Outstanding checks. The company has issued checks that have not yet been presented to the bank for payment. Since they have not been presented, the bank does not record these checks in its records. This difference will eventually vanish, when the bank receives the checks.
Deposits in transit. The company records received cash and then sends the cash to the bank. If the cash is still in transit as of month-end, then the bank will not record it until the following month. As was the case with outstanding checks, this difference will vanish when the bank receives the deposits.
Interest on deposited cash. Depending on the nature of the account, the bank may credit interest income to the account. The company is not aware of this amount until the bank statement arrives, and so has not yet recorded it.
Bank service fees. The bank charges the account for a variety of services, and removes the related cash from the company’s account. The company is not aware of these charges until the bank statement arrives, and so has not yet recorded them.
Check printing charges. The bank charges the company to print additional checks for it, and removes the related cash from the company’s account. The company is not aware of the amount of this charge until the bank statement arrives, and so has not yet recorded it.
Bank error. The bank has incorrectly recorded a transaction. In this case, the bank must be notified to correct the error.
Company error. The company has incorrectly recorded a cash-related transaction. In this case, the company accountant corrects the error.
Documentation of Bank Balance and Book Balance Differences
When any of these differences have already been recorded in the company’s records but not those of the bank, they are itemized as reconciling items on the bank reconciliation. Examples are outstanding checks and deposits in transit. Outstanding checks are listed as a deduction from the bank balance, while deposits in transit are added to the bank balance.
When any of these differences are listed on the bank statement, they should be recorded on the books of the company, using journal entries. Examples of items to be entered in this way are the interest on deposited cash, bank service fees, check printing charges, and company recordation errors.
Reasons a Bank Balance Will Differ from a Company's Balance
Some of the reasons for a difference between the balance on the bank statement and the balance on the books include:
- Outstanding checks
- Deposits in transit
- Bank service charges and check printing charges
- Errors on the company's books
- Electronic charges and deposits that appear on the bank statement but are not yet recorded in the company's records
How to Document the Differences
Any items that are already recorded in the company's general ledger accounts, but have not yet appeared on the bank statement (outstanding checks, deposits in transit), will be noted as an adjustment to the balance per bank statement. Outstanding checks are a deduction to the balance per bank; deposits in transit are an addition to the balance per bank.
If an item is on the bank statement but has not yet been entered on the books, the items are noted as an adjustment to the balance per books. Bank service charges, check printing charges, and other electronic deductions that are not yet recorded in the company's accounts will become deductions from the cash balance per the books. Electronic deposits not yet recorded by the company will become additions to the cash balance per books.
32) A good internal control system would require that the employee who handles cash must not beinvolved in:A) Reconciling the bank statement.***B) The accounts payable function.C) Hiring decisions.D) Daily operations of the company.
33) Which of the following is correct with respect to a bank reconciliation?
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34) After preparing the bank reconciliation, an NSF check would result in which of the following whenrecording the adjustment to the company's cash balance?
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35) The following information pertains to a company's cash balance and bank reconciliation as of August31:Company balance before reconciliation$5,000Checks outstanding$2,500Notes collected by the bank$2,200Service fee$50Deposits outstanding$2,000What is the correct cash balance for the company?
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