Question

For each of the items indicate whether its amount affects the bank or book side of a bank reconciliation and is an addition or a subtraction in a bank reconciliation and whether an adjusting journal entry is required:
a. Unrecorded deposits
b. Interest on cash balance
c. Bank service charges
d. Debit memos
e. Outstanding checks
f. Credit memos
g. NSF checks

Answer 1

Answer:

The correct answer is:

a)  Unrecorded deposits : bank addition

b)  Interest on cash balance : book addition

c) Bank service charges : book subtraction

d) Debit memos : book subtraction

e) Outstanding Checks : bank subraction

f)  Credit memos : book addition

g) NSF checks : book subtraction

Do unrecorded deposits require an adjusting journal entry?  No

Does interest on cash balance require an adjusting journal entry?  Yes

Do bank service charges require an adjusting journal entry?  Yes

Do debit memos require an adjusting journal entry?  Yes

Do outstanding checks require an adjusting journal entry?  No

Do credit memos require an adjusting journal entry?  Yes

Do NSF checks require an adjusting journal entry?  Yes

Answer 2

Answer:

a. Unrecorded deposits  - This affects the bank side of the  reconciliation. it may be added to the bank balance or subtracted from the book balance to reconcile both. This is however not an adjusting entry in the books.

b. Interest on cash balance  - This affects the books side as the transaction would have been recorded by the bank. It is an addition to the book side balance or a subtraction from the bank side. An adjusting journal entry is required.

c. Bank service charges  - This affects the book balance side of the reconciliation. It is a subtraction to the book side balance or an addition to the bank side. An adjusting journal entry is required.

d. Debit memos  - This is a deduction from the bank balance in the bank statement and as such, a deduction is needed to the book side in the reconciliation. This requires adjusting journal entry

e. Outstanding checks  - This affects the bank side  of the bank reconciliation. It is a subtraction from the bank balance in the reconciliation. This does not require adjustments or adjusting journal entries.

f. Credit memos  - This is an addition to the bank balance in the bank statement and as such, an addition is needed to the book side in the reconciliation. This requires adjusting journal entry

g. NSF checks -  This is an addition to the book side in the reconciliation. It affects the book side of the reconciliation. An adjusting journal entry is required.

Explanation:

Unrecorded deposits are deposits that have been recorded in the books but are yet to be recorded by the bank. Such items require no further adjustments in the books.

Interest on cash balance are reconciling items that have been recorded as credits by the bank but yet to be recorded as debits in the books. As such, the book side are debited to recognize this.

Bank service charges like interest on cash balance are transactions that have been recognized in the bank but yet to be recorded in the cash book. This is a reduction in cash balance and hence should be credited or subtracted in the books.

Debit and credit memos are withdrawals and deposits in the bank statements that are yet to be recognized in the books.

NSF checks are checks that have been deducted from the books but not honored by the bank due to insufficient balance.

Outstanding checks are checks recorded as deductions from the ledger but yet to be recognized by the bank.