Help. Confused about this basic Acct 101 question.

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  • #193385
    Anonymous
    Inactive

    I feel embarrassed even asking this, but I am just stumped on why the answer is what it is.

    Company ABC’s bank statement shows a balance of $54,200. Reconciliation of the statement with company books reveals the following information:

    Bank service charge $10

    Insufficient funds check $650

    Checks outstanding $1,500

    Deposits in transit $350

    What is the net cash balance after the reconciliation?

    First off, this question is asking what our cash amount should be on our books after reconciling, right? We don’t reconcile our bank account, we reconcile our books to our bank account right?

    This is the answer and the calculations:

    54,200 + 350 – 1,500 = $53,050

    Why are we subtracting the $1500 of outstanding checks? We are reconciling our books right? We write our checks out of our books, right? For example, at work, we write out checks out of Quicken. So, even though the checks are outstanding, our books reflect the reduction in our money in quicken. So, why are we reducing that balance again? If anything, we should be adding them to reflect our current money. The checks have not been deposited/cashed by the recipients, so our balance in our books is actually $1,500 less than what it really is.

    Can’t believe I am stumped on accounting 101 stuff.

    edit: sorry, forgot to add this post to the correction subforum.

Viewing 6 replies - 1 through 6 (of 6 total)
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  • #662133
    Jaane
    Participant

    Hello allaboutstout!

    Here is how I approach the problem:

    The starting point is 54200 from the BANK's point of view.

    The BANK ALREADY KNOWS about the service charge and the insufficient funds check, so you do not adjust the starting point from the Bank's point of view.

    So what information does the Bank not have? The bank DOES NOT KNOW about the checks you have written which are outstanding, so subtract the $1500 from the 54200.

    The bank also DOES NOT KNOW that you have dropped some deposits totalling $350 into the overnight drop box, so ADD that amount.

    I hope this helps.

    P.S. I wasn't yelling with the CAPS, just making it easier to understand.

    #662134
    Anonymous
    Inactive

    they probably assume you use the actual books, not the software

    #662135
    Anonymous
    Inactive

    Thanks, ya I get all that, but I guess what confused me was what bank we are making the adjustments in. I always thought we adjust up/down our books based on what the bank has. I guessed it confused me because all the practice problems in my review video has him adjusting the company books (quicken), and not the actual bank.

    #662136
    Anonymous
    Inactive

    you are not adjusting bank, deposits in transit haven't hit your bank account yet, but for accounting purposes you assume they did, because they will soon so you add them to your book cash balance as if they were already deposited. Same with outstanding check. They are not cleared yet but yo know will be so you subtract them from your book balance

    #662137
    Missy
    Participant

    You start with the bank balance and adjust it by outstanding book items because the assumption is everything that is reflected in the bank had already been reflected in the books. There should in theory be no bank items to be adjusted in the books.

    Old timer,  A71'er since 2010.

    Finance manager/HR manager

     

     

    Licensed Massachusetts Non Reporting CPA since 2012
    Finance/Admin/HR Manager

    #662138
    Jaane
    Participant

    Hey again, allaboutstout.

    I am a visual person, but I will try to describe in words how I approach bank reconciliations.

    Always start with the bank statement amount first. Think of it this way, your books should be more updated from your point of view as a business compared to whatever balance the bank has. The only exceptions to this are insufficient funds fees, bank fees, and errors (okay, and any deposits that go directly to the bank). I tell myself that I am using the bank statement as a starting point to work TOWARD my book balance. Put another way, my book balance–aside from the exceptions I just mentioned–is sort of like the “check figure.” It helps me to approach the problem this way. That is not at all the “right way” to describe it (I doubt an accounting professor would say it this way), but it helps me make the proper adjustments.

    EDIT: I debated just deleting this since mla said it much better, but I will leave it.

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