Bank Reconciliation(Quick Test #3 with Coaching)

Here is what ABC Co. does:
When ABC's checking account is increased, ABC will debit ABC's general ledger account Cash and will credit an account such as Accounts Receivable.

Here is what the bank does:
When a bank receives money for ABC's checking account, the bank's cash is increased and the bank's obligation/liability to give the money to ABC on demand is also increased. Therefore, the bank will debit its general ledger Cash account and will credit its liability account Demand Deposits.

A debit memorandum processed by the bank against the depositor's checking account balance will reduce the checking account balance. Hence it reduces the amount that the bank is obligated to give to the checking depositor on demand.

At ABC, its checking account is one of the company's assets and is often represented by the general ledger account Cash. Since the company's Cash account is being reduced, ABC must credit Cash and debit another account such as Bank Fees Expense.

A bank credit memo increases the checking account balance. Hence, the bank's credit to its liability account (such as Demand Deposits) increases the amount that the bank must give to its depositor when it is demanded.

At the company, the checking account is one of the company's assets. Since the company's Cash is being increased by the bank, the company must debit its general ledger asset account Cash and credit another account.

Outstanding checks are the checks that a company has written/issued/recorded on its "books", but they have not yet appeared on the company's checking account statement.

There is an old tip for reconciling the bank statement: Put it where it isn't. Since the outstanding checks are already subtracted from the balance in the company's general ledger, but they are not deducted from the bank statement, the outstanding checks will be a deduction from the balance per bank.

A deposit in transit (also known as an outstanding deposit) is a deposit that has already been included in the company's cash account in the company's books or general ledger, but the deposit does not yet appear in the bank account. (For example, the receipts of June 30 are entered into the company's books as of June 30, but the amount is deposited in the bank account on July 1.)

In the bank reconciliation, the deposit in transit is an addition to the balance per bank. (Put it where it isn't. It is in the balance per books as of June 30, but it isn't in the balance per bank as of June 30.)

The bank service charge is already deducted on the bank statement, but it is not yet deducted from the company's books. Therefore, a journal entry is required to deduct the bank service charge from the general ledger account Cash and also to debit an account such as Bank Fee Expense (or Miscellaneous Expense).

[Deposits in transit and outstanding checks are already recorded in the general ledger accounts.]

Since the bank fee has reduced the company's checking account, the company will need to credit its general ledger Cash account and debit an expense such as Bank Fees Expense.

When the bank returns the customer's check to the company, the bank deducts the amount from the company's bank account. Therefore, the company must credit its general ledger Cash account. Since the check had reduced the customer's account receivable, the company will have to reinstate the receivable with a debit to Accounts Receivable.

When voiding a check that has been outstanding for several months, the company should debit its general ledger Cash account and credit the general ledger account that was debited when the check was originally processed.

Since the check is no longer outstanding, it must be removed from the list of outstanding checks.

Originally, the company deducted $967 from its general ledger Cash account. However, the company should have deducted $976. Therefore the company must deduct an additional $9 from its general ledger Cash account. This is done by crediting Cash for $9 and debiting another account for $9 (because of double-entry accounting).

The correct answer of $740 can be determined as follows:

A key part of a company's internal controls is to have separation of duties. In other words, the writing of checks, processing of receipts, recording amounts in the accounts, reconciling the bank statement, etc. should be done by different people. When there is the separation of duties, it is more difficult for someone to steal company assets.

In our example, the best way to improve internal control over the company's money is to have the bank statement reconciled by the owner of the business.

In the list of four reconciling items, only the customer's NSF check will require a company to record a journal entry.

(NSF is the acronym for not sufficient funds and will require a credit to Cash and usually a debit to Accounts Receivable.)

Because of accounting's double-entry system and debits and credits, if the amount of cash is wrong, another account must also be wrong.

For example, if a bank service charge is not recorded, the company's cash and its expenses are incorrect. Hence, both the balance sheet and the income statement will contain incorrect amounts.