College Accounting, by Heintz and Parry

Chapter 8: Accounting for Cash

The Eddie and the Losers bank statement arrived on Feb. 18, but it was dated Feb. 16. It said that the band had $258 in its account. However, Eddie looked at his general ledger and his checkbook, and they both listed $563 in the account as of Feb. 16.

Question: Does this mean that somebody made an error? Shouldn’t the two balances always agree?If not, why not?

Answer: No, the balances usually won’t agree. Although it could mean that an error has been made, the difference is usually because you know about transactions that the bank doesn’t know about yet, and the bank knows about transactions that you don’t know about yet.

The process of making sure that the balances would be the same if all information were known by both parties is called reconciling the bank statement.

Eddie started the reconciliation by listing the bank statement balance. Then he compared the bank statement to his checkbook to look for a deposit in transit. This is a deposit that was recorded on the books by the statement date but not received and recorded by the bank. Eddie found that the bank had not yet recorded the $250 that Eddie and the Losers got for playing a Valentine’s Day Dance at the Rho Rho Rho sorority house. Eddie and the Losers Bank Reconciliation Feb. 16, 2000Bank Stmt. Balance, Feb. 16 258 Add: Deposit in transit 250 508

Next, Eddie compared the bank statement to his checkbook to look for outstanding checks: checks recorded on the books by the statement date but not received and recorded by the bank. Eddie found that the bank had not yet recorded the $80 in checks that Eddie paid the band members for the Valentine’s Day Dance. Outstanding checks can be listed individually on the bank reconciliation or on a supporting schedule. Subtracting the total of these checks gives you the adjusted bank balance.

Eddie and the Losers Bank Reconciliation Feb. 16, 2000Bank Stmt. Balance, Feb. 16 258 Add: Deposit in transit 250 508Deduct: Outstanding checks 80Adjusted Bank Balance 428

At this point, Eddie listed the cash balance that was in both his checkbook and his general ledger cash account. Eddie and the Losers Bank Reconciliation Feb. 16, 2000

Bank Stmt. Balance, Feb. 16 258 Add: Deposit in transit 250 508Deduct: Outstanding checks 80Adjusted Bank Balance 428

Book Balance, Feb. 16 563

While finding outstanding checks, Eddie discovered that check #115, for sound equipment rental, was recorded as $32 on the books when it was actually for $23, per the bank statement (and the cancelled check).

Question: In relation to this error, what amount should be listed on the bank reconciliation, and should it be added to or subtracted from the book balance?

Answer: Since Eddie subtracted too much from his account, the difference of $9 must be added back to the book balance. Eddie and the Losers Bank Reconciliation Feb. 16, 2000

Bank Stmt. Balance, Feb. 16 258 Add: Deposit in transit 250 508Deduct: Outstanding checks 80Adjusted Bank Balance 428

Book Balance, Feb. 16 563Add: Error on Check 115 9 572

The bank statement listed three items that were not on Eddie’s books. First, Eddie discovered that he forgot to record an ATM withdrawal for $40 (he took Kara to dinner for Valentine’s Day before the band played). Eddie and the Losers Bank Reconciliation Feb. 16, 2000

Bank Stmt. Balance, Feb. 16 258 Add: Deposit in transit 250 508Deduct: Outstanding checks 80Adjusted Bank Balance 428

Book Balance, Feb. 16 563Add: Error on Check 115 9 572Deduct: ATM withdrawal 40

The bank statement also listed an NSF check received by the band. An NSF (“bounced”) check does not get added to the band’s account because the check writer’s account does not have enough money to cover it. In this case, Eddie deposited the check from the Big Brothers/Big Sisters fundraiser before the college organization had a chance to deposit the fundraiser’s proceeds into their account.

Question: What do the initials NSF stand for?

Answer: Not sufficient funds. This amount is also deducted from the book balance, as is the bank’s monthly service charge. Deductions are totaled and subtracted. Eddie and the Losers Bank Reconciliation Feb. 16, 2000

Bank Stmt. Balance, Feb. 16 258 Add: Deposit in transit 250 508Deduct: Outstanding checks 80Adjusted Bank Balance 428

Book Balance, Feb. 16 563Add: Error on Check 115 9 572Deduct: ATM withdrawal 40 NSF check 100 Bank service charge 4 144Adjusted Book Balance 428

Since the totals for adjusted bank balance and adjusted book balance are in agreement, Eddie can double underline both totals. He is now ready to make journal entries for all adjustments to the book balance. Eddie and the Losers Bank Reconciliation Feb. 16, 2000

Bank Stmt. Balance, Feb. 16 258 Add: Deposit in transit 250 508Deduct: Outstanding checks 80Adjusted Bank Balance 428

Book Balance, Feb. 16 563Add: Error on Check 115 9 572Deduct: ATM withdrawal 40 NSF check 100 Bank service charge 4 144Adjusted Book Balance 428

All entries based on the bank reconciliation involve cash. The error correction entry is to the same two accounts involved in the original incorrect entry. Since it was added to the cash balance, cash is the debit. Equipment rental expense is the credit.

Date Description P. R. Debit Credit 2000 Feb. 16 Cash 9.00 Equipment Rental Expense 9.00

Because the ATM withdrawal was for personal use, the drawing account is used. Since it was subtracted from the cash balance, cash is the credit.

Question: What accounts are involved in the entry for the NSF check?

Date Description P. R. Debit Credit 2000 Feb. 16 Cash 9.00 Equipment Rental Expense 9.00 16 Eddie O’Hare, Drawing 40.00 Cash 40.00

Answer: Since Eddie will request another check to replace the NSF check, the amount should be put into accounts receivable for now. Since it was subtracted from the cash balance, cash is the credit.

Date Description P. R. Debit Credit 2000 Feb. 16 Cash 9.00 Equipment Rental Expense 9.00 16 Eddie O’Hare, Drawing 40.00 Cash 40.00

16 Accounts Receivable 100.00 Cash 100.00

The bank service charge will generally be very small, so the amount should be put into miscellaneous expense. Since it was subtracted from the cash balance, cash is the credit.

Date Description P. R. Debit Credit 2000 Feb. 16 Cash 9.00 Equipment Rental Expense 9.00 16 Eddie O’Hare, Drawing 40.00 Cash 40.00

16 Accounts Receivable 100.00 Cash 100.00 16 Miscellaneous Expense 4.00 Cash 4.00

The band got a big break when they played their next gig (at an on-campus club). In the audience was Nick Flannery, a well-known local music promoter with the nickname “Mr. Bandman.” After the gig, Nick talked to Eddie and offered to be the band’s agent.

When he found out that Eddie was an accounting major, he also offered him a part-time job. It seems that he was starting a store that would sell new and used compact discs, and he needed a bookkeeper/cashier to work in “The CD Side of Town.”

Eddie’s first day on the job was the day before the grand opening. His first task was to take a $100 check (made out to “cash”) down to the store’s bank and get small bills and change for a petty cash box. This box would be used for small purchases of supplies, stamps, low-priced business lunches, and other miscellaneous items. Eddie established the fund with this journal entry: Date Description P. R. Debit Credit 2000 Mar. 10 Petty Cash 100.00 Cash

100.00

During the grand opening, Nick became aware of many things he needed: stapler, tape, cash register tapes, etc. Each time, he or Eddie would fill out a slip showing how much cash was taken from petty cash, make the purchase, and return the change and the receipt. By Monday, the fund was under $25, so Nick wrote another check to “cash” to replenish the fund. The receipts were sorted and added to see what accounts were involved, and the entry looked like this: Date Description P. R. Debit Credit 2000 Mar. 13 Supplies 41.50 Miscellaneous Expense 8.45 Advertising Expense 28.22

Cash 78.17

During the grand opening, Eddie experienced a common event in the retail business: at day’s end, his sales total from the cash register did not balance with the cash in the register. To balance his cash debit with his sales credit, he used an account called Cash Short and Over. The first day, Eddie was $2.24 short, so the account was debited like an expense. On day two, he was $1.89 over, so the account got credited like a revenue account. Only at year end would they know what type of account this would be.

Date Description P. R. Debit Credit 2000 Mar. 11 Cash 1,468.19 Cash Short and Over 2.24 Sales 1,470.43

12 Cash 1,124.23 Sales 1,122.34

Cash Short and Over 1.89

As a clue to completing the major task of this chapter, reconciling a bank statement, just remember the following: Unless you find a bank error, there are only two items used to adjust the bank balance:

Bank Balance + Deposits in Transit Outstanding Checks = Adjusted Bank Balance

All other reconciling items impact the book balance.