ACCT 2000 Exam #2 prep chapter 5

What are the two control features of using a bank, and why does each one help?

1) It minimizes the cash on hand, so there is less to lose or steal. 2) It creates a double record of transactions (one kept by the bank, one by the company), so each record can be checked against the other to catch errors or tampering.

Why is the double record the thing that makes a bank reconciliation possible?

A reconciliation compares two independently kept records of the same cash. If only the company kept records, there would be nothing to compare against.

What does a bank reconciliation do?

It compares the balance per bank with the balance per books and explains the differences, adjusting both to the same corrected (true) cash balance.

Fill in: Deposits held by a bank are considered what type of account for the bank?

A liability. The bank owes that money back to the depositor on demand.

Why is the same bank account an asset for the company but a liability for the bank?

It is the same money seen from opposite sides. The company owns it and can use it (asset). The bank holds it and owes it back (liability).

When the bank receives a deposit, what happens to the bank's liability? When it pays a check?

A deposit increases the bank's liability (it owes the customer more). A paid check decreases it (it owes the customer less).

What does a canceled (cancelled) check mean?

The bank has PAID the check and the money left the account. It is not voided and not a bad thing - it is the normal successful end of a check.

What is an NSF check?

Not Sufficient Funds. A check that reaches the bank but is not paid because the writer's account does not have enough money.

Walk through what happens to you when a customer's check bounces (NSF).

You deposited it, so your bank credited your account. When it bounces, your bank takes the money back out. The customer still owes you, so the books lower Cash and put the amount back into Accounts Receivable.

What does "the life of a check takes time" mean, and which reconciling items does it explain?

A check or deposit is recorded by one party right away but takes days to reach and be processed by the other. That gap creates deposits in transit and outstanding checks.

What are the two causes of needing a bank reconciliation?

1) Time lags (one party records the transaction before the other). 2) Errors (made by either the bank or the company).

Fill in: List the three types of reconciling items that adjust the BANK balance.

1) Deposits in transit (+). 2) Outstanding checks (-). 3) Bank errors (+/-).

List the three types of reconciling items that adjust the BOOK balance.

1) Unrecorded receipts such as electronic collections (+). 2) Unrecorded payments such as NSF checks, service charges, card fees (-). 3) Company errors (+/-).

State the "who doesn't know yet" rule for choosing which balance to adjust.

Adjust the side that does not know about the transaction yet. If the company knows but the bank does not, adjust the bank balance. If the bank knows but the company does not, adjust the book balance.

Study guide MC: In a bank reconciliation, deposits in transit are… (a deducted from book, b added to book, c added to bank, d deducted from bank)

c - added to the bank balance. The company already recorded the deposit, but the bank has not processed it yet, so the bank's number is caught up by adding it.

Study guide MC: In a bank reconciliation, outstanding checks are… (a deducted from book, b added to book, c added to bank, d deducted from bank)

d - deducted from the bank balance. The company already recorded the check, but the bank has not paid it yet, so the bank's number is caught up by subtracting it.

Why is a deposit in transit NOT something the company needs to record in its books?

The company already recorded it when it made the deposit. Only the bank is behind, which is why it adjusts the bank side.

Fill in: Does the return of an NSF check show up as a reconciling item for the bank or the book?

The book (company). The bank already took the money back and knows about it. The company finds out on the statement, so the books must be corrected downward.

Fill in: A check was recorded by the company for $975 but correctly cleared the bank for $925. Added or subtracted from the book balance?

Added ($50). The books subtracted $50 too much, so the book balance is too low and the $50 is added back.

How do you decide whether to add or subtract a company error?

Ask which way the books are wrong. If the books subtracted too much (or recorded too little cash in), the balance is too low, so ADD the difference. If the books subtracted too little, the balance is too high, so SUBTRACT the difference.

Laird example: check No. 443 was written and paid for $1,226 but recorded as $1,262. What is the correction?

The books subtracted $36 too much, so add $36 to the book balance. Journal entry: Cash +36 and Accounts Payable +36 (the books also reduced what Laird owes the supplier by too much).

Fill in: Wrote checks of $1,000 in November ($600 cleared) and $1,500 in December ($700 cleared). Outstanding checks at the end of December?

$400 from November + $800 from December = $1,200. Outstanding checks carry forward until they clear, so you add both months.

Why do November's uncleared checks still count as outstanding in December?

Outstanding means recorded by the company but not yet paid by the bank. Uncleared checks stay outstanding no matter how many months pass, until the bank pays them.

Fill in: What account is always affected by bank reconciliation adjustments?

Cash. Every book-side adjustment ends up correcting the Cash account, since the goal is the true cash balance.

Study guide MC: To record the adjustment for an NSF check returned by the bank, the company would… (a increase cash, b increase A/R, c decrease A/R, d increase miscellaneous expense)

b - increase Accounts Receivable (and decrease Cash). The customer's payment failed, so the customer owes the money again.

Study guide MC: Why should a bank reconciliation be prepared?

To explain any difference between the depositor's balance per books and the balance per bank. (Not to catch fraud and not to match deposits to checks.)

Why can the reconciliation not be done by simply forcing the two balances to match?

Each difference must be explained by a real item (timing or error). The purpose is to find the true cash balance and identify what the books need to correct.

Which reconciling items need a journal entry, and which do not? Why?

Only BOOK items (unrecorded receipts, NSF checks, fees, company errors) need journal entries, because they correct the company's records. Bank-side items (deposits in transit, outstanding checks, bank errors) need no entry on the company's books because the company's records are already right or the bank will fix its own.

A bank makes an error. Whose balance is adjusted and does the company make a journal entry?

The bank balance is adjusted in the reconciliation. The company makes no journal entry because its own books are correct; the bank has to fix its own mistake.

Laird: balance per bank $15,907.45, deposit in transit $2,201.40, outstanding checks $5,904.00. Adjusted bank balance?

15,907.45 + 2,201.40 - 5,904.00 = $12,204.85.

Laird: balance per books $11,709.45, electronic receipt $1,035.00, company error $36.00, NSF $425.60, bank charges $150.00 ($120 card fees + $30 service charge). Adjusted book balance?

11,709.45 + 1,035.00 + 36.00 - 425.60 - 150.00 = $12,204.85, matching the adjusted bank balance.

Class notes check: the notes list the NSF check as $425.00 in the reconciliation but $425.60 in the reconciling-items table. Which is right?

$425.60. With $425.00 the book side would come out to $12,205.45 and would not match $12,204.85. Fix this in your notes.

Why must the adjusted bank balance and the adjusted book balance be equal?

Both are being corrected to the same thing: the company's true cash balance. They start apart only because of timing and errors, so once every item is accounted for, they converge.

What does it mean if the two adjusted balances do NOT match?

Something was missed or miscalculated, such as an unrecorded item, a wrong sign, or an arithmetic error. Recheck each reconciling item and its sign.

Sign check: classify each as bank or book and + or -: deposit in transit, outstanding check, service charge, NSF check, electronic receipt, bank error in the company's favor.

Deposit in transit: bank, +. Outstanding check: bank, -. Service charge: book, -. NSF check: book, -. Electronic receipt not yet recorded: book, +. A bank error that overstated the bank balance: bank, - (the opposite sign fixes the error).

Scenario: you deposit $500 on Oct 31 and record it. The bank posts it Nov 1. Which side, which sign, and why?

Bank side, plus $500. Your books already know about it and the bank does not, so the bank's balance is caught up by adding it.

Scenario: the bank charges a $30 service fee on Oct 31 and you find out when you read the statement. Which side, which sign, and why?

Book side, minus $30. The bank already knows and the company does not, so the books are caught up by subtracting it and the company records the expense.