
Concept explainers
(1)
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.
(2)
To 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.
(3)
To prepare: 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 | $86,720 | Ending cash balance per books | $95,470 |
Additions: | Additions: | ||
Deposits in transit | 13,000 | Interest earned | 50 |
99,720 | 95,520 | ||
Deductions: | Deductions: | ||
Outstanding checks | 4,650 | NSF check | 300 |
Up-to-date ending cash balance | $95,070 | Bank service charge | 150 |
Up-to-date ending cash balance | $95,070 |
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)
To prepare:
(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 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. Revenuesincrease 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 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 bank service charge) |
Table (4)
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)
To indicate: The balance in Cash account, after
(5)

Answer to Problem 5.3PA
Explanation of Solution
(6)
To indicate: The balance to be reported in the
(6)

Answer to Problem 5.3PA
Explanation of Solution
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Chapter 5 Solutions
Connect 1 Semester Access Card for Fundamentals of Financial Accounting
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