Principles of Financial Accounting

Chapter 7 | Fraud, Internal Controls, & Cash

1) Prepare a bank reconciliation
 Reconciling the Bank Account
The bank and the depositor (customer /
company) maintain independent records
of the company’s account.
Therefore, the bank statement / books
and the depositor’s books / records need
to be reconciled to reach their adjusted
(corrected) cash balances.
The depositor maintains its bank account
ledger like the cash ledger is maintained.
Prepared by: Saira Rizwan for LUMS Undergraduate Course- ACCT100
How the bank works
The bank CREDITS to the customer / depositor’s
account every deposit it receives.
The reverse occurs (DEBIT for every payment) when the
bank pays a check issued by the customer/
company from its account’s balance.
Payment (on behalf of depositor/ customer) reduces the
bank’s liability, so the bank debits the customer’s
account.
 Practice Question
The accountant of Whyth Ltd., developed the
following reconciling information in preparing its
September bank reconciliation:

Cash balance per bank, 31/7 $20,000

Note receivable collected by bank 8,000
Outstanding Cheques 12,000
Deposits in Transit 6,000
Bank Service Charges 100
NSF Cheque 1,600
7,700

Required: Determine the cash balance per books

(before adjustments) for Whyth Ltd.

Un-credited Chqs
Un-presented Chqs

Direct Credit
Direct Debit
Prepared by: Saira Rizwan for LUMS Undergraduate Course- ACCT100
 Prepared by: Saira Rizwan for LUMS Undergraduate Course- ACCT100

Practice Question:
Happenings Ltd.’s bank statement for May 2019 shows the
following data. Accounts Receivable 1,750
Balance 5/1: $126,500 Balance 5/31: $136,220 Cash 1,750
(To reinstate receivable due to insufficient balance in
Debit memorandum: Credit memorandum: customer account)
NSF check : $1,750 Collection of note receivable:
$5,050
Cash 5,150
The cash balance per books at May 31 is $133,190. Your review
Accounts Receivable 5,000
of the data reveals the following. Interest Earned (12% x 5,000 x 3/12) 150
1. The NSF cheque was from Yummy’s Co., a customer.
Collection fee 100
2. The note collected by the bank was a $5,000, 3-month, 12%
note. The bank charged a $100 collection fee. No interest has Cash 100
been accrued.
Accounts Payable 270
3. TasteBuds Ltd. cheque for $3,520 dated May 10, cleared the
bank on May 25. The company recorded this chq, which was a Cash 270
payment on account, for $3,250. (to rectify error of payment to supplier: 3,520 – 3,250)

Prepare the bank reconciliation at May 31 and journalize the

related entries.
 Practice Question:
Happenings Ltd.’s bank statement for May 2019 shows the
following data.
Balance 5/1: $126,500 Balance 5/31: $136,220

Debit memorandum: Credit memorandum:

NSF check : $1,750 Collection of note receivable:
$5,050
The cash balance per books at May 31 is $133,190. Your review
of the data reveals the following. 136,220

1. The NSF cheque was from Yummy’s Co., a customer.

5,150
2. The note collected by the bank was a $5,000, 3-month, 12% [5,000 +150]
note. The bank charged a $100 collection fee. No interest has
been accrued. 5,150

3. TasteBuds Ltd. cheque for $3,520 dated May 10, cleared the
[T#2]
bank on May 25. The company recorded this chq, which was a
payment on account, for $3,250. [3,520 – 3,250]

Prepare the bank reconciliation at May 31 (the adjusted

balance). 136,220
Prepared by: Saira Rizwan for LUMS Undergraduate Course- ACCT100
 Practice Question

If the month-end bank statement shows a balance of

In the month of November, Coler Company Ltd.
¥360,000, outstanding checks are ¥120,000, a deposit of
wrote checks in the amount of $18,500. In
¥40,000 was in transit at month end, and a check for ¥5,000
December, checks in the amount of $25,316 were
was erroneously charged by the bank against the account,
written. In Nov., $16,936 of these checks were
the correct balance in the bank account at month end is:
presented to the bank for payment, and $21,766
Solution were presented in December. What is the amount of
¥ outstanding checks at the end of November?
Unadjusted Bank Statement Bal. 360,000
Less: Outstanding Chqs. (120,000) a. $3,550
b. $1,564
Add: Deposit in Transit 40,000 c. $5,114
d. $7,100
Add: Amount mistakenly charged Solution
against account 5,000
November Transactions:
Adjusted bank account balance ¥285,000
$18,500 chq issued by Coler |Outstanding
16,936 chqs presented for payment
$1,564 Chqs Outstanding at end Nov.
Prepared by: Saira Rizwan for LUMS Undergraduate Course- ACCT100
 Practice Question
The cash account shows a balance of $45,000 before
reconciliation. The bank statement does not include a
deposit of $2,300 made on the last day of the month. The Un-Adj. Bal. 45,000
bank statement shows a collection by the bank of $940
and a customer’s check for $320 was returned because it Direct Credit 940 320 NSF
was NSF. A customer’s check for $450 was recorded on the Error 18 90 Error
books as $540, and a check written for $79 was recorded
as $97. The correct balance in the cash account was: Adj. Bal. 45,548

Solution $
Unadjusted Cash book Bal. 45,000
Add: Direct Credit | Collection by bank 940
Less: NSF | Reinstatement of receivable (320)
Less: Error in cash book [450-540] (90)
Add: Error in recording [97-79) 18

Adjusted bank account balance $45,548

Prepared by: Saira Rizwan for LUMS Undergraduate Course- ACCT100

 Practice Question

ISLO Company assembled the following information

in completing its March bank reconciliation:
balance per bank $3,820; outstanding checks $775; Bank Statement Bal. 3,820
deposits in transit $1,250; NSF check $80; bank Less: O/S Cheques (775)
service charge $25; cash balance per books $4,400. Add: Deposits in Transit 1,250
As a result of this reconciliation, ISLO will Adjusted Bank Balance 4,295

a. reduce its cash account by $475 Unadjusted Cash book Bal. 4,400
b. reduce its cash account by $25 Less: NSF (80)
c. increase its cash account by $55 Less: Bank Charges (25)
d. reduce its cash account by $105 Adjusted Cash Balance 4,295

Prepared by: Saira Rizwan for LUMS Undergraduate Course- ACCT100

 Page: 369 | P7-3A | Terrel Ltd.
On May 31, 2017, Terrell Ltd. had a cash balance per books of ￡6,781.50. The bank statement from Home Town Bank
on that date showed a bal. of ￡6,824.60. A comparison of the statement with the Cash account revealed the
following:

1. The statement included a debit memo of ￡60 for the printing of additional company checks.
2. Cash sales of ￡836.15 on May 12 were deposited in the bank. The cash receipts journal entry and the deposit slip
were incorrectly made for ￡886.15. The bank credited Terrell Company for the correct amount.
3. Outstanding checks at May 31 totaled ￡276.25. Deposits in transit were ￡1,916.15.
4. On May 18, the company issued check No. 1181 for ￡685 to Barry Dietz on account. The check, which cleared the
bank in May, was incorrectly journalized and posted by Terrell for ￡658.
5. A ￡3,000 note receivable was collected by the bank for Terrell on May 31 plus ￡80 interest. The bank charged a
collection fee of ￡20. No interest has been accrued on the note.
6. Included with the cancelled checks was a check issued by Bridges plc to Jon Newton for ￡600 that was incorrectly
charged to Terrell by the bank.
7. On May 31, the bank statement showed a NSF charge of ￡640 for a check issued by Sandy Grifton, a customer, to
Terrell on account.
Required:
(a) Prepare the bank reconciliation at May 31, 2017.
(b) Prepare the necessary adjusting entries for Terrell at May 31, 2017.

Prepared by: Saira Rizwan for LUMS Undergraduate Course- ACCT100

 On May 31, 2017, Terrel Ltd. had a cash balance per books of
￡6,781.50. The bank statement from Home Town Bank on that date
showed a bal. of ￡6,824.60. A comparison of the statement with the
Cash account revealed the following:
T#3
1. The statement included a debit memo of ￡60 for the printing of T#6: reinstating bank bal.
additional company checks.
2. Cash sales of ￡836.15 on May 12 were deposited in the bank. The T#3
cash receipts journal entry and the deposit slip were incorrectly
made for ￡886.15. The bank credited Terrell Company for the
correct amount.
3. Outstanding checks at May 31 totaled ￡276.25. Deposits in transit
were ￡1,916.15.
4. On May 18, the company issued check No. 1181 for ￡685 to Barry
Dietz on account. The check, which cleared the bank in May, was
T#5: Plus interest less collection fee
incorrectly journalized and posted by Terrell for ￡658.
5. A ￡3,000 note receivable was collected by the bank for Terrell on
May 31 plus ￡80 interest. The bank charged a collection fee of
T#7: May 31
￡20. No interest has been accrued on the note.
T#1:
6. Included with the cancelled checks was a check issued by Bridges
T#2: May 12 [886.15-836.15]
plc to Jon Newton for ￡600 that was incorrectly charged to Terrell T#4: May 18: [685-658]
by the bank.
7. On May 31, the bank statement showed NSF charge of ￡640 for a
check issued by Sandy Grifton, a customer, to Terrell on account.
Prepared by: Saira Rizwan for LUMS Undergraduate Course- ACCT100
 Prepared by: Saira Rizwan for LUMS Undergraduate Course- ACCT100
On May 31, 2017, Terrel Ltd. had a cash balance per books of
￡6,781.50. The bank statement from Home Town Bank on that date
showed a bal. of ￡6,824.60. A comparison of the statement with the
Cash account revealed the following:
May 31 Bank Charges 60
1. The statement included a debit memo of ￡60 for the printing of Cash 60
additional company checks.
2. Cash sales of ￡836.15 on May 12 were deposited in the bank. The
cash receipts journal entry and the deposit slip were incorrectly May 31 Sales Revenue 50
made for ￡886.15. The bank credited Terrell Company for the Cash 50
correct amount.
3. Outstanding checks at May 31 totaled ￡276.25. Deposits in transit
were ￡1,916.15.
4. On May 18, the company issued check No. 1181 for ￡685 to Barry May 31 A/c Payable—Barry Dietz 27
Dietz on account. The check, which cleared the bank in May, was Cash 27
incorrectly journalized and posted by Terrell for ￡658.
5. A ￡3,000 note receivable was collected by the bank for Terrell on May 31 Cash 3,060
May 31 plus ￡80 interest. The bank charged a collection fee of Bank Charges 20
￡20. No interest has been accrued on the note. Notes Receivable 3,000
6. Included with the cancelled checks was a check issued by Bridges Interest Revenue 80
Ltd. to Newton Ltd. for ￡600 that was incorrectly charged to
Terrell by the bank.
7. On May 31, the bank statement showed NSF charge of ￡640 for a May 31 A/c Rec. —Sandy Grifton 640
check issued by Sandy Grifton, a customer, to Terrell on account. Cash 640
 Bank Reconciliation | Illustration Solution

Prepared by: Saira Rizwan for LUMS Undergraduate Course- ACCT100