Outstanding check: Assume that on July 8 the Lowell Corporation wrote a $500 check to Staples Depot for the purchase of supplies. Staples Depot deposited the check in its bank of July 8. On July 10, the Lawrence National Bank received the check and processed it. How would this transaction affect the Lowell Corporation's general ledger?

When the Lowell Corporation wrote the $500 check for supplies, it would increase its supplies asset and decrease its cash asset. The resulting journal entry would be a $500 supplies debit and a $500 cash credit. When the journal entry is posted, part of the company's general ledger would appear as follows. Note in this illustration, the supplies debit appears in "All other accounts."

Lowell Corporation's General Ledger

Cash

 

All other accounts

7/2   $6,000

$500   7/8

 

7/8   $500

$6,000   7/2

7/5      $800

 

 

 

$800   7/5

7/8   $6,300

 

 

 

$6,300   7/8

 

As a result of its transactions, the Lowell Corporation's records show it has $6,300 cash available to use on July 8.

After the Staples Depot received the $500 check from the Lowell Corporation, it deposited it in its bank of July 8. On July 10, the Lawrence National Bank received the check from the Staples Depotís bank and processed it. How would this transaction affect the bank's general ledger and its customer deposits subsidiary ledger?

Lawrence National Bank's General Ledger

Cash

 

Customer Deposits

7/1    $960,000

$500   7/10

 

7/10   $500

$825,000     7/1

7/2       $6,000

 

 

 

$6,000     7/2

7/6          $800

 

 

 

$800     7/6

7/10  $966,300

 

 

 

$831,300   7/10

 

The Lowell Corporation's $500 check results in $500 flowing out of the Lawrence National Bank to the bank of Staples Depot. In its general ledger, the Lawrence National Bank's cash asset decreases by $500. Since the bank now owes the Lowell Corporation $500 less cash, the bank's customer deposits liability also decreases by $500. In its customer deposits subsidiary ledger, the bank would reduce the Lowell Corporation's account by $500, as shown below.

 

Lawrence National Bank's Customer Deposits Subsidiary Ledger

All companies other than the Lowell Corporation

 

Lowell Corporation

 

$825,000   7/1

 

7/10   $500

$6,000     7/2

 

 

 

 

$800     7/6

 

 

 

 

$6,300   7/10

 

July 8 bank reconciliation: Suppose the Lowell Corporation wanted to compare its records of cash with the Lawrence National Bank's records of the Lowell Corporation's cash in the bank as of July 8. According to its records, as shown earlier, the Lowell Corporation's cash asset is a $6,300 debit balance on July 8. The Lawrence National Bank's subsidiary ledger balance in the Lowell Corporation's liability account would have been a $6,800 credit balance on July 8. The $500 difference between the company's cash balance and the bank's records is because the bank did not receive and process until July 10 the $500 check written by the Lowell Corporation on July 8. In business terms, a check written by a company but not received and processed by its bank is called an outstanding check. The outstanding check would appear on the company's July 8 bank reconciliation as follows.

 

Balance per Lawrence National Bank, July 8

$6,800

Add: Outstanding deposit

0

Subtotal

$6,800

Deduct: Outstanding checks

$500

Adjusted bank balance, July 8

$6,300

 

 

Balance per Lowell Corporation checkbook, July 8

$6,300

 

The bank reconciliation shows that the company's record of a $6,300 cash balance is reasonable. The bank's records confirm that the company does have cash of $6,300 that it can use on July 8. The company may write up to $6,300 of checks if it so desires. It is important to note that the outstanding check was deducted from the bank's balance because that is exactly what the bank will do when it receives and processes the check. The bank will reduce its liability to the Lowell Corporation and, thus, the Lowell Corporation will have $500 less cash in the bank.

You should notice the various items included in the Lowell Corporation's bank reconciliation. The balance per the bank is increased for any outstanding deposits and decreased for any outstanding checks. The result is called the adjusted bank balance because it represents what the bank's liability to the Lowell Corporation will be once the bank processes all the company's deposits made and checks written. In the following paragraphs, additional items will appear as adjustments on the bank reconciliation.
 
 

Practice Exercise

The Christopher Corporation's March 31 bank statement reported a balance of $7,358.92. Based on an examination of its checkbook, the company determined it had outstanding deposits of $684.55 and outstanding checks of $1,496.39 on March 31.

1. Determine the Christopher Corporation's adjusted bank balance on March 31.

Balance per bank, March 31

$7,358.92

Add: Outstanding deposits

684.55

Subtotal

$8,043.47

Deduct: Outstanding checks

$1,496.39

Adjusted bank balance, March 31

$6,547.08

 

2. Determine the dollar amount of cash the Christopher Corporation has available to use on March 31.

Based on its bank reconciliation, the company has $6,547.08 cash available to use.
 
 

** You now have the background to do text exercise 6.9.

 

Interest revenue and bank service charge: Assume that on July 15, the Lowell Corporation received its bank statement from the Lawrence National Bank. The bank statement summarized Lowell Corporation's activities with the bank for the time period ended July 12. In addition to reporting all the Lowell Corporation's deposits and checks processed by the bank, the bank statement also reported that on July 12 the bank added $4 to the company's account for interest earned on its cash and subtracted $19 for services provided to the company by the bank. How would this information affect the Lowell Corporation's general ledger?

When the Lowell Corporation analyzed its bank statement, it would record $4 of interest revenue and a $19 bank service expense. The journal entry to record interest revenue would be a $4 cash debit and a $4 interest revenue credit. The journal entry to record the bank service expense would be a $19 bank service expense debit and $19 cash credit. When the journal entries are posted, part of the company's general ledger would appear as follows. Note in this illustration, the bank service expense debit and the interest revenue credit appear in "All other accounts."

Lowell Corporation's General Ledger

Cash

 

All other accounts

7/2    $6,000

$500     7/8

 

7/8   $500

$6,000     7/2

7/5       $800

$19   7/12

 

7/12   $19

$800     7/5

7/12        $4 

 

 

 

$4   7/12

7/15  $6,285

 

 

 

$6,285   7/15

 

As a result of its transactions, the Lowell Corporation's records show it has $6,285 cash available to use on July 15.

On July 12, the Lawrence National Bank added $4 to the Lowell Corporation's account for interest earned on its cash and subtracted $19 for services provided to the company by the bank. How would this information affect the bank's general ledger and its customer deposits subsidiary ledger?

Lawrence National Bank's General Ledger

Cash

 

Customer Deposits

7/1    $960,000

$500   7/10

 

7/10   $500

$825,000     7/1

7/2        $6,000

 

 

7/12     $19

$6,000     7/2

7/6          $800

 

 

 

$800     7/6

7/12   $966,300

 

 

 

$4   7/12

 

 

 

 

$831,285   7/12


 

Service Revenue

 

Interest Expense

 

$19   7/12

 

7/12   $4

 

 

The $4 interest added to the Lowell Corporation's account increases the bank's customer deposits liability (credit) because the bank now owes $4 more to the Lowell Corporation. The $4 is the bank's cost of using the Lowell Corporation's cash and, thus, increases the bank's interest expense (debit). On the other hand, the $19 bank service charge reduces the bank's customer deposits liability (debit) because the bank now owes the Lowell Corporation $19 less. The $19 bank service charge was the bank's fee for processing the company's deposits and checks and, thus, results in an increase in the bank's service revenue (credit). In accounting for interest and the bank service charge, the Lawrence National Bank's customer deposits subsidiary ledger would appear as follows.

 

Lawrence National Bank's Customer Deposits Subsidiary Ledger

All companies other than the Lowell Corporation

 

Lowell Corporation

 

$825,000   7/1

 

7/10   $500

$6,000     7/2

 

 

 

7/12     $19

$800     7/6

 

 

 

 

$4   7/12

 

 

 

 

$6,285   7/12

 

In addition to reporting items such as interest and service charges on bank statements, banks often report such information in the form of notes or memos, mailed to companies. A memo reporting an item such as the $4 interest, which resulted in an increase (credit) in the Lowell Corporation's account in the bank's customer deposits liability account, is often called a credit memo. A memo reporting an item such as the $19 bank service charge, which resulted in a decrease (debit) in the Lowell Corporation's account in the bank's customer deposits liability account, is often called a debit memo. Companies must be careful when accounting for debit and credit memos because the terms may be a bit confusing at first. Banks communicate information about the banks' records. In the case of the Lawrence National Bank, it communicates to the Lowell Corporation information related to the bank's liability to the company. Thus, a bank debit memo reports a reduction of the bank's liability to the company. (Remember, debits reduce liabilities.) On the other hand, the Lowell Corporation is accounting for its cash asset. At first glance, a debit memo suggests an increase in cash, because assets increase with debits. However, since a bank debit memo reduces the bank's liability, it must be accounted for in the company's records as a reduction of cash, which is a credit. This complication is a result of the bank reporting about its liability while the company is reporting about its assets. Since debits and credits affect assets and liabilities differently, companies must be careful to account for debit and credit memos correctly.

July 12 bank reconciliation: Suppose the Lowell Corporation wanted to compare its records of cash with the Lawrence National Bank's records of the Lowell Corporation's cash in the bank as of July 12. According to its records, the Lowell Corporation's cash asset balance would have been a $6,300 debit balance on July 12. The Lawrence National Bank's subsidiary ledger balance in the Lowell Corporation's liability account is a $6,285 credit balance on July 12. The $15 difference between the company's cash balance and the bank's records is because the company did not receive the bank statement until July 15 and, thus, did not account for the interest or bank service until July 15. The interest and bank service would appear on the company's July 12 bank reconciliation as follows.

Balance per Lawrence National Bank, July 12

$6,285

Add: Outstanding deposit

0

Subtotal

$6,285

Deduct: Outstanding checks

0

Adjusted bank balance, July 12

$6,285

 

 

Balance per Lowell Corporation checkbook, July 12

$6,300

Add: Interest revenue

$4

Subtotal

$6,304

Deduct: Bank service charge

$19

Adjusted checkbook balance, July 12

$6,285

 

The bank reconciliation shows that the company's record of a $6,300 cash balance is not reasonable. The bank's records show that the company does not have cash of $6,300 that it can use on July 12. The company may only write up to $6,285 of checks. The Lowell Corporation should adjust is cash balance by preparing journal entries to record the $4 interest revenue and the $19 bank service charge, as discussed previously.

Once again, you should notice the various items included in the Lowell Corporation's bank reconciliation. The balance per the bank is increased for any outstanding deposits and decreased for any outstanding checks. The result is called the adjusted bank balance because it represents what the bank's liability to the Lowell Corporation will be once the bank processes all the company's deposits made and checks written. The balance per the company's checkbook is increased for any additions to the company's account made by the bank. The balance per the company's checkbook is decreased for any deductions to the company's account made by the bank. The company's adjusted checkbook balance represents the amount of cash the company has available to use.

Bank reconciliations are important tools in controlling cash because they provide independent verification of a company's cash receipts and checks written. By comparing the bank's records with the company's records, the company should be able to identify any deposits that were recorded by the company but were never processed by the bank. Such deposits could have been lost, stolen, processed incorrectly, or simply not yet processed by the bank. By comparing the bank's records with the company's records, the company should be able to identify any checks that were recorded by the company but never processed by the bank. Such checks could have been lost, incorrectly processed, or simply not yet processed by the bank. The general form for a bank reconciliation is shown below.

Balance per bank statement

+ Outstanding deposits

Subtotal

- Outstanding checks

Adjusted bank balance

 

Balance per company's checkbook

+ Bank collections and additions

Subtotal

- Bank service charge and deductions

Adjusted checkbook balance

 

It is important to note that if a bank reconciliation is prepared properly, the adjusted bank balance will equal the adjusted cash balance.


Practice Exercise

The Christopher Corporation's April 30 checkbook reported a balance of $8,478.37. Based on an examination of its bank statement, the company determined it had $21.25 interest revenue and $15 bank service charge that it had not recorded in its checkbook.

1. Determine the Christopher Corporation's adjusted checkbook balance on April 30.

Balance per checkbook, April 30

$8,478.37

Add: Interest revenue

21.25

Subtotal

$8,499.62

Deduct: Bank service charge

$15.00

Adjusted bank balance, April 30

$8,484.62

 

2. Determine the dollar amount of cash the Christopher Corporation has available to use on April 30.

Based on its bank reconciliation, the company has $8,484.62 cash available to use.
 
 

** You now have the background to do text exercise 6.10 and text problems 6.1 and 6.2.

 

 

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