Items on the Bank Reconciliation Requiring Adjustments
1. Outstanding Checks:
* Description: Checks issued by the company but not yet cashed by the recipient.
* Reason for Adjustment: The company has recorded these checks as expenses, but the bank hasn't yet deducted them from the balance.
* Adjustment: Reduce the company's cash balance (debit Cash, credit the appropriate expense account).
2. Deposits in Transit:
* Description: Deposits made by the company but not yet recorded by the bank.
* Reason for Adjustment: The company has already increased its cash balance, but the bank hasn't yet added it.
* Adjustment: Increase the company's cash balance (debit Cash, credit the appropriate revenue account).
3. Bank Charges (Service Charges, NSF Checks):
* Description: Fees charged by the bank (e.g., monthly service charges) and non-sufficient funds (NSF) checks that were deposited by the company.
* Reason for Adjustment: The company wasn't aware of these charges until receiving the bank statement.
* Adjustment: Reduce the company's cash balance (debit the appropriate expense account, credit Cash).
4. Bank Collections (Notes Receivable, Interest Received):
* Description: Payments received by the bank on behalf of the company (e.g., from a customer's note receivable).
* Reason for Adjustment: The company may not have yet recorded the collection of the note or the interest income.
* Adjustment: Increase the company's cash balance (debit Cash, credit Notes Receivable or Interest Income).
5. Errors:
* Description: Mistakes made by either the company or the bank in recording transactions.
* Reason for Adjustment: To correct the error and ensure accurate accounting.
* Adjustment: The nature of the adjustment depends on the specific error. It might involve increasing or decreasing cash, adjusting revenue or expense accounts, or correcting balances in other accounts.
Key Points to Remember:
* Purpose of Bank Reconciliation: The primary goal of a bank reconciliation is to match the company's cash balance in its books with the balance reported by the bank.
* Only Adjusting Company Books: Adjustments are typically made only to the company's books, not to the bank's records.
* Journal Entries: After identifying items requiring adjustments, journal entries are created to update the company's accounts.
Let me know if you'd like a specific example of how a journal entry would be created for any of these items!