Problem 8 - Accounting

Question

Identify each of the following reconciling items as: (a) an addition to the cash balance according to the bank statement, (b) a deduction from the cash balance according to the bank statement, (c) an addition to the cash balance according to the depositor's records, or (d) a deduction from the cash balance according to the depositor's records. (None of the transactions reported by bank debit and credit memorandums have been recorded by the depositor.) 1\. Check drawn by depositor for \(\$ 300\) but incorrectly recorded as \(\$ 3,000\). 2\. Check of a customer returned by bank to depositor because of insufficient funds, \(\$ 775 .\) 3\. Bank service charges, \(\$ 35\). 4\. Check for \(\$ 129\) incorrectly charged by bank as \(\$ 219\). 5\. Outstanding checks, \(\$ 6,137.68\). 6\. Deposit in transit, \(\$ 7,500\). 7\. Note collected by bank, \(\$ 12,000\).

Step-by-Step Solution

Answer

1. c; 2. d; 3. d; 4. a; 5. b; 6. a; 7. c

Step 1: Analyzing the Depositor's Check Error

The depositor wrote a check for $300, but it was recorded as $3,000 in their records. This means the depositor's records show $2,700 ($3,000 - $300) too much deducted. To correct, you add back $2,700 to the depositor's records.

Step 2: Insufficient Funds Check

A customer's check for $775 was returned due to insufficient funds. This check was deposited but not cleared, reducing the depositor's bank balance without affecting the bank statement. The $775 must be deducted from the depositor's records.

Step 3: Bank Service Charges

The bank charged $35 for service fees. This needs to be recorded by the depositor as a deduction in their records as it's a reduction in cash balance not yet accounted for.

Step 4: Bank's Check Error

The bank incorrectly reduced the account by $219 for a check meant to be $129, an error of $90 ($219 - $129). This amount should be added back to the bank statement balance as it's an overcharge.

Step 5: Outstanding Checks

Outstanding checks totaling $6,137.68 have been written but not yet cleared by the bank. These should be deducted from the bank statement balance as they are yet to be cashed but reduce available cash.

Step 6: Deposit in Transit

A deposit of $7,500 was made but not yet reflected on the bank statement. This should be added to the bank statement balance as it increases available cash once processed.

Step 7: Note Collected by Bank

The bank has collected a note worth $12,000 not yet recorded by the depositor. This should be added to the depositor's records, increasing the cash balance.

Key Concepts

Depositor's Records

Depositor’s records are logs that keep track of all transactions involving money received and spent by an individual or company. These records ensure that every penny is accounted for, predicting the actual cash available. Often, a depositor's records may show discrepancies if transactions haven't been recorded correctly or are delayed in processing.

For instance, if a check is drawn for $300, but mistakenly recorded as $3,000, the depositor’s records will show an excess deduction of $2,700. Adjusting this involves adding back the incorrect amount, ensuring the records reflect accurate information.

• Keep all documents organized.
• Note every transaction promptly.
• Regularly compare records with other financial statements to catch errors quickly.

Bank Statement

A bank statement is like a report card from your financial institution. It lists all the transactions that have occurred over a specified time. It's crucial to verify this document against your own records to identify any mismatches.

Bank statements ensure transparency with entries made for every check, deposit, or transaction. Sometimes errors happen, like the bank incorrectly charging $219 for a $129 check.

Correcting such discrepancies involves adding back the overcharged amount. Understanding and reviewing bank statements are vital: they validate your recorded transactions and highlight any bank-side issues.

• Review statements monthly.
• Check for errors regularly.
• Acknowledge all bank fees for service charges.

Cash Balance Adjustments

Cash balance adjustments refer to changes made in the recorded cash balance so that it matches accurate figures. This ensures that the depositor’s and bank's records are in sync and correct. Adjustments can arise from discrepancies like bank errors, unrecorded notes, or delayed transactions.

For instance, a deposit in transit worth $7,500 should be added to the bank statement as it wasn’t reflected yet. Similarly, outstanding checks, still pending, need to be deducted until they clear.

Adjustments are vital for reflecting the true available cash balance at any given time.

• Ensure all adjustments reflect true cash flow.
• Perform adjustments regularly, preferably monthly.
• Communicate with your bank to resolve any persistent discrepancies.