Cash
Practice As You Learn
Financial Accounting
Cash
Practice As You Learn
You will be required to do a bank reconciliation of the cash ending balance and the bank ending balance
Follow these steps:
1) Set up two columns – one for cash and one for bank
2) Start with the ending balance for the month for each
3) In the “cash” column – put the items the bank knows about and recorded and the company has not yet recorded
Non-sufficient funds check
Bank fees and service charges
Interest earned
Automatic deposits and withdrawals
4) In the “bank” column – put the items the company knows about and recorded and the bank has not yet recorded.
Outstanding checks
Deposits in transit
5) Record the fix for errors made. Put the error amount difference in the column of the one who made the error
6) Total the two columns to get the adjusted ending balance – The two columns will agree if you have accounted for all unknown transactions for both sides.
You must then make entries to the cash account to correct the cash balance.
Only make journal entries for amounts in the cash column.
Debit all reductions from cash (negative) for the account name impacted.
Credit all the additions to cash (positive) for the account name impacted.
Cash – Practice Problem – Prepare a bank reconciliation
The company has the following information for the month of February:
- The bank statement shows $4,687 for the ending balance 2/28
- The cash account balance is $7,389 on 2/28
- The bank service charge for February is $39
- Deposits not yet posted by the bank total $1,900
- Checks written by the company, not yet cleared by the bank total $624
- A note payment, automatically paid by the bank for the company was paid for $1,200. The payment included $128 for interest expense
- A customer check was marked “non sufficient funds” in the amount of $375
- A deposit in the amount of $1,800 was recorded by the bank as $1,900.
- Interest earned for the period was $88
A. Prepare the bank reconciliation for the company for the month of February
B. Prepare the journal entries required to the cash account.
Check Your Answer
A. Prepare the bank reconciliation – Follow these steps:
1) Set up two columns – one for cash and one for bank
2) Start with the ending balance for the month for each
| Cash | Bank | |
| Ending Balance 2/28 | $7,389 | $4,687 |
3) In the “cash” column – put the items the bank knows about and recorded and the company has not yet recorded
| 1) Non-sufficient funds check – always subtract | $375 |
| 2) Bank fees and service charges – always subtract | $39 |
| 3) Interest earned – always add | $88 |
| 4) Automatic deposits (add) and withdrawals (subtract) | $128 |
| $1072 |
4) In the “bank” column – put the items the company knows about and recorded and the bank has not yet recorded.
| Outstanding checks – always subtract | $624 |
| Deposits in transit – always add | $1,900 |
5) Record the fix of errors made by either, put the error fix in the column of the one who made the error – the company “cash” or the bank
The bank made the error – so it goes in the bank column
They recorded too much added to the account, so the error amount must be subtracted
$1,900 should be $1,800, so the difference is the error $100
6) Total the two columns to get the adjusted ending balance – The two columns must agree and will if you have accounted for all transactions correctly.
| Cash | Bank | ||
| Ending Balance 2/28 | $7,389 | $4,687 | |
| Bank service charge | ($39) | ||
| Deposits in transit | $1,900 | ||
| Outstanding checks | ($624) | ||
| Interest expense – auto | ($128) | ||
| PAyment on note | ($1,072) | ||
| NSF check | ($375) | ||
| Error on deposit | ($100) | ||
| Interest earned | 88 | ||
| Adjusted 2/28 balance | $5,863 | = | $5,863 |
B. Prepare the journal entries required to the cash account.
Important: You will only make journal entries for items in the cash column.
1st – Determine the difference in the cash column ending balance you started with and the adjusted ending balance
In this problem, cash decreased by $1,526
2nd – Start the journal entry with the cash account – debit for an increase and credit for a decrease calculated in 1st step In this case it is a credit.
3rd – Positives will be credit accounts and negatives will be debit accounts.
Record the reconciling items in the cash column ONLY
Bank service expense 39
Interest expense 128
Note payable 1,072
Accounts receivable 375
Cash 1,526
Interest income 88
Non-sufficient funds checks are always debited to accounts receivable. The customer still owes since the check bounced.