ACCOUNTING 17NB

A17NB_002
CASH AND CASH EQUIVALENTS jcr_cpa

BANK RECONCILIATION PROCESS

1. Adjusting the Balance per Bank
Adjust the balance on the bank statement (Balance per Bank) to the true, adjusted, or corrected
balance. The items necessary are listed in the following schedule:
1. Balance per bank statement on Aug. 31, 2011
Adjustments:
Add: Deposits in transit
Deduct: Outstanding checks
Add or Deduct: Bank errors
Adjusted/corrected balance per bank

Deposits in transit are amounts already received and recorded by the company, but are not yet
recorded by the bank.

Because deposits in transit are already included in the company's Cash account, there is no need to
adjust the company's records. However, deposits in transit are not yet on the bank statement.
Therefore, they need to be listed on the bank reconciliation as an increase to the balance per bank in
order to report the true amount of cash.

Outstanding checks are checks that have been written and recorded in the company's Cash account,
but have not yet cleared the bank account. This results when the payee has not yet presented the
check to the bank for encashment. Checks written during the last few days of the month plus a few
older checks are likely to be among the outstanding checks.

Because all checks that have been written are immediately recorded in the company's Cash account,
there is no need to adjust the company's records for the outstanding checks. However, the
outstanding checks have not yet reached the bank and the bank statement. Therefore, outstanding
checks are listed on the bank reconciliation as a decrease in the balance per bank.

Identifying the outstanding checks for the current month

List of Disbursements/Book Credits Bank Debits/Bank Disbursements/Withdrawal
Outstanding checks previous months Bank Debits/Bank Disbursements/Withdrawal

Bank errors are mistakes made by the bank. Bank errors could include the bank recording an incorrect
amount, entering an amount that does not belong on a company's bank statement, or omitting an
amount from a company's bank statement.

2. Adjusting the Balance per Books

The second step of the bank reconciliation is to adjust the balance in the company's Cash account so
that it is the true, adjusted, or corrected balance. The items necessary are listed in the following
schedule:

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 2. Balance per books on Aug. 31, 2011
Adjustments:
Deduct: Bank service charges
Deduct: NSF checks & fees
Add: Interest earned
Add: Notes receivable collected by bank
Add or Deduct: Errors in company's cash account
Adjusted/corrected balance per books

Bank service charges are fees deducted from the bank statement for the bank's processing of the
checking account activity (accepting deposits, posting checks, mailing the bank statement, etc.) These
charges will not be recorded by the Company’s book during the current month for the reason that the
bank statement will be received on the subsequent month.

The service charges will have to be entered as an adjustment to the company's books. The company's
Cash account will need to be decreased by the amount of the service charges.

An NSF check is a check that was not honored by the bank of the person or company writing the check
because that account did not have a sufficient balance. As a result, the check is returned without
being honored or paid.

Because the NSF check and the related bank fee have already been deducted on the bank statement,
there is no need to adjust the balance per the bank. However, if the company has not yet decreased
its Cash account balance for the returned check and the bank fee, the company must decrease the
balance per books in order to reconcile.

Interest earned will appear on the bank statement when a bank gives a company interest on its
account balances. The amount is added to the checking account balance and is automatically on the
bank statement. Hence there is no need to adjust the balance per the bank statement. However, the
amount of interest earned will increase the balance in the company's Cash account on its books.

Notes Receivable are assets of a company. When notes come due, the company might ask its bank to
collect the notes receivable. For this service the bank will charge a fee. The bank will increase the
company's checking account for the amount it collected (principal and interest) and will decrease the
account by the collection fee it charges. Since these amounts are already on the bank statement, the
company must be certain that the amounts appear on the company's books in its Cash account.

Errors in the company's Cash account result from the company entering an incorrect amount, entering
a transaction that does not belong in the account, or omitting a transaction that should be in the
account. Since the company made these errors, the correction of the error will be either an increase
or a decrease to the balance in the Cash account on the company's books.

3. Comparing the Adjusted Balances

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After adjusting the balance per bank and after adjusting the balance per books, the two adjusted
amounts should be equal. The balances should be the true, correct amount of cash as of the date of
the bank reconciliation.

4. Preparing Journal Entries

Journal entries must be prepared for the adjustments to the balance per books. Adjustments to
increase the cash balance will require a journal entry that debits Cash and credits another account.
Adjustments to decrease the cash balance will require a credit to Cash and a debit to another account.

Reference: http://www.accountingcoach.com/online-accounting-course/13Xpg01.html

PROBLEMS
1. Determine the amount of cash and cash equivalents to be reported in the Statement of
Financial Position as at December 31, 2012.
A. Current account at Prime Bank P15,000
B. Current accounts at Prudent Bank (43,200)
C. Treasury bills (acquired 3 months before maturity) 150,000
D. Treasury bills (maturity date is 12/31/2015) 2,500,00
E. Payroll accounts 175,000
F. Foreign bank account – restricted (translated using the 4,000,000
12/31/12 exchange rate)
G. Postage stamps 450
H. Employee’s postdated check 3,500
I. IOU from the Vice-President 13,000
J. Credit memo from a supplier for a purchase return 7,200
K. Traveler’s check 15,000
L. Money order 7,000
M. Petty cash fund (P3,000 in currency and expense 10,000
receipts for P7,000)

2. Included in the CASH account of BAGSIK Company which amounted to P30,000 are the
following:
Treasury warrant P5,000
Treasury bills (3-month) 8,000
Petty cash vouchers 3,000
Currency and coins 5,000
Checking account 9,000
What is the correct cash balance?
A. P30,000 B. P25,000 C. P19,000 D. P14,000

3. Western Company reported a total cash and cash equivalent of P6,325,000 on December 31,
2009, which includes the following information:
o Two certificates of deposits, each totaling P500,000. These certificate of deposit have a
maturity of 120 days.
o A check that is dated January 12, 2009 in the amount of P125,000.
o A commercial paper of P2,100,000 which is due in 120 days.
o Currency and coins on hand amounted to 7,700.

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 Western Company has agreed to maintain a cash balance of P500,000 in one of its banks at all
times to ensure future credit availability (this amount was included in the above balance).
How much is the correct amount of cash and cash equivalents that Western Company should
report in its December 31, 2008 balance sheet?
A. P2,600,000 C. P5,200,000
B. P3,100,000 D. P6,200,000

4. Upon inspecting the company’s records on December 2011, you have seen that the cash account
has an amount of P90,000 which is already net of overdraft amounting to P8,000. The said
overdraft is from the company’s 2nd account in UCPB. Included in the P90,000 balance is a check
received from a customer which is dated February 2012 in the amount of P10,000. Furthermore,
the company has not yet recorded a disbursement amounting to P11,000 in payment of account.
Compute for the correct amount of cash.
A. P61,000 B. P69,000 C. P80,000 D. P90,000

5. Pigeon Company had the following account balances on December 31, 2011:
Cash in bank – current account 5,000,000
Cash in bank – payroll account 1,000,000
Cash on hand 500,000
Cash in bank – restricted account for building
construction expected to be disbursed in 2012 3,000,000
Time deposit, purchased December 15, 2011 and
due March 15, 2012 2,000,000

The cash on hand includes a P 200,000 check payable to Pigeon, dated January 15, 2012. What
total amount should be reported as “cash and cash equivalent” on December 31, 2011?
A. 6,300,000 C. 6,500,000
B. 8,300,000 D. 8,700,000

6. A petty cash fund amounting to P15,000 has just been established during January. Accordingly,
P9,000 worth of expenses have been paid out of the said fund and replenishments were made
only on the following month. Salaries amounting to P70,000 were paid by the company during the
month of January but were not taken from its petty cash. No other expenses were incurred during
the entire month and the company uses Imprest Fund System.

If an unadjusted trial balance would be prepared at the end of January, the amount of Petty Cash
Fund that would be reflected would be
A. P85,000 B. P70,000 C. P79,000 D. P15,000

7. The checkbook balance of Dove Company on December 31, 2011 was P 4,000,000. Data about
certain cash items follow:
o A customer check amounting to P 200,000 dated January 2, 2012 was included in the
December 31, 2011 checkbook balance.

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 o Another customer check for P 500,000 deposited on December 22, 2011 was included in its
checkbook balance but returned by the bank for insufficiency of fund. This check was re-
deposited on December 26, 2011 and cleared two days later.
o A P 400,000 check payable to supplier dated and recorded on December 30, 2011 was mailed
on January 16, 2012.
o A petty cash fund P 50,000 with the following summary on December 31, 2011:
Coins and currencies 5,000
Petty cash vouchers 43,000
Return value of 20 cases of soft drinks 2,000
50,000
o A check of P 43,000 was drawn on December 31, 2011 payable to Petty Cash.

What is the amount to be reported as “cash” on December 31, 2011?

A. 4,248,000
B. 4,200,000
C. 4,205,000
D. 3,748,000

8. In preparing its bank reconciliation at December 31, 2008, Smiley Company has the following
available data:
Balance per bank statement, December 31, 2008 P 38,075
Deposit in transit, December 31, 2008 5,200
Outstanding checks, December 31, 2008 6,750
Amount erroneously credited by bank to Smiley`s account,
December 28, 2008 400
Bank service charges for December 75

How much is Smiley`s adjusted cash in bank balance at December 31, 2008?
A. P36,050 c) P36,450
B. P36,125 d) P36,525

9. As of June 30, 2008, the bank statement of Marine Trading had an ending balance of P373, 612.
The following data were assembled in the course of reconciling the bank balance:
o The Bank erroneously credited Marine Trading for P2,150 on June 19.
o During the month, the bank charged NSF checks amounting to P 2,340 of which P800 had
been deposited on the 24th of June.
o Collection for June 30 totaling P10,330 was deposited the following month.
o Checks outstanding as of June 30 were P30,205.
o Notes collected by the bank for Marine Trading were P8,150 and the corresponding bank
charges were P50.
What is the adjusted bank balance on June 30, 2008?
A. P353,147 C. P351,587
B. P353,927 D. P359,687

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10. Thesaurus, Inc. reported a balance of P43,000 in its Cash account at the end of the month. There
were P20,000 deposits in transit and P15,000 outstanding checks. The bank statement showed a
balance of P50, 000, including a note with face value of P15,000, and a P6,000 service charge.
How much is the interest on the note collected by the bank?
A. P 3, 000 C. P9, 000
B. P 6, 000 D. P12, 000

11. Everlasting Company is preparing its March 31 bank reconciliation. The following data are
available:
From the February 28 bank reconciliation:
Deposits in transit, P1, 700
Outstanding checks, P3, 900
March data: Per bank Per book

Balance, February 28 P74, 140 P71, 940

March deposits reflected 47, 600 49, 000
March checks reflected (61, 700)* (61, 000)
Note collected (including P200 interest) 20, 000
Service charge (120)
Balance, March 31 P 79,920 P59,940
*Erroneously includes a check drawn by Everlasting Company for P 1, 500.

Question 1: How much is the deposits in transit at March 31?

A. P 300 C. P3, 100
B. P1, 400 D. P4, 500
Question 2: How much is the outstanding checks at March 31?
A. P4, 700 C. P6, 900
B. P6, 200 D. P8, 600

12. The following information was included in the bank reconciliation for Bayside Company for
October and November 2011:
Checks and charges recorded by bank in November
including a November service charge of P4,000
and NSF check of P20,000 550,000
Service charge made by bank in October and
recorded by depositor in November 2,000
Total credits to cash in all journals during November 620,000
Customer’s NSF check returned in October and
redeposited in November (no entry made by
depositor in either October or November) 40,000
Outstanding checks on October 31, 2010 that
cleared in November 230,000

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 What is the total amount of outstanding checks on November 30, 2011?
A. 282,000
B. 300,000
C. 322,000
D. 302,000

Items 8 to 10
Lazer Company had the following bank reconciliation on June 30, 2011:

Balance per bank statement, June 30 3,000,000

Deposit in transit 400,000
Total 3,400,000
Outstanding checks (900,000)
Balance per book, June 30 2,500,000

The bank statement for the month of July showed the following:

Deposits (including P200,000 note collected for Lazer) 9,000,000

Disbursements (including P140,000 NSF check and
P10,000 service charge 7,000,000

All reconciling items on June 30 cleared through the bank in July. The outstanding checks totaled to
P600,000 and the deposit in transit amounted to P1,000,000 on July 31.

13. What is the cash balance per book on July 31?

A. 5,400,000
B. 5,350,000
C. 5,550,000
D. 4,500,000
14. What is the amount of cash receipts per book in July?
A. 9,400,000
B. 9,600,000
C. 8,600,000
D. 9,800,000
15. What is the amount of cash disbursement per book in July?
A. 6,550,000
B. 6,700,000
C. 7,300,000
D. 6,850,000

“You may never know what results come of your action,

But if you do nothing there will be no result “

*** END ***

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