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Chapter 7: Problem 9

In a bank reconciliation, outstanding checks are: a. Deducted from the bank balance. b. Added to the bank balance. c. Deducted from the general ledger balance. d. Added to the general ledger balance.

Short Answer

Expert verified
a. Deducted from the bank balance.

Step by step solution

01

Understanding Outstanding Checks

First, let's understand what outstanding checks are. These are checks that the company has written and recorded in its ledger, but have not yet been cashed or cleared by the bank. This means that these checks are not yet reflected in the bank statement balance.
02

Effect on the Bank Balance

Next, we determine how outstanding checks affect the bank balance in reconciliation. Since these checks have been subtracted in the company's ledger but not by the bank, they make the bank balance appear higher than the actual available cash.
03

Reconciling the Bank Balance

To reconcile the bank statement with the company's ledger, outstanding checks must be deducted from the bank balance. This adjustment aligns the bank's balance with the actual cash position by accounting for checks that are written but not yet cleared.

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Key Concepts

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

Outstanding Checks
Outstanding checks are an important concept in financial accounting. These are checks issued by a company to its creditors or suppliers. They have been recorded in the company's ledger but have not yet been processed or cleared by the bank. In other words, the company has written these checks and expects that the funds will be deducted from its bank account soon.
  • This situation causes the cash balance in the ledger to be different from the bank statement.
  • The delay in processing these checks can be due to mailing time or other administrative procedures.
  • Reconciling these outstanding checks is crucial for maintaining accurate financial records.
Ignoring outstanding checks can lead to a misunderstanding of a company's cash flow and financial position, making it essential to account for them correctly during bank reconciliation.
Bank Balance
The bank balance is the starting point of any bank reconciliation. It refers to the amount of money that is recorded by the bank at a given point in time, reflecting deposits, withdrawals, and any bank fees or errors. Here's why understanding the bank balance is crucial:
  • The balance shown on the bank statement represents the cash the bank believes the company has.
  • Differences between the company鈥檚 records and the bank statement need to be identified and corrected for reconciliation.
  • Items like outstanding checks or deposits in transit are common factors that cause discrepancies.
By adjusting for outstanding checks and other reconciling items, the company can ascertain the corrected bank balance, which should align with the general ledger's cash account balance after reconciliation is complete.
General Ledger Balance
The general ledger balance is an internal record of all the company's financial transactions. It reflects the company's cash account balance based on its own documentation. It is essential for financial management for various reasons:
  • It includes all check writing, deposits, and other cash-related transactions.
  • Discrepancies may occur between the ledger balance and the bank statement due to timing differences such as outstanding checks or bank errors.
  • Maintaining an accurate general ledger balance helps ensure reliable financial reporting and reflects the true financial position of the company.
When reconciling, the goal is to adjust both the bank statement and the general ledger to reflect the true cash position. Any differences need to be identified and appropriate adjustments made to achieve balance.
Financial Accounting
Financial accounting is a vital discipline that ensures that businesses maintain proper records of their financial transactions and present an accurate financial picture. It involves:
  • Recording all financial transactions systematically and systematically checking the accuracy of these records through processes like bank reconciliation.
  • Ensuring that financial statements are prepared according to established accounting principles, providing stakeholders with transparency.
  • Finance professionals, accountants, and auditors rely on well-managed financial accounts to conduct analysis and make informed decisions.
Bank reconciliation, involving items like outstanding checks, bank balance adjustments, and ledger alignments, is just one aspect of financial accounting that helps ensure the accuracy and integrity of financial reporting.

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Most popular questions from this chapter

Internal Control Walt Company encountered the following situations: a. Jenny Farrell, head of the receiving department, created a fictitious company named Speedy Forms and used it to send invoices to Walt Company for business documents that Walt never ordered or received. Farrell prepared receiving reports that stated that the business documents had been received, Walt's controller compared the receiving reports to the invoices and paid each one, b. Walt Company lost one day's cash receipts. An employee took the receipts to the bank after the bank's closing hours to deposit them in the night depository slot. A creative thief had placed a sign on the slot saying it was out of order and all deposits should be placed in a metal canister placed next to the building. Walt's employee placed the deposit in the canister and left. Employees from two other companies did the same thing. Later that night, the thief returned and stole the deposits from the canister. (This is an actual case.) c. Walt Company does not prenumber the sales invoices used for over-the- counter sales. A cashier pocketed cash receipts and destroyed all copies of the related sales invoices. Required For each situation, describe any violations of good internal control procedures and identify the steps that you would take to prevent each situation.

Describe the three elements of the fraud triangle and how they relate to each other.

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 Listed below are (a) four potential errors or problems that could occur in the processing of cash transactions and (b) internal control principles. For each error or problem, identify an internal control principle that could reduce the chance of the error or problem occurring. You may also cite more than one principle if more than one applies, or write none if none of the principles will correct the error or problem. 1\. Three cashiers use one cash register and the cash in the drawer is often short of the recorded balance. 2\. The same employee is responsible for opening the mail, listing any checks received, preparing the deposit receipt, and recording to the accounts receivable journal. Several customers have complained that their balances are incorrect. 3\. In an effort to save printing costs, generic receipts without numbers are used for customer sales. 4\. Because things have been hectic, no budgets were prepared this year. One department seems to be doing less volume in revenue, but cost of goods sold appear to be high relative to sales. Internal control principles: a. Establish clear lines of authority and responsibility. b. Segregation of duties. c. Hire competent personnel. d. Use control numbers on all business documents. e. Develop plans and budgets. f. Maintain adequate accounting records. g. Provide physical and electronic controls. h. Conduct internal audits.

Which of the following are considered to be cash: paper money, certificates of deposit, postdated checks, traveler's checks, funds in a checking account, and money orders?
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