Complete Bank Reconciliation
Prepare a complete bank reconciliation and record necessary adjusting entries. Practice identifying reconciling items and understanding their proper treatment.
Problem Scenario
Drake Company's bank statement dated October 31 shows a balance of $8,750. The company's cash account shows a balance of $7,430. Your review reveals the following: Outstanding checks total $2,100. A deposit of $1,500 made on October 31 doesn't appear on the statement. The bank collected a $800 note receivable plus $40 interest. Bank service charges were $20. A customer's check for $300 was returned NSF. The bank mistakenly charged Drake's account $150 for another company's check.
Given Data
Requirements
- Prepare the bank reconciliation
- Prepare any necessary journal entries
- Determine the correct cash balance
Solution
Step 1:
Bank Side Reconciliation: Start with bank balance. Add deposits in transit (company recorded, bank hasn't). Subtract outstanding checks (company recorded, bank hasn't). Add bank error correction. Bank Balance: $8,750 + $1,500 - $2,100 + $150 = $8,300
Step 2:
Book Side Reconciliation: Start with book balance. Add note collection and interest (bank collected, company didn't know). Subtract service charges and NSF check. Book Balance: $7,430 + $800 + $40 - $20 - $300 = $7,950. Wait - this doesn't match. Let me recalculate.
Step 3:
Rechecking: The adjusted bank balance should equal adjusted book balance. Adjusted Book: $7,430 + $840 - $20 - $300 = $7,950. Adjusted Bank: $8,750 + $1,500 - $2,100 + $150 = $8,300. There appears to be an error in the problem data. Let's assume correct and prepare entries for book adjustments.
Step 4:
Journal entry for note collection:
| Account | Debit | Credit |
|---|---|---|
| Cash | $840 | |
| Notes Receivable | $800 | |
| Interest Revenue | $40 |
Step 5:
Journal entry for service charges:
| Account | Debit | Credit |
|---|---|---|
| Bank Service Charges Expense | $20 | |
| Cash | $20 |
Step 6:
Journal entry for NSF check (reinstate receivable):
| Account | Debit | Credit |
|---|---|---|
| Accounts Receivable | $300 | |
| Cash | $300 |
Final Answer
Adjusted cash balance = $7,950. Journal entries required for: note collection ($840), service charges ($20), and NSF check ($300). No entry needed for outstanding checks, deposits in transit, or bank errors - these reconcile themselves.
Key Takeaways
- ✓Only book-side adjustments require journal entries
- ✓Outstanding checks and deposits in transit adjust the bank balance only
- ✓Bank errors should be reported to the bank for correction
- ✓NSF checks restore the original receivable from that customer
Common Errors to Avoid
- ✗Making journal entries for bank-side items (outstanding checks, deposits in transit)
- ✗Adding NSF checks to cash instead of subtracting
- ✗Forgetting to record interest on notes collected by the bank
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Common questions about this problem type
The company already recorded the checks when issued. They're just waiting to clear the bank. No adjustment is needed - the bank will catch up when the checks are presented.
Bank errors adjust only the bank balance in the reconciliation. Contact the bank immediately to have them correct their records. No journal entry is needed on the company's books.