I have begun restudying financial accounting material, starting with the fundamentals and basics. I have just finished reading a chapter about cash management and internal controls and am in the midst of finishing a few related end-of-chapter questions. I have successfully and easily completed all of the problems regarding bank reconciliations, except for one that is giving me a problem.
Here is the problem:
Date Checks Deposits Balance
6/30 $6,500
7/1 $300 6,800
7/2 $270 $150 $330 4,500 10,550
7/3 25 7,025 10,000 3,500
7/5 150 450 1,400 11,500
7/9 1,500 25 325 9,650
7/12 500 100 3,500 9,050
7/15 1,600 2,700 8,250
7/19 75 425 7,750
7/24 650 550 6,550
7/29 275 525 5,750
7/31 475 25 5,250
* The check on 7/29 for $525 was a returned NSF check.
** The check on 7/31 for $25 was a bank service charge.
Cash Account
Balance, 6/30 $5,550
Date Amount Deposited Check # Amount Check # Amount
7/1 $300 176 $270 186 $25
7/5 4,500 177 150 187 100
7/15 10,000 178 330 188 500
7/29 3,500 179 25 189 2,700
7/30 950 180 7,025 190 1,600
Total Deposits $19,250 181 150 191 75
182 450 192 425
183 1,400 193 550
184 1,500 194 650
185 325 195 275
Total Disbursements $18,525
Balance, 7/31 $6,275
Towanda Corporation
Bank Reconciliation
July 31
Bank account balance, 7/31 $5,250
Add: Deposits in transit 950
Less: Error in recording 475
Adjusted bank balance, 7/31 $5,725
Cash account balance, 7/31 $6,275
Less: NSF check 525
Bank service charge 25
Adjusted cash account balance, 7/31 $5,725
Now, I am confused by this solution, even though the software says it is correct. I am confused about why the $475 is subtracted from the bank account in the reconciliation. To begin, the $475 debit to the bank account is not listed as a check (credit) on the cash account, therefore I assume it is an outstanding check from a prior month, which the software says it is. So, at the time the check was written, the cash account was already credited this amount, and during that month, was subtracted from the bank account in the reconciliation process. Before any adjustments, the actual cash account balance is $1,025 larger than the actual bank account at 7/31; $550 is explained by an NSF and bank service charge totaling this amount. The difference after crediting the cash account by $550 is $475, the amount of the outstanding check from a prior month which has cleared this month. Now, if this $475 was previously credited to the cash account, and everything else is already reconciled, how could the $475 debit to the bank account cause it to be $475 smaller than a cash account which has already been credited this amount?
Here is the problem:
Date Checks Deposits Balance
6/30 $6,500
7/1 $300 6,800
7/2 $270 $150 $330 4,500 10,550
7/3 25 7,025 10,000 3,500
7/5 150 450 1,400 11,500
7/9 1,500 25 325 9,650
7/12 500 100 3,500 9,050
7/15 1,600 2,700 8,250
7/19 75 425 7,750
7/24 650 550 6,550
7/29 275 525 5,750
7/31 475 25 5,250
* The check on 7/29 for $525 was a returned NSF check.
** The check on 7/31 for $25 was a bank service charge.
Cash Account
Balance, 6/30 $5,550
Date Amount Deposited Check # Amount Check # Amount
7/1 $300 176 $270 186 $25
7/5 4,500 177 150 187 100
7/15 10,000 178 330 188 500
7/29 3,500 179 25 189 2,700
7/30 950 180 7,025 190 1,600
Total Deposits $19,250 181 150 191 75
182 450 192 425
183 1,400 193 550
184 1,500 194 650
185 325 195 275
Total Disbursements $18,525
Balance, 7/31 $6,275
Towanda Corporation
Bank Reconciliation
July 31
Bank account balance, 7/31 $5,250
Add: Deposits in transit 950
Less: Error in recording 475
Adjusted bank balance, 7/31 $5,725
Cash account balance, 7/31 $6,275
Less: NSF check 525
Bank service charge 25
Adjusted cash account balance, 7/31 $5,725
Now, I am confused by this solution, even though the software says it is correct. I am confused about why the $475 is subtracted from the bank account in the reconciliation. To begin, the $475 debit to the bank account is not listed as a check (credit) on the cash account, therefore I assume it is an outstanding check from a prior month, which the software says it is. So, at the time the check was written, the cash account was already credited this amount, and during that month, was subtracted from the bank account in the reconciliation process. Before any adjustments, the actual cash account balance is $1,025 larger than the actual bank account at 7/31; $550 is explained by an NSF and bank service charge totaling this amount. The difference after crediting the cash account by $550 is $475, the amount of the outstanding check from a prior month which has cleared this month. Now, if this $475 was previously credited to the cash account, and everything else is already reconciled, how could the $475 debit to the bank account cause it to be $475 smaller than a cash account which has already been credited this amount?
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