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B An Nsf Check Appears On The Bank Statement As A Ccounting Chapter 7 Flashcards

What is a Bank Reconciliation?

A bank reconciliation statement is a document that compares the cash balance on a company’s balance sheetBalance SheetThe balance sheet is one of the three fundamental financial statements. The financial statements are key to both financial modeling and accounting. to the corresponding amount on its bank statement. Reconciling the two accounts helps identify whether accounting changes are needed. Bank reconciliations are completed at regular intervals to ensure that the company’s cash records are correct. They also help detect fraudTop Accounting ScandalsThe last two decades saw some of the worst accounting scandals in history. Billions of dollars were lost as a result of these financial disasters. In this and any cash manipulations.

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Reasons for Difference Between Bank Statement and Company’s Accounting Record

When banks send companies a bank statement that contains the company’s beginning cash balanceCash Flow Statement​A cash flow Statement contains information on how much cash a company generated and used during a given period., transactions during the period, and ending cash balance, the bank’s ending cash balance and the company’s ending cash balance are almost always different. Some reasons for the difference are:

Deposits in transit: Cash and checks that have been received and recorded by the company but have not yet been recorded on the bank statement.Outstanding checks: Checks that have been issued by the company to creditors but the payments have not yet been processed.Interest income: Banks pay interest on some bank accounts.Not sufficient funds (NSF) checks: When a customer deposits a check into an account but the account of the issuer of the check has an insufficient amount to pay the check, the bank deducts from the customer’s account the check that was previously credited. The check is then returned to the depositor as an NSF check.

Nowadays, many companies use specialized accounting software in bank reconciliation to reduce the amount of work and adjustments required and to enable real-time updates.

Bank Reconciliation Procedure

On the bank statement, compare the company’s list of issued checks and deposits to the checks shown on the statement to identify uncleared checks and deposits in transit.Using the cash balance shown on the bank statement, add back any deposits in transit.Deduct any outstanding checks.This will provide the adjusted bank cash balance.Next, use the company’s ending cash balance, add any interest earned and notes receivable amount.Deduct any bank service fees, penalties, and NSF checks. This will arrive at the adjusted company cash balance.After reconciliation, the adjusted bank balance should match with the company’s ending adjusted cash balance.

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Example

XYZ Company is closing its books and must prepare a bank reconciliation for the following items:

Bank statement contains an ending balance of $300,000 on February 28, 2018, whereas the company’s ledger shows an ending balance of $260,900Bank statement contains a $100 service charge for operating the accountBank statement contains interest income of $20XYZ issued checks of $50,000 that have not yet been cleared by the bankXYZ deposited $20,000 but this did not appear on the bank statementA check for the amount of $470 issued to the office supplier was misreported in the cash payments journal as $370.A note receivable of $9,800 was collected by the bank.A check of $520 deposited by the company has been charged back as NSF.

AmountAdjustment to Books
Ending Bank Balance $300,000
Deduct: Uncleared cheques – $50,000 None
Add: Deposit in transit + $20,000 None
Adjusted Bank Balance $270,000
Ending Book Balance $260,900
Deduct: Service charge – $100 Debit expense, credit cash
Add: Interest income + $20 Debit cash, credit interest income
Deduct: Error on check – $100 Debit expense, credit cash
Add: Note receivable + $9,800 Debit cash, credit notes receivable
Deduct: NSF check – $520 Debt accounts receivable, credit cash
Adjusted Book Balance $270,000

Bank Reconciliation Statement

After recording the journal entries for the company’s book adjustments, a bank reconciliation statement should be produced to reflect all the changes to cash balances for each month. This statement is used by auditors to perform the company’s year-end auditing.

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Video Explanation of Bank Reconciliation

Below is a video explanation of the bank reconciliation concept and procedure, as well as an example to help you have a better grasp of the calculation of cash balance.

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Related Readings

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)®Become a Certified Financial Modeling & Valuation Analyst (FMVA)®CFI”s Financial Modeling and Valuation Analyst (FMVA)® certification will help you gain the confidence you need in your finance career. Enroll today!certification program, designed to help anyone become a world-class financial analyst. Through financial modeling courses, training, and exercises, anyone in the world can become a great analyst.

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