Multiple Choice
If a check is correctly written and paid by the bank for \$450, but is erroneously recorded in the company's books as \$540, how should this error be treated in the bank reconciliation?
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6. Internal Controls and Reporting Cash
Bank Reconciliation
Multiple Choice
Which of the following items should be subtracted from the book balance during the preparation of a bank reconciliation statement?
A
Deposits in transit
B
Bank service charges
C
Interest earned on the bank account
D
Outstanding checks
Verified step by step guidance1
Understand the purpose of a bank reconciliation statement: It is used to reconcile the differences between the bank statement balance and the company's book balance by identifying items that cause discrepancies.
Identify the items listed in the problem and classify them based on their impact on the book balance: Deposits in transit, Bank service charges, Interest earned on the bank account, and Outstanding checks.
Recognize that deposits in transit are amounts recorded in the company's books but not yet reflected in the bank statement. These are added to the bank balance during reconciliation, not subtracted from the book balance.
Understand that bank service charges are fees deducted by the bank from the account. These charges reduce the book balance and should be subtracted during reconciliation.
Note that interest earned on the bank account increases the book balance and should be added, while outstanding checks are payments issued by the company but not yet cleared by the bank. Outstanding checks reduce the bank balance but do not directly affect the book balance during reconciliation.
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