Example Exercise 3 Bank Reconciliation Bank Section A bank reconciliation is an analysis of the items and amounts that cause the cash balance reported in the bank statement to differ from the balance of the cash account in the ledger. A bank reconciliation is divided into two sections: the bank section which begins with the cash balance according to the bank statement, and the company section that begins with the cash balance according to the company records. Each section is adjusted for items not yet included to determine an adjusted balance. Note that this adjusted balance according to the bank and the company’s books must be equal, or in accounting language, reconciled.. Company Section

Example Exercise 3 Bank section of the reconciliation The bank section of the reconciliation starts with the cash balance according to the bank statement. Next, [CLICK] deposits not recorded by the bank, called deposits in transit, are added. These represent deposits that have been recorded on the company’s books, but are not yet recorded by the bank. Then [CLICK] outstanding checks are deducted. These are checks that have been deducted on the company’s books, but have not yet been presented to the bank for payment. Finally [CLICK], the adjusted balance is determined.

Example Exercise 3 Company section of the reconciliation Next, the company section of the reconciliation is completed. [CLICK] The cash balance according to the general ledger is entered. Then [CLICK] the company adds credit memos and [CLICK] deducts debit memos that were received with the bank statement. Next, we determine the adjusted balance for the company’s section. Finally, [CLICK] we need to verify that the adjusted balance of the bank equals the adjusted balance per the company records.

Example Exercise 3 Example of a bank reconciliation Shown is an example of a bank reconciliation. Notice that in addition to the steps outlined above that there is a deduction in the book section for an error made in the accounting records. In this example we see that the company made an error. If the bank had made an error during July, the error notation appear in the bank section. Keep in mind that an error, whether made by the company or the bank, could have a positive or negative impact on cash depending on the circumstances.

Example Exercise 3 Journal Entries The company’s records need to be updated for any items in the company section of the bank reconciliation. They do not need to be updated for items in the bank section, but the bank should be notified of any errors that need to be corrected. The company’s records are updated using journal entries. For example, journal entries should be made for any unrecorded bank debit or credit memos and for any company errors.

Example Exercise 3 3 For this example exercise, we need to [CLICK] determine the adjusted balance for Photo Op. First let’s look at the bank section of the bank reconciliation.

Example Exercise 3 Bank section of the reconciliation First, the balance according to the bank needs to be entered. Then, deposits in transit need to be added [CLICK]. The two amounts are summed [CLICK]. Next, outstanding checks are deducted next [CLICK]. Finally the adjusted balance according to the bank is determined [CLICK].

Adjusted Balances are equal Example Exercise 3 Company section of the reconciliation Next, the company section of the bank reconciliation is added. First, add the cash balance according to the company records [CLICK], then deduct the NSF check as well as the bank service charge [CLICK] to arrive at the adjusted balance [CLICK]. As a last step in the bank reconciliation, determine that the adjusted balance per the bank and per the company are equal [CLICK]. Adjusted Balances are equal

Example Exercise 3 3 The company’s records need to be updated for any items in the company section of the bank reconciliation.

Example Exercise 3 Journal Entries In this example, an NSF check was returned by the bank. Since the company originally recorded this as a debit to cash and a credit to accounts receivable, this entry needs to be reversed in the amount of $800. Also, the service charge for $75 needs to be expensed. The resulting decrease to cash is recorded as a credit of $875.

Example Exercise 3  For Practice: PE 3A, PE 3B 3 3 3A, 3B Refer to Practice Exercises PE 3A and PE 3B for practice on preparing a bank reconciliation.  For Practice: PE 3A, PE 3B