Concept explainers
(a)
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.
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.
To prepare: Bank reconciliation of Company T as at May 31, 2017
(a)
Answer to Problem 7.5AP
Explanation of Solution
Prepare bank reconciliation of Company T as at May 31, 2017.
Company T | ||
Bank Reconciliation | ||
July 31, 2017 | ||
Cash balance as per bank statement, May 31, 2017 | $6,968.00 | |
Add: Deposits in transit | $1,880.15 | |
Error in wrongly debiting Company T check | 360.00 | 2,240.15 |
9,208.15 | ||
Less: Outstanding checks | 276.25 | |
Adjusted cash balance per bank | $8,931.90 | |
Cash balance as per books, May 31, 2017 | $6,738.90 | |
Add: Note receivable collected by bank | 2,690.00 | |
9,428.90 | ||
Less: Check printing charges | $40.00 | |
Error in May 12 deposit | 50.00 | |
Error in recording check number: 1181 | 27.00 | |
NSF check | 380.00 | 497.00 |
Adjusted cash balance per books | $8,931.90 |
Table (1)
Working Notes:
Calculate book error deposit amount.
Calculate book error in check number: 1181 amount.
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 . - The incorrectly charged check to the company’s account would decrease the cash balance per bank. So, company adds the check to balance per bank while bank reconciliation preparation.
- 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.
- Note receivable being collected by bank, is credited to bank account. But the company is not aware of it. So, while preparing bank reconciliation statement, company should add the amount to the cash balance per books.
- The accountant has recorded the amount of cash sales of $883.15 as $933.15. So, the cash balance increased by $50. Therefore, the balance should be deducted from books, to reduce amount from the cash ledger account balance.
- The accountant has recorded the amount of payable of $685 as $658 for the check numbered 1181. So, the cash balance increased by $27. Therefore, the balance should be deducted from books, to reduce amount from the cash ledger account balance.
- Banks deduct the service charge for the services rendered like lock box rental, or printed checks. But the company is not aware of such deductions. So, company deducts the cash balance per books while bank reconciliation preparation.
(b)
To prepare:
(b)
Explanation of Solution
Prepare journal entry to record note receivable collected by bank.
Date | Account Titles and Description | Ref. | Debit ($) | Credit ($) | |
2017 | |||||
May | 31 | Cash | 2,690 | ||
Note Receivable | 2,690 | ||||
(To record receivable collected by bank) |
Table (2)
Description:
- Cash is an asset account. The amount is increased because bank collected note receivable, and an increase in assets should be debited.
- Note Receivable is an asset account. The amount has decreased because the amount to be received is collected by the bank, and, a decrease in assets should be credited.
Prepare journal entry to record printing charge.
Date | Account Titles and Description | Ref. | Debit ($) | Credit ($) | |
2017 | |||||
May | 31 | Bank Charge Expense | 40 | ||
Cash | 40 | ||||
(To record printing charge) |
Table (3)
Description:
- Bank Charges Expense is an expense account and the amount is increased because bank has charged service charges for printing. Expenses decrease Equity account and decrease in Equity is debited.
- Cash is an asset account. The amount is decreased because bank service charge is paid, and a decrease in asset is credited.
Prepare journal entry to record book error in recording cash sales.
Date | Accounts and Description | Post Ref. | Debit ($) | Credit ($) | |
2017 | |||||
May | 31 | Sales Revenue | 50 | ||
Cash | 50 | ||||
(To record decrease in over-deposited amount) |
Table (4)
Description:
- Sales Revenue is a revenue account. Sales revenue is debited to decrease the previously over-deposited cash sale amount.
- Cash is an asset account. The amount is decreased to decrease the over-deposited cash, and a decrease in asset is credited.
Prepare journal entry to record book error in recording payable.
Date | Accounts and Description | Post Ref. | Debit ($) | Credit ($) | |
2017 | |||||
May | 31 | Accounts Payable | 27 | ||
Cash | 27 | ||||
(To record amount under-payable by accountant) |
Table (5)
Description:
- Accounts Payable is a liability account. The under-paid payable is paid, and so, amount to be paid is decreased. A decrease in liability is debited.
- Cash is an asset account. The amount is decreased to pay the under-paid check, and a decrease in asset is credited.
Prepare journal entry to record NSF check.
Date | Accounts and Description | Post Ref. | Debit ($) | Credit ($) | |
2017 | |||||
May | 31 |
| 380 | ||
Cash | 380 | ||||
(To record NSF check) |
Table (6)
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.
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Chapter 7 Solutions
FINANCIAL ACCOUNTING (MWSU) W/ACCESS
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