
Concept explainers
Bank Reconciliation:
A procedure through which difference between bank balance provided in the bank statement and bank balance appearing in the books of account, is being ascertained at a particular point of time of a company is known as bank reconciliation
It means record of financial data related to business transactions in a journal in a manner so that debit equals credit. It provides an audit trail to the auditor and a means to analyze the effects of transactions to an organization’s financial health.
Rules of Journal Entry:
The rules for journal entry are defined by 5 accounting components,
- Assets: Increase in asset should be debit and decrease should be credit.
- Liabilities: Increase in liabilities should be credit and decrease should be debit.
- Equity: Increase in Equity should be credit and decrease should be debit.
- Expense: Increase in expense should be debit and decrease should be credit.
- Revenue: Increase in revenue should be credit and decrease should be debit.
1.
To prepare: Bank reconciliation of B Company as at July 31, 2017.

Explanation of Solution
While bank reconciliation required adjustments should be made to match the balances.
Bank reconciliation of B Company as follows:
B Company | |||
Bank reconciliation | |||
July 31, 2017 | |||
Particulars | Amount ($) | Particulars | Amount ($) |
Balance as per bank statement | 27,233 | Balance as per book of account | 27,497 |
Add: | Add: | ||
Deposit made on July 31 | 11,514 | Non interest-bearing note | 7,955 |
Less: | Less: | ||
Outstanding check No.3031 | 1.482 | Service charges levied by bank | 25 |
Outstanding check No.3065 | 382 | NSF check | 805 |
Outstanding check No.3069 | 2,281 | Error underlying check No.3056 | 20 |
Adjusted balance of bank | 34,602 | Adjusted balance of book | 34,602 |
Hence, adjusted balance is $34,602.
2.
To prepare: Journal entries to bring the company’s book balance of cash into conformity with the reconciled cash balance as of July 31, 2017.
2.

Explanation of Solution
A. Journal entry related to note receivable
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
July 31,2017 | Cash | 7,955 | ||
Expenses for collection | 45 | |||
Notes receivable | 8000 | |||
(To record note receivable collection) |
Here, note receivable is of $8,000 and collection fee of note receivable accounts for $45. Thus cash received against this is $7,955
- Cash has come into the business which shows increment in cash and when cash increases it gets debited because cash is an asset.
- On the other hand note receivable is also a form of asset which decreases and gets credited. Thus note receivable account gets credited.
B. Service charges levied by the bank for NSF check.
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
July 31,2017 | 805 | |||
Cash | 805 | |||
(To record charges levied by the bank for NSF check in addition to fees ) |
- In such case, service charges $805 deducted by the bank which pertains to NSF check.
- Since cash and accounts receivable are asset account, which get debited when increases and credited when decreases. Thus Cash has gone it gets credited and accounts receivable increased so it gets debited.
C. Bank charged rent for safety deposit box
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
July 31,2017 | Miscellaneous expenses | 25 | ||
Cash | 25 | |||
(To record charges levied by the bank for safety deposit box) |
- All expenses are debited when it increases. Thus rent charges for deposit box is also an expense and debited under miscellaneous expenses account.
- Whereas cash has gone out of the business and same has been decreased. Thus cash account gets credited.
D. Rent payment.
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
July 31,2017 | Expense for rent | 20 | ||
Cash | 20 | |||
(To record correction of error in entry) |
- All expenses are debited when it increases. Thus rent charged is also an expense. Hence, expense for rent account debited.
- Whereas cash has gone out of the business and same has been decreased. Thus cash account gets credited.
3.
a.
To explain: effect on (i) the adjusted bank statement cash balance and (ii) the adjusted
3.
a.

Explanation of Solution
Balance of cash account of the company is $24,497 which is wrongly stated as $27,947 in the bank reconciliation, and then effects would be observed as follows:
Final balance calculated by adjustment in the bank statement would be overstated by an amount of $450
- Adjustments are required to be made in order to ascertain correct balance of respective books.
- Further, this error would leave an overstated status in bank statement.
b.
To explain: effect on (i) the adjusted bank statement cash balance and (ii) the adjusted cash account book balance related to the bank’s collection of $8,000 less collection fee which is added to the bank statement cash balance on the reconciliation.
b.

Explanation of Solution
In such case final balance ascertained with the help of adjustment:
- The bank statement would be overstated by the amount of $7,955.
- The books of accounts would be understated by an amount of $7,955.
- Here Collection of accounts receivable by the bank of $8,000 from which $45 for collection fees is required to be deducted and net amount should be added to the books of accounts. However it was added to the bank statement.
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