Problem 6-1 Bank Reconciliation
The following information is available to assist you in preparing a bank reconciliation for Calico
Corners on May 31, 2012:
a. The balance on the May 31, 2012, bank statement is $8,432.11.
b. Not included on the bank statement is a $1,250 deposit made by Calico Corners late on
May 31.
c. A comparison between the canceled checks returned with the bank statement and the company records indicated that the following checks are outstanding at May 31:
No. 123 $ 23.40
No. 127 145.00
No. 128 210.80
No. 130 67.32
d. The Cash account on the company’s books shows a balance of $9,965.34.
e. The bank acts as a collection agency for interest earned on some municipal bonds held by
Calico Corners. The May bank statement indicates interest of $465.00 earned during the
month.
f. Interest earned on the checking account and added to Calico Corners’ account during May
was $54.60. Miscellaneous bank service charges amounted to $50.00.
g. A customer’s NSF check in the amount of $166.00 was returned with the May bank
statement.
h. A comparison between the deposits listed on the bank statement and the company’s books
revealed that a customer’s check in the amount of $123.45 was recorded on the books during
May but was never added to the company’s account. The bank erroneously added the check
to the account of Calico Closet, which has an account at the same bank.
i. The comparison of deposits per the bank statement with those per the books revealed that another customer’s check in the amount of $101.10 was correctly added to the company’s account. In recording the check on the company’s books, however, the accountant erroneously increased the Cash account by $1,011.00
Required
1. Prepare a bank reconciliation in good form.
2. Record the necessary journal entries on the company’s books resulting from the bank reconciliation prepared in part (1) above.
3. A friend says to you: ‘‘I don’t know why companies bother to prepare bank reconciliations it seems a waste of time. Why don’t they just do like I do and adjust the Cash account for any difference between what the bank shows as a balance and what shows up in the books?’’
Explain to your friend why a bank reconciliation should be prepared as soon as a bank statement is received.
To prepare a bank reconciliation, follow these steps:
1. Start with the balance on the bank statement: $8,432.11
2. Add any deposits in transit not included on the bank statement. In this case, there is a $1,250 deposit made by Calico Corners late on May 31. The adjusted balance now becomes $8,432.11 + $1,250 = $9,682.11.
3. Subtract any outstanding checks. By comparing the canceled checks with the company records, we find the following outstanding checks: No. 123: $23.40, No. 127: $145.00, No. 128: $210.80, No. 130: $67.32. Subtracting these amounts from the adjusted balance: $9,682.11 - ($23.40 + $145.00 + $210.80 + $67.32) = $9,235.59.
4. Compare the deposits listed on the bank statement with those in the company's records. We find that a customer's check for $123.45 was recorded on the books but not added to the company's account, and the bank erroneously added it to the account of Calico Closet. Subtracting this amount from the adjusted balance: $9,235.59 - $123.45 = $9,112.14.
5. Add or subtract any other items that affect the balance. In this case, the bank statement shows interest earned of $465.00 and interest earned on the checking account of $54.60. We also have bank service charges of $50.00. Adding the interest and subtracting the service charges: $9,112.14 + $465.00 + $54.60 - $50.00 = $9,581.74.
6. Finally, compare the adjusted bank balance with the Cash account balance on the company's books. The Cash account balance on the books is given as $9,965.34. The difference between the two balances represents the reconciling items and should be investigated for any errors.
To record the necessary journal entries resulting from the bank reconciliation, follow these steps:
1. Increase the Cash account for any deposits in transit not included on the bank statement. In this case, we add the $1,250 deposit made by Calico Corners late on May 31.
2. Decrease the Cash account for any outstanding checks. Reduce the balance by the amounts of the outstanding checks: No. 123: $23.40, No. 127: $145.00, No. 128: $210.80, No. 130: $67.32.
3. Adjust the Cash account for any other reconciling items, such as interest earned or bank service charges. Add the interest earned of $465.00 and the interest earned on the checking account of $54.60, and subtract the bank service charges of $50.00.
To address your friend's question about why companies bother to prepare bank reconciliations, there are several reasons:
1. Detecting Errors: Preparing a bank reconciliation allows companies to identify errors or discrepancies between their records and the bank statement. This could include errors in recording deposits, issuing checks, or bank errors. By reconciling, companies can locate and correct these errors promptly, ensuring accurate financial records.
2. Fraud Prevention: Bank reconciliations can help in detecting fraudulent activities, such as unauthorized withdrawals or forged checks. By comparing the bank statement with their own records, companies can identify any suspicious transactions and take appropriate actions.
3. Cash Flow Management: Bank reconciliations help companies monitor their cash position accurately. By reconciling, companies can ensure that their cash balances reflected in their books are accurate, allowing them to make informed decisions about cash management, including payments and investments.
4. Internal Control: Preparing bank reconciliations is an essential part of internal control procedures. It helps ensure that company funds are accounted for correctly and that any discrepancies are promptly investigated. This helps in establishing transparency, preventing fraud, and promoting good governance practices.
In summary, preparing bank reconciliations is crucial for ensuring accuracy in financial records, detecting errors or fraud, managing cash flow effectively, and maintaining strong internal control procedures. It is not a waste of time but rather an essential process for ensuring financial integrity.