The bank is a very important partner to all businesses. Not only does the bank provide basic checking services, but they process credit card transactions, keep cash safe, and may finance loans when needed. Show
Bank accounts for businesses can involve thousands of transactions per month. Due to the number of ongoing transactions, an organization’s book balance for its checking account rarely is the same as the balance that the bank records reflect for the entity at any given point. These timing differences are typically caused by the fact that there will be some transactions that the organization is aware of before the bank, or transactions the bank is aware of before the company. For example, if a company writes a check that has not cleared yet, the company would be aware of the transaction before the bank is. Similarly, the bank might have received funds on the company’s behalf and recorded them in the bank’s records for the company before the organization is aware of the deposit. With the large volume of transactions that impact a bank account, it becomes necessary to have an internal control system in place to assure that all cash transactions are properly recorded within the bank account, as well as on the ledger of the business. The bank reconciliation is the internal financial report that explains and documents any differences that may exist between the balance of a checking account as reflected by the bank’s records (bank balance) for a company and the company’s accounting records (company balance). The bank reconciliation is an internal document prepared by the company that owns the checking account. The transactions with timing differences are used to adjust and reconcile both the bank and company balances; after the bank reconciliation is prepared accurately, both the bank balance and the company balance will be the same amount. Note that the transactions the company is aware of have already been recorded (journalized) in its records. However, the transactions that the bank is aware of but the company is not must be journalized in the entity’s records. Fundamentals of the Bank Reconciliation ProcedureThe balance on a bank statement can differ from company’s financial records due to one or more of the following circumstances:
Demonstration of a Bank ReconciliationA bank reconciliation is structured to include the information shown in Figure 8.6. Figure 8.6 Bank Reconciliation. A bank reconciliation includes categories for adjustments to both the bank balance and the book balance. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license) Assume the following circumstances for Feeter Plumbing Company, a small business located in Northern Ohio.
Each item would be recorded on the bank reconciliation as follows: One important trait of the bank reconciliation is that it identifies transactions that have not been recorded by the company that are supposed to be recorded. Journal entries are required to adjust the book balance to the correct balance. In the case of Feeter, the first entry will record the collection of the note, as well as the interest collected. The second entry required is to adjust the books for the check that was returned from Berson. The third entry is to adjust the recording error for check 5386. The final entry is to record the bank service charges that are deducted by the bank but have not been recorded on the records. The previous entries are standard to ensure that the bank records are matching to the financial records. These entries are necessary to update Feeter‛s general ledger cash account to reflect the adjustments made by the bank.
Link to LearningIn which journal would adjusting entries be found?Answer and Explanation: Adjusting entries are found in c) the general journal. Adjusting entries and closing entries are recorded in the general ledger and this will cause temporary accounts to be set to zero for the new accounting cycle.
Which of the following items will require a journal entry following a bank reconciliation?Examples of items requiring a journal entry as the result of the bank reconciliation include:. Bank service charges which are often shown on the last day of the bank statement. ... . Check printing charges.. Customer checks that were deposited but are now returned as NSF (not sufficient funds). Bank fees for returned checks.. What is the correct order of the steps for adjusting entries?How to prepare your adjusting entries. Step 1: Recording accrued revenue. ... . Step 2: Recording accrued expenses. ... . Step 3: Recording deferred revenue. ... . Step 4: Recording prepaid expenses. ... . Step 5: Recording depreciation expenses.. Which account would normally not require an adjusting entry?When adjusting journal entries, you generally will never need to create an adjusting journal entry for the cash account. Accountants debit cash throughout the month to record inflows of cash and credit the cash account to reflect money going out of the business.
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