Chapter 6, Problem 4PSA

To determine

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

Journal Entry:

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 determine

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.

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 $\left(\$8,000-\$45\right)$

• 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	Accounts receivable		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 determine

To explain: effect on (i) the adjusted bank statement cash balance and (ii) the adjusted cash account book balance related to company’s unadjusted cash account balance of $27,497 which is listed on the reconciliation as $27,947.

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 $\left(\$27,947-\$27,497\right)$ .

• 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 determine

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.

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.