On July 31, Carla Vista Ltd. had a cash balance of $13,340 in its general ledger. The bank statement from the Caisse Populaire on that date showed a balance of $23,074. A comparison of the bank statement with the Cash account revealed the following:
The bank statement included service charges and debit and credit card processing fees of $166.
The bank statement included electronic collections from customers on account totaling $5,810. Carla Vista had not recorded the EFT.
A deposit of $3,380 made by another company was incorrectly added to Carla Vista’s account by the Caisse Populaire.
Salaries of $4,260 were paid electronically during the month. The company has already recorded these.
Cheques outstanding on June 30 totaled $2,960. Of these, $2,250 worth cleared the bank in July. All cheques written in July cleared the bank in July.
(a) Prepare the bank reconciliation at July 31. (List items that increase balance as per bank & books first.)
The correct answer and explanation is :
To prepare the bank reconciliation for Carla Vista Ltd. at July 31, we’ll compare the balance per the bank statement to the balance in the Cash account, adjusting for items that have not yet been recorded in the books or bank. The reconciliation process ensures that the cash balance in the company’s records matches the cash balance reported by the bank.
Bank Reconciliation for Carla Vista Ltd. (as of July 31)
Balance per Bank (as of July 31):
Bank Statement Balance: $23,074
Adjustments to Bank Balance:
- Add: Deposit error (deposit made by another company)
- The bank mistakenly added a deposit of $3,380 made by another company to Carla Vista’s account. This should be removed.
Adjustment: – $3,380
- Less: Outstanding cheques
- Cheques written by Carla Vista but not yet cleared by the bank in July: $2,250.
Adjustment: – $2,250
Adjusted Bank Balance:
$23,074 – $3,380 – $2,250 = $17,444
Balance per Books (as of July 31):
General Ledger Cash Balance: $13,340
Adjustments to Book Balance:
- Add: Electronic funds transfer (EFT) collections
- The bank collected $5,810 from customers on Carla Vista’s behalf, but this was not recorded in the books.
Adjustment: + $5,810
- Less: Bank service charges and processing fees
- The bank charged service fees of $166, which need to be recorded in the books.
Adjustment: – $166
Adjusted Book Balance:
$13,340 + $5,810 – $166 = $18,984
Final Reconciliation:
- Adjusted Bank Balance: $17,444
- Adjusted Book Balance: $18,984
To reconcile these balances, we need to consider that any differences between the adjusted bank balance and the adjusted book balance are likely due to timing differences. However, the final adjusted bank balance and book balance should eventually match, once the discrepancies are resolved in future periods.
Explanation:
A bank reconciliation is an important internal control process for ensuring that a company’s cash records match what the bank reports. The main purpose of the reconciliation is to identify discrepancies caused by timing differences, errors, or transactions that the bank has recorded but the company hasn’t yet, or vice versa.
In this case, the differences between the book and bank balances were due to several factors:
- A bank error where a deposit made by another company was mistakenly credited to Carla Vista’s account.
- Outstanding cheques that Carla Vista wrote but which hadn’t cleared the bank by the end of July.
- EFT collections that the bank processed but Carla Vista had not yet recorded in its books.
- Service fees charged by the bank that needed to be accounted for in Carla Vista’s books.
By adjusting both the bank and book balances, Carla Vista can ensure that both match and reflect the actual cash available to the company as of July 31.