Steps in a Bank Reconciliation 1. Compare each deposit listed on the bank statement with unrecorded deposits appearing on the preceding period’s reconciliation and with deposit receipts. Add deposits not recorded by the bank to the balance according to the bank statement. 2. Compare paid checks with outstanding checks appearing on the preceding period’s reconciliation and with recorded checks. Deduct checks outstanding that have been paid by the bank from the balance according to the bank statement. 3. Compare bank credit memorandums to entries in the journal. Add credit memorandums that have not been recorded to the balance according to the depositor’s records.

Steps in a Bank Reconciliation 4. Compare bank debit memorandums to entries recording cash payments. Deduct debit memorandums that have not been recorded from the balance according to the depositor’s records. 5. List any errors discovered during the preceding steps.

Depositor’s records Bank’s books Beginning balance $3,359.78 Beginning balance $2,549.99 Power Network prepares to reconcile the monthly bank statement as of July 31, 2006

A deposit of $816.20 did not appear on the bank statement. Depositor’s records Bank’s books Beginning balance $3,359.78 Beginning balance $2,549.99 Add deposit not recorded by bank 816.20 $4,175.98 A deposit of $816.20 did not appear on the bank statement.

Depositor’s records Bank’s books Beginning balance $3,359.78 Add deposit not recorded by bank 816.20 $4,175.98 Beginning balance $2,549.99 Add note and interest collected by bank 408.00 $2,957.99 The bank collected a note in the amount of $400 and the related interest of $8 for Power Networking

A deposit of $637.02 did not appear on the bank statement. Depositor’s records Bank’s books Beginning balance $3,359.78 Beginning balance $2,549.99 Add deposit not recorded by bank 816.20 Add note and interest collected by bank 408.00 $4,175.98 $2,957.99 Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 Three checks that were written during the period did not appear on the bank statement: #812, $1,061; #878, $435.39, #883, $48.60. A deposit of $637.02 did not appear on the bank statement.

Depositor’s records Bank’s books Beginning balance $3,359.78 Add deposit not recorded by bank 816.20 $4,175.98 Beginning balance $2,549.99 Add note and interest collected by bank 408.00 $2,957.99 Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 Deduct check returned because of insufficient funds $300.00 The bank returned an NSF check from one of the firm’s customers, Thomas Ivey, in the amount of $300. This was a payment on account.

The bank service charges totaled $18.00. Bank’s books Beginning balance $3,359.78 Add deposit not recorded by bank 816.20 $4,175.98 Depositor’s records Beginning balance $2,549.99 Add note and interest collected by bank 408.00 $2,957.99 Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 Deduct check return because of insufficient funds $300.00 Bank service charges 18.00 The bank service charges totaled $18.00.

Depositor’s records Bank’s books Beginning balance $3,359.78 Add deposit not recorded by bank 816.20 Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 $4,175.98 Beginning balance $2,549.99 Add note and interest collected by bank 408.00 Deduct check return because of insufficient funds $300.00 Bank service charges 18.00 $2,957.99 Error recording Check No. 879 9.00 327.00 Check No. 879 for $732.26 to Taylor Co. on account, erroneously recorded in journal as $723.26.

Depositor’s records Bank’s books Beginning balance $3,359.78 Beginning balance $2,549.99 Add deposit not recorded by bank 816.20 Add note and interest collected by bank 408.00 $4,175.98 $2,957.99 Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 Deduct check return because of insufficient funds $300.00 Bank service charges 18.00 Error recording Check No. 879 9.00 327 Adjusted balance $2,630.99 Adjusted balance $2,630.99

Now, if desired, we can prepare a formal statement for Power Networking.

Power Networking Bank Reconciliation July 31, 2006 Balance per bank statement $3,359.78 Add: Deposit not recorded by bank 816.20 $4,175.98 Deduct: Outstanding checks No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 Adjusted balance $2,630.99 Balance per depositor’s records $2,549.99 Add: Note and interest collected by bank 408.00 $2,957.99 Deduct: NSF check (Thomas Ivey) returned $300.00 Bank service charges 18.00 Error in recording Check No. 879 9.00 327.00

Journal entries must be prepared for those items that affected the depositor’s side of the reconciliation.

Power Networking Bank Reconciliation July 31, 2006 Balance per bank statement $3,359.78 Add: Deposit not recorded by bank 816.20 $4,175.98 Deduct: Outstanding checks No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 Adjusted balance $2,630.99 Balance per depositor’s records $2,549.99 Add: Note and interest collected by bank 408.00 $2,957.99 Deduct: NSF check (Thomas Ivey) returned $300.00 Bank service charges 18.00 Error in recording Check No. 879 9.00 327.00

Entries Related to a Bank Reconciliation July 31 Cash 408 00 Notes Receivable 400 00 Interest Receivable 8 00 Note collected by bank.

Power Networking Bank Reconciliation July 31, 2006 Balance per bank statement $3,359.78 Add: Deposit not recorded by bank 816.20 $4,175.98 Deduct: Outstanding checks No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 Adjusted balance $2,630.99 Balance per depositor’s records $2,549.99 Add: Note and interest collected by bank 408.00 $2,957.99 Deduct: NSF check (Thomas Ivey) returned $300.00 Bank service charges 18.00 Error in recording Check No. 879 9.00 327.00

Entries Related to a Bank Reconciliation July 31 Cash 408 00 Note collected by bank. Notes Receivable 400 00 Interest Receivable 8 00 30 Accounts Receivable—Thomas Ivey 300 00 Miscellaneous Administrative Exp. 18 00 Accounts Payable—Taylor Co. 9 00 Cash 327 00 NSF check, bank service charges, and error in recording Check no. 879.

Petty Cash

On August 1, issued Check No On August 1, issued Check No. 511 for $100 to established a petty cash fund. Aug. 1 Petty Cash 100 00 Cash 100 00 Established petty cash fund.

At the end of August, the petty cash receipts indicated expenditures for the following items: office supplies, $28, postage (office supplies), $22; store supplies, $35, and miscellaneous administrative items, $3. Aug. 31 Office Supplies 50 00 Store Supplies 35 00 Miscellaneous Administrative Exp. 3 00 Cash 88 00 Replenished petty cash fund.

Financial Analysis and Interpretation Solvency is the ability of a business to meet its financial obligations (debts) as they are due. Solvency analysis focuses on the ability of a business to pay or otherwise satisfy its current and noncurrent liabilities. This ability is normally assessed by examining balance sheet relationships.

Financial Analysis and Interpretation Doomsday Ratio Laettner Co. Oakley Co. A. Cash and equivalents $100,000 $ 120,000 B. Current liabilities 400,000 1,500,000 Doomsday ratio A / B 0.25 0.08 Use: To indicate the company’s ability to meet creditors obligations in the worst case assumption that should the business cease to exist. How are these ratios used?

Chapter 7 The End