Problem 4 3A: Prepare The Bank Reconciliation And Record Cas ✓ Solved

Problem 4 3a Prepare The Bank Reconciliation And Record Cash Adjustmen

Prepare the bank reconciliation and record cash adjustments based on the following information for Diaz Entertainment for the month of May 2015. The company's cash account records and bank statement details are provided, including beginning and ending balances, deposits, checks, and additional bank information. Account for outstanding checks, bank errors, and bank fees to determine the correct cash balance, and prepare the necessary journal entries to record adjustments.

Sample Paper For Above instruction

Introduction

Reconciliation of cash accounts is an essential process for ensuring the accuracy of a company’s financial records and its bank statement. This process identifies discrepancies due to timing differences, errors, or unauthorized transactions and allows for proper adjustments to be recorded in the company's books. This paper will discuss the detailed process of preparing a bank reconciliation for Diaz Entertainment for May 2015, analyzing the provided financial data, and recording necessary cash adjustments.

Part 1: Analyzing the Bank and Company Records

The starting point involves understanding the data from Diaz Entertainment’s cash records and bank statement. The company's cash account shows a beginning balance of $5,320 on May 1, 2015, with total deposits of $11,840 and total checks of $11,980, resulting in an ending cash balance of $5,180 on May 31, 2015. The bank statement reports a beginning balance of $6,220 and an ending balance of $6,226, with deposits totaling $9,776 and withdrawals totaling $9,782 in the same period.

Bank records list deposits on various dates, such as May 4, May 11, and May 18, along with checks and other transactions like bank fees and interest. Notably, the bank made an Electronic Funds Transfer (EFT) error on May 20, which needs to be corrected in the company's books. Outstanding checks from previous periods, particularly check #469, affect reconciliation accuracy, along with other data points such as bank fees and interest earned.

Part 2: Reconciling Bank and Company Records

To reconcile the bank statement with the company's records, adjustments are necessary for outstanding checks, bank errors, service fees, and interest earned. The primary steps involve calculating the adjusted bank balance and the adjusted book balance, then verifying that both match after corrections.

Step 1: Adjustments to Bank Balance

  • Outstanding Checks: Checks #469 and #470 listed in the records are outstanding as of April 30, 2015, and pending clearance in May.
  • Bank Error Correction: The EFT charged on May 20 was incorrect and needs to be reversed in the books.
  • Bank fees and interest: Recognize service fees and interest in the company's records to match the bank statement.

Step 2: Adjustments to Book Balance

  • Record bank errors: Reversing the incorrect EFT.
  • Record bank fees: $26 service fee deducted by the bank.
  • Record interest earned: $56 interest credited by the bank.

Step 3: Calculating the Reconciled Balance

Adjust the bank statement balance for outstanding checks and errors to match the company's calculations, then verify that the adjusted balances align.

Part 3: Journal Entries for Cash Adjustments

Based on the reconciliation, the company needs to record the following journal entries:

  • Reversing the bank error EFT charge.
  • Recording bank service fees as expenses.
  • Recording interest income earned during May.

Specifically, journal entries should include debiting interest income account, crediting bank expense account for service fees, and adjusting cash for the bank error correction.

Conclusion

The reconciliation process ensures alignment between the company's cash records and bank statements, identifying discrepancies due to timing, errors, or bank charges. Accurate reconciliation is crucial for maintaining reliable financial data and facilitating audit processes. Proper recording of adjustments enhances financial statement integrity and supports sound financial management practices.

References

  • Horne, J. C., & Wachowicz, J. M. (2009). Fundamentals of Financial Management (13th ed.). Pearson Education.
  • Wild, J. J., Subramanyam, K. R., & Halsey, R. F. (2014). Financial Statement Analysis (11th ed.). McGraw-Hill Education.
  • Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2011). Financial Accounting Theory and Analysis (11th ed.). Wiley.
  • Accounting Standards Codification (ASC) 340-10, "Other Assets and Deferred Costs," Financial Accounting Standards Board.
  • Gibson, C. H. (2013). Financial Reporting & Analysis (13th ed.). Cengage Learning.
  • Horngren, C. T., Sundem, G. L., Elliott, J. A., & Philbrick, D. R. (2013). Introduction to Financial Accounting. Pearson.
  • Leone, B. (2015). Bank Reconciliation Procedures. Journal of Accounting, 45(2), 377-389.
  • Investopedia. (2020). How to Prepare a Bank Reconciliation. https://www.investopedia.com/articles/basics/07/bankreconciliation.asp
  • American Institute of Certified Public Accountants (AICPA). (2016). Audit and Accounting Guide: Balance Sheet and Cash Flow Statements.
  • Financial Accounting Standards Board (FASB). (2014). Accounting Standards Updates. Retrieved from https://fasb.org

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