statements Cash balance, beginning of period + = Cash balance, end of period

  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: Deposits Balance per statement, June 30 $ 3,308.59 Add: Deposit in transit 642.30 7

  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 bank ABC Co. Pay to the order of: XYZ Co.

  9. Example of Reconciliation Bank Statement Adjustments: Checks Outstanding Balance per statement, June 30 $3,308.59 Add: Deposit in transit 642.30 Deduct: Outstanding checks: Check No. 496 $ 79.89 Check No. 501 213.20 Check No. 502 424.75 (717.84) Adjusted balance, June 30 $3,233.05 9

  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 Memoranda Balance per books,June 30 $ 2,895.82 Add: Note collected $500.00 Interest on note 50.00 Interest earned 15.45 Recording error, #498 54.00 619.45 11

  12. Date Non-Sufficient Funds Bank Reconciliation - Step 4 List all other subtractions (debit memoranda) shown on the bank statement. Subtract from book balance. Debit memoranda: NSF checks, service charges, etc.

  13. Example of Reconciliation Cash Account Adjustments:Debit Memoranda Balance per books, June 30 $ 2,895.82 Add: Note collected $500.00 Interest on note 50.00 Interest earned 15.45 Recording error, #498 54.00 619.45 Deduct: NSF check $245.72 Collection fee – note 16.50 Service charge 20.00(282.22) Adjusted balance, June 30 $ 3,233.05 13

  14. Bank Reconciliation - Step 5 Identify errors made by the bank or the company in recording transactions during the period.

  15. Use the information collected in Steps 1 - 5 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 - Step 6

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

  17. Bank Reconciliation Adjusting Entries Dr.Cr. Accounts Receivable 245.72 Collection Fee Expense 16.50 Rent Expense - Lockbox 20.00 Cash 337.23 Notes Receivable 500.00 Interest revenue 65.45 Supplies 54.00 To record bank reconciliation adjustments.

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