Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 7 Sarbanes-Oxley, Internal Control, and Cash 323

deposits.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 pe-
   riod’s reconciliation and with recorded checks. Deduct checks outstanding that have
   not been paid by the bank from the balance according to the bank statement.


3. Compare bank credit memorandums to entries in the journal. For example, a bank
   would issue a credit memorandum for a note receivable and interest that it collected
   for a company. Add credit memorandums that have not been recorded to the balance ac-
   cording to the company’s records.


4. Compare bank debit memorandums to entries recording cash payments. For
   example, a bank normally issues debit memorandums for service charges and
   check printing charges. A bank also issues debit memorandums for not sufficient
   funds checks. NSF checks are normally charged back to the customer as an account
   receivable.Deduct debit memorandums that have not been recorded from the balance
   according to the company’s records.


5. List any errors discovered during the preceding steps. For example, if an amount
   has been recorded incorrectly by the company, the amount of the error should be
   added to or deducted from the cash balance according to the company’s records.
   Similarly, errors by the bank should be added to or deducted from the cash bal-
   ance according to the bank statement.

To illustrate a bank reconciliation, we will use the bank statement for Power

Networking in Exhibit 5. This bank statement shows a balance of $3,359.78 as of July 31.

The cash balance in Power Networking’s ledger as of the same date is $2,549.99. The

following reconciling items are revealed by using the steps outlined above:

Deposit of July 31, not recorded on bank statement..................... $ 816.20

Checks outstanding: No. 812, $1,061.00; No. 878, $435.39;

No. 883, $48.60.............................................. 1,544.99

Note plus interest of $8 collected by bank (credit memorandum), not

recorded in the journal........................................ 408.00

Check from customer (Thomas Ivey) returned by bank because of

insufficient funds (NSF)........................................ 300.00

Bank service charges (debit memorandum), not recorded in the journal...... 18.00

Check No. 879 for $732.26 to Taylor Co. on account, recorded

in the journal as $723.26....................................... 9.00

The bank reconciliation, based on the bank statement and the reconciling items, is

shown in Exhibit 7.

Q.Is an NSF check added
to or deducted from the
bank balace according to
the company’s records?

A.Deducted

Cash balance according to company $XXX

Add: Unrecorded bank credits (notes collected

by bank) $XX

Deduct: Unrecorded bank debits (NSF checks,

service charges, etc.) XX XXX

Adjusted balance $XXX

Cash balance according to bank $XXX

Add: Debits to cash not on bank statement

(deposits in transit, etc.) $XX

Deduct: Credits to cash not on bank statement

(outstanding checks, etc.) XX XXX

Adjusted balance $XXX

Must

be

equal