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Steps in a Bank Reconciliation

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Presentation on theme: "Steps in a Bank Reconciliation"— Presentation transcript:

1 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.

2 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.

3 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

4 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 $4,175.98 A deposit of $ did not appear on the bank statement.

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

6 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 Add note and interest collected by bank $4,175.98 $2,957.99 Deduct outstanding checks: No. 812 $1,061.00 No No ,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 $ did not appear on the bank statement.

7 Depositor’s records Bank’s books
Beginning balance $3,359.78 Add deposit not recorded by bank $4,175.98 Beginning balance $2,549.99 Add note and interest collected by bank $2,957.99 Deduct outstanding checks: No. 812 $1,061.00 No No ,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.

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

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

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

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

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

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

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

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

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

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

18 Petty Cash

19 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 Cash Established petty cash fund.

20 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 Store Supplies Miscellaneous Administrative Exp Cash Replenished petty cash fund.

21 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.

22 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 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?

23 Chapter 7 The End


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