Bank Reconciliation Process
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Bank Reconciliation Process

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Questions and Answers

What is the formula for computing maturity value of a promissory note?

  • Maturity Value = Principal + (Principal * Rate * Days / 360) (correct)
  • Maturity Value = Principal + Total Interest (correct)
  • Maturity Value = Principal * Rate * Days
  • Maturity Value = Principal - (Principal * Rate * Days / 360)

    • Which of the following reduces the net realizable value of accounts receivable?

  • Allowance for Doubtful Accounts (correct)
  • Total Accounts Receivable
  • Asset Recovery
  • Cash Sales

    • When disposing of an asset, under which condition would you recognize a loss on the sale?

  • Proceeds are greater than book value
  • Proceeds are less than book value (correct)
  • Proceeds are equal to the original cost
  • Proceeds equal accumulated depreciation

    • What should NOT be included in the costs debited to the asset account when purchasing an asset?

    <p>Operating costs</p> Signup and view all the answers

    Which of the following entries would increase cash after a daily cash sale?

    <p>Cash (for OVERAGE)</p> Signup and view all the answers

    What does the allowance for doubtful accounts represent?

    <p>Potential losses from uncollectible accounts</p> Signup and view all the answers

    To calculate total interest on a promissory note, which amount is always divided by 360?

    <p>Days</p> Signup and view all the answers

    When writing off an uncollectible account, which of the following accounts is credited?

    <p>Accounts Receivable</p> Signup and view all the answers

    Which of the following items should be added to the book balance during a bank reconciliation?

    <p>Interest earned</p> Signup and view all the answers

    What accounting action is taken when a bank service charge is recorded in the books?

    <p>Debit Bank Charge Expense</p> Signup and view all the answers

    Which of these adjustments would NOT be recorded in the journal entries of the books?

    <p>Errors made by the bank</p> Signup and view all the answers

    What should be done when a check from a customer bounces?

    <p>Debit Accounts Receivable</p> Signup and view all the answers

    During a bank reconciliation, what should be subtracted from the book balance?

    <p>NSF checks</p> Signup and view all the answers

    When correcting an error in the original journal entry, which account is adjusted?

    <p>The same account involved in the erroneous entry</p> Signup and view all the answers

    What is the purpose of adding deposits in transit during a bank reconciliation?

    <p>To show cash that has been received but not processed by the bank</p> Signup and view all the answers

    For which of the following items should no journal entry be made in the books?

    <p>Outstanding checks</p> Signup and view all the answers

    Which accounts are affected when writing off an uncollectible account?

    <p>Allowance for Doubtful Accounts and Accounts Receivable</p> Signup and view all the answers

    What is the formula to compute interest on a note receivable?

    <p>Principal * Rate * Days / 360</p> Signup and view all the answers

    When recovering a previously written-off account, which entries must be made?

    <p>Accounts Receivable increase, Allowance for Doubtful Accounts decrease</p> Signup and view all the answers

    Which entry is made to record the receipt of payment at maturity for a note receivable?

    <p>Cash (debit), Note Receivable (credit), and Interest Income (credit)</p> Signup and view all the answers

    Which of the following is NOT true regarding adjustment entries for notes that cross over year-end?

    <p>Interest is always calculated for every note regardless of maturity.</p> Signup and view all the answers

    In the case where the note maker does not pay at maturity, which accounts are affected?

    <p>Accounts Receivable and Note Receivable</p> Signup and view all the answers

    What is the first step in accruing interest for an adjusting journal entry?

    <p>Debit Interest Receivable</p> Signup and view all the answers

    Which account is credited during the receipt of a note receivable at maturity?

    <p>Notes Receivable</p> Signup and view all the answers

    When recording the receipt of payment at maturity, which entry should NOT be made?

    <p>Debit Interest Income</p> Signup and view all the answers

    When an account is written off as uncollectible, how is the Allowance for Doubtful Accounts affected?

    <p>It decreases.</p> Signup and view all the answers

    What should be debited in the case where a note matures but the note maker does not pay?

    <p>Accounts Receivable</p> Signup and view all the answers

    Which amount is always involved when debiting or crediting Notes Receivable?

    <p>Principal Amount</p> Signup and view all the answers

    During maturity of a note, under what condition would you credit Interest Receivable?

    <p>If the note was issued one period and matured in the next period</p> Signup and view all the answers

    What is the effect of making an adjusting entry for accrued interest?

    <p>Increase Interest Receivable and increase Interest Income</p> Signup and view all the answers

    What key component should be included in a bank reconciliation?

    <p>Both bank and books parts</p> Signup and view all the answers

    When preparing bank reconciliation, what factor is important to remember?

    <p>You must account for both bank and books sections</p> Signup and view all the answers

    What is emphasized as the key to doing well on the test?

    <p>Practice, practice, and practice</p> Signup and view all the answers

    Which topic does not have additional homework problems listed?

    <p>Inventory Management</p> Signup and view all the answers

    What is the recommended action before taking the test?

    <p>Work through extra practice problems</p> Signup and view all the answers

    Which of the following sections includes exercises related to Accounts Receivable turnover?

    <p>Quantitative multiple-choice questions</p> Signup and view all the answers

    What should students be able to do nearing test day?

    <p>Work homework problems without referring to notes</p> Signup and view all the answers

    Which of these problems is specifically associated with assessing bad debt expense?

    <p>BE 8-4</p> Signup and view all the answers

    Which type of problems are given for the Cost of asset topic?

    <p>Basic exercises and problems</p> Signup and view all the answers

    Where can students find solutions to their homework?

    <p>On D2L</p> Signup and view all the answers

    Study Notes

    Bank Reconciliation

    • Format: two sections—Bank and Books—with adjustments for differences between the bank statement and company records.
    • Bank Section:
      • Add: Deposits in Transit (deposits made by the company but not yet recorded by the bank)
      • Add: Bank Errors in favor of the company (bank understates the balance)
      • Subtract: Outstanding Checks (checks issued by the company but not yet cashed by the recipient)
      • Subtract: Bank Errors against the company (bank overstates the balance)
    • Book Section:
      • Add: Interest Earned (earned from bank but unrecorded)
      • Add: Note Receivable Collections (collected by the bank on the company's behalf)
      • Add: Company Errors (errors that understate the book balance)
      • Subtract: Service Charges (fees charged by the bank)
      • Subtract: NSF Checks (checks deposited from customers that bounce/are not paid)
      • Subtract: Company Errors (that overstate the book balance)
    • Adjustment to Book Balance:
      • All Adjustments ADDED to the Book Balance require debiting Cash.
      • Common credits for additions to the book balance include Interest Income and Notes Receivable.
      • All Adjustments SUBTRACTED from the Book Balance require crediting Cash.
      • Common debits for subtractions from the book balance include Bank Charge Expense and Accounts Receivable (for NSF checks).
    • Note: Journal entries are only required for adjustments to the Books, not for those to the Bank.

    Bad Debt Expense

    • Estimating Bad Debt Expense: Companies use a variety of methods to estimate the amount of uncollectible receivables. - Percentage of Sales Method: Estimates Uncollectible Accounts Expense as a portion of credit sales. - Percentage of Receivables Method: Estimates Uncollectible Accounts Expense based on the percentage of accounts receivable considered likely to be uncollectible. - Aging of Receivables Method: Further refines the percentage of receivables method by aging receivables and applying different percentages to different age categories.
    • Recording Write-Offs:
      • Write-Off: When an account is deemed uncollectible, it is written off, removing it from Accounts Receivable.
        • Credit Allowance for Doubtful Accounts (contra asset account reducing accounts receivable)
        • Debit Accounts Receivable (specific customer's account)
    • Recording Recoveries:
      • Recovery: When a previously written-off account is collected, two entries are required:
        • Debit Accounts Receivable (re-establish the customer's account)
        • Credit Allowance for Doubtful Accounts (reduce the allowance)
        • Debit Cash (record receipt of payment)
        • Credit Accounts Receivable (reduce the customer's balance).

    Notes Receivable

    • Maturity Value:
      • Maturity Value = Principal + Total Interest
      • Maturity Date: The date the note is due.
      • Interest = Principal * Rate * Days / 360
    • Journal Entries:
      • Receiving the Note:
        • Credit Accounts Receivable, Cash, Sales, etc.(depending on how the note was generated)
        • Debit Notes Receivable (for the principal amount).
      • Maturity:
        • Payment at Maturity:
          • Debit Cash (for maturity Value: Principal + Total Interest).
          • Credit Notes Receivable (for the principal amount).
          • Credit Interest Income (amount of earned interest).
        • Non-Payment at Maturity: (same entries as if they were paid!)
          • Debit Accounts Receivable (for the total unpaid balance)
          • Credit Notes Receivable (for the principal amount).
          • Credit Interest Income (for any accrued interest).
        • Note Crossing Year-End:
          • Adjusting Entry (for accrued interest): Debit Interest Receivable (Interest earned but not received yet) Credit Interest Income (for the amount of interest earned during the accounting period)

    Asset Acquisition

    • Costs to be Included:
      • Purchase Price: The amount paid for the asset.
      • Freight Costs: Cost of transporting the asset to its location.
      • Installation Costs: Cost of installing the asset.
      • Other Reasonable Costs: Costs directly related to getting the asset ready for use.
    • Costs to be Excluded:
      • Operating Costs: Costs associated with running the asset (e.g., repairs, maintenance, insurance).
      • Vandalism, Damage: Costs resulting from unexpected events.

    Asset Disposal

    • Calculating Gain or Loss:
      • Book Value: Original Cost - Accumulated Depreciation.
      • Proceeds: The amount received from selling the asset.
      • Gain: If the proceeds are greater than the book value.
      • Loss: If the book value is greater than the proceeds.
    • Journal Entries:
      • Sale:
        • Debit Cash (proceeds received)
        • Credit Accumulated Depreciation (to reduce the asset's carrying value to zero)
        • Credit Gain on Sale (if proceeds exceed book value)
        • Debit Loss on Sale (if proceeds are less than book value)
        • Credit Asset (ORIGINAL COST: to reduce the asset's balance to zero).

    Miscellaneous

    • Cash Short and Over: An account used to track discrepancies between the actual cash on hand and the expected cash balance.
      • Short: Debit Cash Short and Over (to account for shortage).
      • Over: Credit Cash Short and Over (to account for overage).
    • Estimating Bad Debt Expense: Companies estimate the amount of uncollectible accounts expense.
      • Percentage of Sales Method: Estimates a percentage of credit sales that are likely to be uncollectible based on past experience.
      • Percentage of Accounts Receivable Method: Estimates a percentage of accounts receivable that are likely to be uncollectible based on past experience.
      • Aging of Receivables Method: Applies different percentages to different age categories of accounts receivables.
    • Daily Cash Sales:
      • Journal Entry:
        • Debit Cash (amount in cash register)
        • Credit Cash Short and Over (for shortage) or Credit Cash Short and Over (for overage).
    • Accounts Receivable Turnover: Measures how efficiently a company collects its receivables.
    • Days Cash on Hand: Evaluates how long, on average, a company takes to collect its cash.

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    Description

    Test your understanding of the bank reconciliation process through this quiz. It covers adjustments needed for differences between bank statements and company records, including deposits in transit and outstanding checks. Perfect for accounting students looking to master this crucial topic.

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