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Chapter 7: Problem 15

Indicate whether the following bank reconciliation items should be (1) added to the bank statement balance, (2) deducted from the bank statement balance, (3) added to the ledger account balance, or (4) deducted from the ledger account balance: a. Bank service charge b. NSF check c. Deposit in transit d. Outstanding check e. Bank error charging company 's account with another company's check f. Difference of \(270 in amount of check written for \)410 but recorded by the company as $140

Short Answer

Expert verified
Add to bank: Deposit in transit, Bank error; Deduct from bank: Outstanding check; Add to ledger: None; Deduct from ledger: Bank service charge, NSF check, Check difference ($270).

Step by step solution

01

Analyze Bank Service Charge

The bank service charge is a fee the bank deducts from the company's account. This is seen in the bank statement but not yet recorded in the company's ledger. Thus, it should be deducted from the ledger account balance.
02

Analyze NSF Check

An NSF (non-sufficient funds) check is a bounced check where the payments promised by the check were not covered by the bank. This amount is recorded in the company's ledger as received but needs to be adjusted. Consequently, it should be deducted from the ledger account balance.
03

Analyze Deposit in Transit

Deposits in transit are amounts received and recorded by the company but not yet reflected in the bank statement. These amounts should be added to the bank statement balance to reconcile it.
04

Analyze Outstanding Check

Outstanding checks are payments issued by the company but not yet cashed by the recipient. These items should be deducted from the bank statement balance as these funds are not available.
05

Analyze Bank Error

A bank error where another company's check is mistakenly charged to the company鈥檚 account should be corrected by adding the mistakenly charged amount back to the bank statement balance.
06

Analyze Difference in Recorded Check Amount

The company recorded a check as $140 instead of the actual $410 (a difference of $270). This mistake means the ledger shows an excess. Therefore, $270 should be deducted from the ledger account balance to correct the error.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Financial Statements
Financial statements are vital reports that summarize the financial health of a business over a specific period. They include the balance sheet, income statement, and cash flow statement.
These documents provide insights into a company's operations, financial position, and cash management practices.
  • The **balance sheet** shows a snapshot of a company's assets, liabilities, and shareholders' equity.
  • The **income statement** highlights the company鈥檚 revenue, expenses, and profits or losses over a period.
  • The **cash flow statement** details the inflows and outflows of cash, showcasing how activities are financed and how cash is generated and used.
Each piece provides essential information for business owners, investors, and other stakeholders. They use it to make informed decisions about investments, credit, and more.
Understanding how bank reconciliations affect these statements is crucial. Errors or adjustments like an NSF check or bank errors can impact financial reporting, causing discrepancies if not properly addressed.
Ledger Account
A ledger account is a comprehensive record of all financial transactions that occur in a business. It's a fundamental component of accounting, forming the basis of a company's financial system.
Every transaction is recorded in the **general ledger**, which is divided into different accounts such as assets, liabilities, equity, revenues, and expenses.
  • **Assets** increase with debits and decrease with credits.
  • **Liabilities** and **equity** accounts increase with credits and decrease with debits.
  • **Revenue** and **expenses** follow similar rules, impacting the company's net income.
During reconciliation, discrepancies, like NSF checks, bank fees, or recording mistakes, often necessitate adjustments to the ledger accounts.
Correctly adjusting the ledger ensures that financial statements accurately reflect the true financial position of a company, highlighting the importance of precise and diligent entries.
NSF Check
An NSF Check, or Non-Sufficient Funds Check, is a check that a bank does not honor because the issuer's account lacks sufficient funds.
This can create complications in accounting as the recipient might initially record the expected funds, leading to a mismatch in records.
  • To reconcile, the amount must be deducted from the ledger account balance of the receiver.
  • The recipient must contact the issuer for payment rectification.
NSF checks can also incur additional fees for both the issuer and the receiver. In the context of bank reconciliation, it's crucial to ensure that such checks are properly adjusted in financial records. This adjustment prevents cash flow issues and maintains accurate financial statement reporting.
Bank Errors
Bank errors occur when a bank mistakenly records transactions, ultimately affecting the account holder's balance.
These can range from posting transactions to the wrong account, incorrect amounts, or duplicate entries.
  • Adjusting for a bank error may involve adding or deducting amounts to the bank statement balance.
  • Once detected, these errors require immediate correction to avoid cascading financial discrepancies.
For example, if a bank charges a company's account with another company's check, one must add back the incorrect charge.
This correction ensures that both the bank statement and the ledger reflect the true financial standing, maintaining the integrity of financial statements.

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Most popular questions from this chapter

Bank Reconciliation On July 31, Arthur Company's Cash in Bank account had a balance of \(\$ 8,112.62\). On that date, the bank statement indicated a balance of \(\$ 10,170.62\). A comparison of returned checks and bank advices revealed the following: 1\. Deposits in transit July 31 amounted to \(\$ 3,316.12\). 2\. Outstanding checks July 31 totaled \(\$ 1,251.12\). 3\. The bank erroneously charged a \(\$ 215\) check of Solomon Company against the Arthur bank account. 4\. A \(\$ 15\) bank service charge has not yet been recorded by Arthur Company. 5\. Arthur neglected to record \(\$ 4,000\) borrowed from the bank on a 10 percent six-month note. The bank statement shows the \(\$ 4,000\) as a deposit. 6\. Included with the returned checks is a memo indicating that J. Martin's check for \(\$ 610\) had been retumed NSF. Martin, a customer, had sent the check to pay an account of \(\$ 660\) less a \(\$ 50\) discount. 7\. Arthur Company recorded a \(\$ 107\) payment for repairs as \(\$ 1,070\). Required a. Prepare a bank reconciliation for Arthur Company at July 31 . b. Prepare the journal entry (or entries) necessary to bring the Cash in Bank account into agreement with the reconciled cash balance on the bank reconciliation.

What is a bank reconciliation? a. A formal financial statement that lists all of a fim's bank account balances b. A merger of two banks that previously were competitors c. A statement sent monthly by a bank to a depositor that lists all deposits, checks paid, and other credits and charges to the depositor's account for the month d. A schedule that accounts for differences between a firm's cash balance as shown on its bank statement and the balance shown in its general ledger Cash account

Internal Control Jerry Finch has worked for Jane Hardware for many years. Jerry has been a model employee. He has not taken a vacation in over three years, always stating that work was too important. One of Jerry's primary jobs at the store is to open mail and list the checks received. He also collects cash from customers at the store's outdoor nursery area. There are times that things are so hectic that Jerry does not bother to use the register, simply making change from cash he carries with him. When things slow down at the store Jerry often offers to help Cindy post payments to the customer's accounts receivable ledger. Cindy is always happy to receive help since she is also quite busy and because Jerry is such a careful worker. Required Identify any internal control principles that may be violated in the Jane Hardware store.

Internal Control Each of the following lettered paragraphs briefly describes an independent situa- L02, 4 tion involving some aspect of internal control. Required Answer the questions at the end of each paragraph or numbered section. a. Robert Flynn is the office manager of Oakwood Company, a small wholesaling company. Flynn opens all incoming mail, makes bank deposits, and maintains both the general ledger and the accounts receivable subsidiary ledger. An assistant records transactions in the credit sales journal and the cash receipts journal. The assistant also prepares a monthly statement for each customer and mails the statements to the customers. These statements list the beginning balance, credit sales, cash receipts, adjustments, and ending balance for the month. 1\. If Flynn stole Customer A's \(200 check (payment in full) and made no effort to conceal his embezzlement in the ledgers, how would the misappropriation be discovered? 2\. What routine accounting procedure would disclose Flynn's \)200 embezzlement in part (1), even if Flynn destroyed Customer A's subsidiary ledger account? 3\. What circumstances might disclose Flynn's theft if he posted a payment to Customer A's account in the accounts receivable subsidiary ledger and set up a $200 account for a fictitious customer? 4\. In part (3), why might Flynn be anxious to open the mail himself each morning? 5\. In part (3), why might Flynn want to have the authority to write off accounts considered uncollectible? b. A bagel shop uses a cash register that produces a printed receipt for each sale. The register also prints each transaction on a paper tape that is locked inside the cash register. Only the supervisor has access to the cash-register tape. A prominently displayed sign promises a free bagel to any customer who is not given a cash-register receipt with his or her purchase. How is this procedure an internal control device for the bagel shop? c. Jason Philber, a swindler, sent several businesses invoices requesting payment for office supplies that had never been ordered or delivered to the businesses. A 5 percent discount was offered for prompt payment. What internal control procedures should prevent this swindle from being successful? d. The cashier for Downtown Cafeteria is located at the end of the food line. After customers have selected their food items, the cashier rings up the prices of the food and the customer pays the bill. The customer line frequently stalls while the person paying searches for the correct amount of cash. To speed things up, the cashier often collects money from the next customer or two who have the correct change without ringing up their food on the register. After the first customer finally pays, the cashier rings up the amounts for the customers who have already paid. What is the internal control weakness in this procedure? How might the internal control over the collection of cash from the cafeteria customers be strengthened?

Internal Control Xiley Company encountered the following situations: a. The person who opens the mail for Xiley, Bill Stevens, stole a check from a customer and cashed it. To cover up the theft, he debited Sales Returns and Allowances and credited Accounts Receivable in the general ledger. He also posted the amount to the customer's account in the accounts receivable subsidiary ledger. b. The purchasing agent, Susan Martin, used a company purchase order to order building materials from Lumber Mart. Later, she telephoned Lumber Mart and changed the delivery address to her home address. She told Lumber Mart to charge the material to the company. At month-end, she approved the invoice from Lumber Mart for payment. c. Nash Supply Company sent two invoices for the same order: the first on June 10 and the second on July 20. The accountant authorized payment of both invoices and both were paid. d. On January 1, Jack Monty, a junior accountant for Xiley, was given the responsibility of recording all general journal entries. At the end of the year, the auditors discovered that Monty had made 150 serious errors in recording transactions. The chief accountant was unaware that Monty had been making mistakes. Required For each situation, describe any violations of good internal control procedures and identify the steps that you would take to prevent each situation.
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