Notice that listed in the Checks and Debits column there is a deduction for $18 coded NSF. This entry refers to a check for $18 received from a customer and deposited by ROW.COM with its bank. The bank processed the check through banking channels to the customer’s bank, but the account did not have sufficient funds to cover the check. The customer’s bank therefore returned it to ROW.COM’s bank, which then charged it back to ROW.COM’s account. This type of check often is called an NSF check (not sufficient funds). The NSF check is now a receivable; consequently, ROW.COM must make an entry to debit Receivables and credit Cash for the $18. Notice the $6 listed on June 30 in the Checks and Debits column and coded SC. This is the code for bank service charges. The bank statement included a memo by the bank explaining this service charge (which was not documented by a check). ROW.COM must make an entry to reflect this $6 decrease in the bank balance as a debit to a relevant expense account, such as Bank Service Expense, and a credit to Cash. Notice the $20 listed on June 18 in the Deposits and Credits column and coded INT for interest earned. The bank pays interest on checking account balances, and increased ROW.COM’s account for interest earned during the
period. ROW.COM must record the interest by making an entry to debit Cash and credit Interest Income for the $20. Need for Reconciliation A bank reconciliation is the process of comparing (reconciling) the ending cash balance in the company’s records and the ending cash balance reported by the bank on the monthly bank statement. A bank reconciliation should be completed at the end of each month. Usually, the ending cash balance as shown on the bank statement does not agree with the ending cash balance shown by the related Cash ledger account on the books of the company. For example, the Cash ledger account of ROW.COM showed the following at the end of June (ROW.COM has only one checking account): Cash (A) June 1 balance 7,090.00 June checks written 3,800.00 June deposits 5,750.00 Ending balance 9,040.00 The $8,322.20 ending cash balance shown on the bank statement ( Exhibit 6.5 ) differs from the $9,040.00 ending balance of cash shown on the books of ROW.COM. Most of this difference exists because of timing differences in the recording of transactions: 1. Some transactions affecting cash were recorded in the books of ROW.COM but were not shown on the bank statement. 2. Some transactions were shown on the bank statement but had not been recorded in the books of ROW.COM. Some of the difference may also be caused by errors in recording transactions. The most common causes of differences between the ending bank balance and the ending book balance of cash are as follows: 1. Outstanding checks. These are checks written by the company and recorded in the company’s ledger as credits to the Cash account that have not cleared the bank (they are not shown on the bank statement as a deduction from the bank balance). The outstanding checks are identified by comparing the list of canceled checks on the bank statement with the record of checks (such as check stubs or a journal) maintained by the company.
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- Spring '15
- ab bhushan