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
Compensating balance the
minimum amount a bank requires the
company keep in their bank account
as part of a credit-grant arrangement
Cash Equivalents
Commercial paper
U.S. Treasury bills
Certain money market funds
A
FEDERALRESERVENOTE
THEUNITEDSTATESOFAMERICA THEUNITEDSTATESOFAMERICA
L70744629F
12
12 12
12
L70744629F
ONE DOLLAR ONE DOLLAR
WASHINGTON, D. C.
THI S NOTE I S LEGAL TENDER
FOR ALL DEBTS, PUBLI C AND PRI VATE
SERI ES
1985
H293
1 2 3
4 5 6 7 8 9 10
11 12 13 14 15 16 17
18 19 20 21 22 23 24
25 26 28 29 30 31 27
1 2 3
4 5 6 7 8 9 10
11 12 13 14 15 16 17
18 19 20 21 22 23 24
25 26 28 29 30 31 27
1 2 3
4 5 6 7 8 9 10
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25 26 28 29 30 31 27
Readily
convertible to cash
Original maturity
to investor of 3
months or less
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
Cash balance, beginning of period +






= Cash balance, end of period
Bank Statements
Deposits
Customer notes
and interest
collected by
bank
Interest earned
Canceled
checks
NSF checks
Service
charges
Bank Reconciliation - Step 1
Deposits in Transit:
Late period deposits
not yet reflected on
bank statement
Trace deposits on bank statement to books.
Identify deposits in transit. Add to bank
balance.
Example of
Reconciliation
Balance per statement, June 30 $ 3,308.59
Add: Deposit in transit 642.30

Bank Statement Adjustments: Deposits
7
Bank Reconciliation - Step 2
Outstanding checks:
Checks written but
not yet presented to
bank
Trace checks cleared by bank to books.
Identify outstanding checks. Subtract from
bank balance.
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
Bank Reconciliation - Step 3
Credit memoranda:
Interest earned,
customer notes collected
List all other additions (credit memoranda)
shown on the bank statement. Add to
book balance.
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
List all other subtractions (debit memoranda)
shown on the bank statement. Subtract from
book balance.
Bank Reconciliation - Step 4
Debit memoranda:
NSF checks, service
charges, etc.
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
Bank Reconciliation - Step 5
Identify errors made by the bank or
the company in recording
transactions during the period.
Bank Reconciliation - Step 6
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
Adjusting Entries
Bank Reconciliation

Balance per bank $$$
:
Adjusted balance $$$

Balance per books $$$
:
Adjusted balance $$$
Book
adjustments
are the basis
for
adjusting
entries
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.