Question

 Prepare bank reconciliation and adjusting entries.

 P7.12A

 (LO 4) AP Sally's Sweet Shop's August 31 bank balance was $11,135. The company's cash balance at August 31 was $10,805. Other information follows:

 1.Outstanding cheques were #421 for $165, #485 for $265, #492 for $175, and #494 for $1,165. Cheque #421 was also outstanding on July 31 and was included on July's bank reconciliation.

 2.Included with the statement were EFT deposits totalling $1,735 during August in payment of accounts receivable. These deposits have not been recorded by the company.

 3.Cheque #490 was correctly written and paid by the bank for $206. The cheque had been issued to pay accounts payable and the company had recorded it as $266.

 4.The bank statement showed a cheque #4832 for $795, which did not appear on the company's books. Investigation revealed that the cheque was actually issued by Wally's

 Water Works and was charged to Sally's Sweet Shop's account in error.

 5.The bank returned an NSF cheque from a customer for $385.

 6.The bank statement showed two debit memoranda for service charges: one for $25 related to the NSF cheque (see item [5] above) and one for $45 for cheque printing charges. The company's policy is to pass on all NSF processing fees to the customer.

 7.The company's records showed the August 15 deposit as $4,690. On the bank statement, it was correctly recorded as $4,990. The deposit was for cash sales.

 8.The company has a pre-authorized EFT payment for its monthly utilities for $245 scheduled for the last day of each month. As August 31 was a Sunday this year, the bank posted it on September 1. The company recorded it in August.

 9.The $1,355 July 31 bank deposit was recorded on August 1 on the bank statement. The August 31 bank deposit of $2,530 was not included on the August bank statement.

 Instructions

 a.

 Prepare a bank reconciliation.

 b.

 Prepare any necessary adjusting journal entries.

 c.

 What amount should be reported as cash on the August 31 balance sheet?

 Taking It Further

 Why is it important that the person who prepares the bank reconciliation shouldn't also be able to write and sign cheques? In what ways would that increase the opportunity for employee fraud?

Answer 1

(a)

SALLY’S SWEET SHOP

Bank Reconciliation

August 31

                                                                                                                                              

Unadjusted bank balance                                                                                                $11,135

Add:       Deposits in transit.........................................................       $ 2,530

               Bank error Cheque

                     #4832 Wally’s Water Works...................................             795              3,325

                                                                                                                                    14,460

Less:  Outstanding cheques

                     No. 421...................................................................        $   165

                     No. 485...................................................................             265

                     No. 492...................................................................             175

                     No. 494...................................................................         1,165

                                                                                                               1,770

               Outstanding EFT—for utilities.....................................             245              2,015

Adjusted bank balance..................................................................................           $12,445

Unadjusted cash balance...............................................................................           $10,805

Add:       EFT collections of Accounts Receivable......................        $1,735

               Deposit error August 15 – cash sales

               ($4,990- $4,690)...........................................................             300

               Error in cheque # 490 for Accounts

                 Payable ($266 − $206)................................................               60              2,095

                                                                                                                                    12,900

Less:       NSF cheque ($385 + $25).............................................           $410

               Bank service charges—cheque printing................     45            455

Adjusted cash balance...................................................................................           $12,445

(b)      Aug.      31     Cash ...........................................................          2,095

                                       Accounts Receivable............................                                 1,735

                                       Sales......................................................                                    300

                                       Accounts Payable.................................                                      60

                                      

                         31     Accounts Receivable..................................             410

                                 Bank Charges Expense...............................               45

                                       Cash......................................................                                    455

Check: $10,805 + $2,095 − $455 = $12,445 adjusted cash balance

(c)      The reported cash balance on the August 31 balance sheet is $12,445.

Taking It Further:

The appropriate segregation of duties internal control activity calls for the task of preparing the bank reconciliation to be separated from the responsibility of signing cheques. This is to ensure that someone who has signing authority on the business bank account is not able to conceal the fraud of an unauthorized payment by making false entries on the bank reconciliation.