Concept explainers
1.
Identify the amount of deposits in transit as at December 31.
1.
Explanation of Solution
Deposits-in-transit: The checks that are deposited and recorded by the company, but not yet recorded by the bank are referred to as deposits-in-transit.
Deposits that should be included in bank reconciliation: As per the information, the deposits in transit as at December 31, is $13,000, which is deposited on December 31, but the bank has not recorded.
Hence, the deposits in transit as at December 31, is $13,000.
2.
List the outstanding checks at December 31.
2.
Explanation of Solution
Outstanding checks: Outstanding checks are the checks that are issued by the company, but not yet paid by the bank.
Determine the amount of outstanding checks as at December 31.
Particulars | Amount ($) |
Outstanding check | $150 |
Outstanding check | 4,500 |
Amount of outstanding checks as at December 31 | $4,650 |
Table (1)
Description: The other checks that were issued by company were paid by the bank.
Hence, the amount of outstanding checks at December 31 was $4,650.
3.
Prepare the bank reconciliation of Company S, as at December 31.
3.
Explanation of Solution
Bank reconciliation: Bank statement is prepared by bank. The company maintains its own records from its perspective. This is why the cash balance per bank and cash balance per books seldom agree. Bank reconciliation is the statement prepared by company to remove the differences and disagreement between cash balance per bank and cash balance per books.
Prepare bank reconciliation of Company S, as at December 31.
Company S | |||
Bank Reconciliation | |||
December 31 | |||
Updates to Bank Statement | Updates to Company’s Books | ||
Ending cash balance per bank statement | $88,370 | Ending cash balance per books | $97,120 |
Additions: | Additions: | ||
Deposits in transit | 13,000 | Interest earned | 50 |
101,370 | 97,170 | ||
Deductions: | Deductions: | ||
Outstanding checks (refer table 1) | 4,650 | NSF check | 300 |
Up-to-date ending cash balance | $96,720 | Bank service charge | 150 |
Up-to-date ending cash balance | $96,720 |
Table (2)
Description:
- The deposits which are not recorded by the bank are referred to as deposits in transit. Since the deposits in transit are not reflected on the bank statement, the company should add deposits in transit to cash balance per bank, while preparation of
bank reconciliation statement . - Outstanding checks are the checks that are issued by the company, but not yet paid by the bank. When the check is issued for payment, the company deducts the cash balance immediately. But the bank deducts only when the cash is paid for the issued check. So, company deducts the cash balance per bank to remove the differences.
- Interest earned on checking account is credited by bank to the bank account of which the company is not aware of. So, while preparing bank reconciliation statement, company should add the amount to the cash balance per books.
- While bank reconciliation, the NSF check should be deducted from the cash balance per book. This is because the bank could not collect funds from the customer’s bank due to lack of funds. But being recorded as
Accounts Receivable previously, the balance should be deducted from books, to increase the accounts receivable account. - Banks deduct the service charge for the services rendered like lock box rental, or printed checks. But the company is not aware of such deductions. So, company deducts the cash balance per books while bank reconciliation preparation.
4.
Prepare the
4.
Explanation of Solution
Debit and credit rules:
- Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in
stockholders’ equity accounts. - Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.
Prepare journal entry to record interest earned.
Date | Account Titles and Explanation | Ref. | Debit ($) | Credit ($) | ||
December | 31 | Cash | 50 | |||
Interest Revenue | 50 | |||||
(To record the interest earned) |
Table (3)
Description:
- Cash is an asset account. The amount is increased because credited the interest earned on checking account, and an increase in asset is debited.
- Interest revenue is a revenue account. Revenues increase equity account and an increase in equity is credited.
Prepare journal entry to record NSF check.
Date | Account Titles and Explanation | Ref. | Debit ($) | Credit ($) | ||
December | 31 | Accounts Receivable | 300 | |||
Cash | 300 | |||||
(To record the cash receipt for the NSF check ) |
Table (4)
Description:
- Accounts Receivable is an asset account. The bank has not collected the amount from the customer due to insufficient funds, which was earlier recorded as a receipt. As the collection could not be made, amount to be received increased. Therefore, increase in asset would be debited.
- Cash is an asset account. The amount is decreased because bank could not collect amount due to insufficient funds in customer’s account, and a decrease in asset is credited.
Prepare journal entry to record bank service charge.
Date | Account Titles and Explanation | Ref. | Debit ($) | Credit ($) | ||
December | 31 | Office Expense | 150 | |||
Cash | 150 | |||||
(To record the deduction of bank service charge) |
Table (5)
Description:
- Office Expenses is an expense account and the amount is increased because bank has charged service charges. Expenses decrease equity account and decrease in equity is debited.
- Cash is an asset account. The amount is decreased because bank service charge is paid, and a decrease in asset is credited.
5.
Indicate the balance in cash account, after
5.
Answer to Problem 3PA
The balance in cash account, after posting the reconciliation entries is $96,720.
Explanation of Solution
After the three adjustments (Refer to the bank reconciliation statement in part 3), the balance in cash account is $96,720
Hence, the balance in cash account, after posting the reconciliation entries is $96,720.
6.
Indicate the balance that is to be reported in the
6.
Answer to Problem 3PA
The balance to be reported in the balance sheet as at December 31, after including the balance in petty cash on hand is $97,020.
Explanation of Solution
After adding the balance in petty cash on hand account of $300 to the updated balance in cash account of $96,720, the balance to be reported in the balance sheet as at December 31 is $97,020
Hence, the balance to be reported in the balance sheet as at December 31, after including the balance in petty cash on hand is $97,020.
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Chapter 5 Solutions
Fundamentals Of Financial Accounting
- The bank reconciliation revealed that one deposit had cleared the bank two weeks after the date of the deposit. Should this be of concern? Why, or why not?arrow_forwardUsing the following information, prepare a bank reconciliation. Bank balance: $6,988 Book balance: $6,626 Deposits in transit: $1,600 Outstanding checks: $599 and $1,423 Bank charges: $75 Bank incorrectly charged the account $75. The bank will correct the error next month. Check number 2456 correctly cleared the bank in the amount of $234 but posted in the accounting records as $324. This check was expensed to Utilities Expense.arrow_forwardThe bank reconciliation shows the following adjustments. Deposits in transit: $526 Outstanding checks: $328 Bank charges: $55 NSF checks: $69 Prepare the correcting journal entry.arrow_forward
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