Cash and Receivables PDF

CHAPTER 7 Cash and Receivables LEARNING OBJECTIVES After studying this chapter, you should be able to: 1. Indicate how to report cash 4. Explain accounting issues and related items. related to recognition and...

CHAPTER 7 Cash and Receivables LEARNING OBJECTIVES After studying this chapter, you should be able to: 1. Indicate how to report cash 4. Explain accounting issues and related items. related to recognition and valuation of notes receivable. 2. Define receivables and explain accounting issues 5. Explain additional accounting related to their recognition. issues related to accounts and notes receivables. 3. Explain accounting issues related to valuation of accounts receivable. 7-1  Cash Cash  Most liquid asset.  Standard medium of exchange.  Basis for measuring and accounting for all other items.  Current asset.  Examples: Coin, currency, available funds on deposit at the bank, money orders, certified checks, cashier’s checks, personal checks, bank drafts and savings accounts. 7-2 LO 1  Cash Reporting Cash Cash Equivalents Short-term, highly liquid investments that are both a) readily convertible to cash, and b) so near their maturity that they present insignificant risk of changes in value. Examples: Government bonds, commercial paper, and money market funds 7-3 LO 1  Reporting Cash Restricted Cash Companies segregate restricted cash from “regular” cash. Examples, restricted for: (1) plant expansion, (2) retirement of long-term debt, and (3) compensating balances. 7-4 LO 1  Reporting Cash Restricted Cash Restricted cash - Petty cash, payroll, and dividend funds are examples of cash set aside for a particular purpose. In most situations, these fund balances are not material. Therefore, companies do not segregate them from cash in the financial statements. When material in amount, companies segregate restricted cash from “regular” cash for reporting purposes. Compensating balances - that portion of any demand deposit maintained by a company which constitutes support for existing borrowing arrangements of the company with a lending institution 7-5 LO 1  Reporting Cash Bank Overdrafts Company writes a check for more than the amount in its cash account.  Generally reported as a current liability.  Included as a component of cash if such overdrafts are repayable on demand and are an integral part of a company’s cash management (such as the common practice of establishing off setting arrangements against other accounts at the same bank). 7-6 LO 1  ILLUSTRATION 7.2 Classification of Cash-Related Items 7-7 LO 1  Define Receivables and explain Accounting Issues Related To Their Recognition Receivables - Claims held against customers and others for money, goods, or services. Oral promises of the Written promises to pay a purchaser to pay for goods certain sum of money on a and services sold. specified future date. Accounts Notes Receivable Receivable 7-8 LO 2  Receivables Non-Trade Receivables 1. Advances to officers and employees. 2. Advances to subsidiaries. 3. Deposits paid to cover potential damages or losses. 4. Deposits paid as a guarantee of performance or payment. 5. Dividends and interest receivable. 6. Claims against: Insurance companies for casualties sustained; defendants under suit; governmental bodies for tax refunds; common carriers for damaged or lost goods; creditors for returned, damaged, or lost goods; customers for returnable items (crates, containers, etc.). 7-9 LO 2  Receivables ILLUSTRATION 7.3 Receivables Statement of Financial Position Sheet Presentations 7-10 LO 2  Recognition of Accounts Receivables  Accounts receivable generally arise as part of a revenue arrangement.  The revenue recognition principle indicates that a company should recognize revenue when it satisfies its performance obligation by transferring the good or service to the customer. 7-11 LO 2  Recognition of Accounts Receivables Lululemon Athletica, Inc. (CAN) sells a yoga outfit to Jennifer Burian for $100 on account, the yoga outfit is transferred when Jennifer obtains control of this outfit. When this change in control occurs, Lululemon should recognize an account receivable and sales revenue. Lululemon makes the following entry: Accounts Receivable 100 Sales Revenue 100 7-12 LO 2  Recognition of Accounts Receivables Some key indicators that Lululemon has transferred and that Jennifer has obtained control of the yoga outfit. 1. Lululemon has the right to payment from the customer. 2. Lululemon has passed legal title to the customer. 3. Lululemon has transferred physical possession of the goods. 4. Lululemon no longer has significant risks and rewards of ownership of the goods. 5. Jennifer has accepted the asset. 7-13 LO 2  Receivables Measurement of the Transaction Price The transaction price is the amount of consideration that a company expects to receive from a customer in exchange for transferring goods or services. Variable Consideration In some cases, the price of a good or service is dependent on future events. These future events often include such items as discounts, returns and allowances, rebates, and performance bonuses. 7-14 LO 2  Variable Consideration Trade Discounts Use to:  Avoid frequent changes in 10 % catalogs. Discount for new Retail  Alter prices for different Store quantities purchased. Customers  Hide the true invoice price from competitors. 7-15 LO 2  Variable Consideration Cash Discounts (Sales Discounts)  Offered to induce prompt payment.  Terms such as 2/10, n/30, 2/10, E.O.M., or net Payment 30, E.O.M. terms are  Gross Method vs. Net 2/10, n/30 Method. 7-16 LO 2  Cash Discounts (Sales Discounts) ILLUSTRATION 7.5 Entries under Gross and Net Methods 7-17 LO 2  Variable Consideration Sales Returns and Allowances  Sales Returns and Allowances is a contra revenue account to Sales Revenue.  Allowance for Sales Returns and Allowances is a contra asset account to Accounts Receivable.  The use of both Sales Returns and Allowances, and Allowance for Sales Return and Allowances accounts is helpful to identify potential problems associated with inferior merchandise, inefficiencies in filling orders, or delivery or shipment mistakes. 7-18 LO 2  Sales Returns and Allowances On January 4, 2019, Max sells $5,000 of hurricane glass to Oliver on account. Max records the sale on account as follows. Accounts Receivable 5,000 Sales Revenue 5,000 7-19 LO 2  Sales Returns and Allowances On January 16, 2019, Max grants an allowance of $300 to Oliver because some of the hurricane glass is defective. The entry to record this transaction is as follows. Sales Returns and Allowances 300 Accounts Receivable 300 7-20 LO 2  Sales Returns and Allowances On January 31, 2019, before preparing financial statements, Max estimates that an additional $100 in sales returns and allowances will result from the sale to Oliver on January 4, 2019. An adjusting entry to record this additional allowance is as follows. Sales Returns and Allowances 100 Allowance for Sales Returns and Allowances 100 7-21 LO 2  Variable Consideration Time Value of Money  Theoretically, any revenue after the period of sale is interest revenue.  Companies ignore interest revenue related to accounts receivable because the amount of the discount is not usually material in relation to the net income for the period.  The profession specifically excludes from present value considerations “receivables arising from transactions with customers in the normal course of business which are due in customary trade terms not exceeding approximately one year.” 7-22 LO 2  Accounts Receivable How are these accounts presented on the Statement of Financial Position? Allowance for Accounts Receivable Doubtful Accounts Beg. 500 25 Beg. End. 500 25 End. 7-23 LO 2  Accounts Receivable Brown Furniture Statement of Financial Position (partial) Current Assets: Cash $ 330 Accounts receivable 500 Less: Allowance for doubtful accounts (25) 475 Inventory 812 Prepaid expense 40 Total current assets 1,657 7-24 LO 2  Accounts Receivable Alternate Brown Furniture Presentation Statement of Financial Position (partial) Current Assets: Cash $ 330 Accounts receivable, net of $25 allowance 475 Inventory 812 Prepaid expense 40 Total current assets 1,657 7-25 LO 2  Accounts Receivable Journal entry for credit sale of $100? Accounts Receivable 100 Sales Revenue 100 Allowance for Accounts Receivable Doubtful Accounts Beg. 500 25 Beg. End. 500 25 End. 7-26 LO 2  Accounts Receivable Journal entry for credit sale of $100? Accounts Receivable 100 Sales Revenue 100 Allowance for Accounts Receivable Doubtful Accounts Beg. 500 25 Beg. Sale 100 End. 600 25 End. 7-27 LO 2  Accounts Receivable Collected $333 on account? Cash 333 Accounts Receivable 333 Allowance for Accounts Receivable Doubtful Accounts Beg. 500 25 Beg. Sale 100 End. 600 25 End. 7-28 LO 2  Accounts Receivable Collected $333 on account? Cash 333 Accounts Receivable 333 Allowance for Accounts Receivable Doubtful Accounts Beg. 500 25 Beg. Sale 100 333 Coll. End. 267 25 End. 7-29 LO 2  Accounts Receivable Adjustment of $15 for estimated bad debts? Bad Debt Expense 15 Allowance for Doubtful Accounts 15 Allowance for Accounts Receivable Doubtful Accounts Beg. 500 25 Beg. Sale 100 333 Coll. End. 267 25 End. 7-30 LO 2  Accounts Receivable Adjustment of $15 for estimated bad debts? Bad Debt Expense 15 Allowance for Doubtful Accounts 15 Allowance for Accounts Receivable Doubtful Accounts Beg. 500 25 Beg. Sale 100 333 Coll. 15 Est. End. 267 40 End. 7-31 LO 2  Accounts Receivable Write-off of uncollectible accounts for $10? Allowance for Doubtful accounts 10 Accounts Receivable 10 Allowance for Accounts Receivable Doubtful Accounts Beg. 500 25 Beg. Sale 100 333 Coll. 15 Est. End. 267 40 End. 7-32 LO 2  Accounts Receivable Write-off of uncollectible accounts for $10? Allowance for Doubtful accounts 10 Accounts Receivable 10 Allowance for Accounts Receivable Doubtful Accounts Beg. 500 25 Beg. Sale 100 333 Coll. 15 Est. 10 W/O W/O 10 End. 257 30 End. 7-33 LO 2  Accounts Receivable Brown Furniture Statement of Financial Position (partial) Current Assets: Cash $ 330 Accounts receivable, net of $30 allowance 227 Inventory 812 Prepaid expense 40 Total current assets 1,409 7-34 LO 2  Valuation of Accounts Receivable Uncollectible Accounts Receivable  Record credit losses as debits to Bad Debt Expense (or Uncollectible Accounts Expense).  Normal and necessary risk of doing business on credit.  Two methods to account for uncollectible accounts: 1) Direct write-off method 2) Allowance method 7-35 LO 3  Valuation of Accounts Receivable Methods of Accounting for Uncollectible Accounts Direct Write-Off Method Allowance Method Theoretically deficient: Losses are estimated:  Fails to record expenses as  Percentage-of-sales. incurred.  Percentage-of-receivables.  Receivable not stated at  IFRS requires when bad cash realizable value. debts are material in  Not appropriate when amount. amount uncollectible is material. 7-36 LO 3  Valuation of Accounts Receivable Direct Write-Off Method for Uncollectible Accounts When a company determines a particular account to be uncollectible, it charges the loss to Bad Debt Expense. Assume, for example, that on December 10 Cruz Ltd. writes off as uncollectible Yusado’s NT$8,000,000 balance. The entry is: Bad Debt Expense 8,000,000 Accounts Receivable (Yusado) 8,000,000 7-37 LO 3  Valuation of Accounts Receivable Allowance Method for Uncollectible Accounts  Involves estimating uncollectible accounts at the end of each period.  Ensures that companies state receivables on the statement of financial position at their cash realizable value.  Companies estimate uncollectible accounts and cash realizable value using information about past and current events as well as forecasts of future collectibility. 7-38 LO 3  Allowance Method for Uncollectible Accounts Recording Estimated Uncollectibles Illustration: Assume that Brown Furniture in 2019, its first year of operations, has credit sales of £1,800,000. Of this amount, £150,000 remains uncollected at December 31. The credit manager estimates that £10,000 of these sales will be uncollectible. The adjusting entry to record the estimated uncollectibles (assuming a zero balance in the allowance account) is: Bad Debt Expense 10,000 Allowance for Doubtful Accounts 10,000 7-39 LO 3  Recording Estimated Uncollectibles ILLUSTRATION 7.5 Presentation of Allowance for Doubtful Accounts The amount of £140,000 represents the cash realizable value of the accounts receivable at the statement date. 7-40 LO 3  Allowance Method for Uncollectible Accounts Recording the Write-Off of an Uncollectible Account  When companies have exhausted all means of collecting a past-due account and collection appears impossible, the company should write off the account.  In the credit card industry, for example, it is standard practice to write off accounts that are 210 days past due. 7-41 LO 3  Write-Off of an Uncollectible Account Illustration: The financial vice president of Brown Furniture authorizes a write-off of the £1,000 balance owed by Randall plc on March 1. The entry to record the write-off is: Allowance for Doubtful Accounts 1,000 Accounts Receivable 1,000 Assume that on July 1, Randall plc pays the £1,000 amount that Brown had written off on March 1. These are the entries: Accounts Receivable 1,000 Allowance for Doubtful Accounts 1,000 Cash 1,000 Accounts Receivable 1,000 7-42 LO 3  Allowance Method for Uncollectible Accounts Estimating the Allowance Percentage-of-Receivables Approach  Reports estimate of receivables at cash realizable value. Companies may apply this method using  one composite rate, or  an aging schedule using different rates. 7-43 LO 3  Estimating the Allowance using Aging Schedule 7-44 LO 3  What entry would Wilson make assuming that the allowance account had a zero balance? Bad Debt Expense 26,610 Allowance for Doubtful Accounts 26,610 7-45 LO 3  What entry would Wilson make assuming the allowance account had a credit balance of €800 before adjustment? Bad Debt Expense (€26,610 – €800) 25,810 Allowance for Doubtful Accounts 25,810 7-46 LO 3  Example : Estimating the Allowance Illustration: Duncan SA reports the following financial information before adjustments. Instructions: Prepare the journal entry to record Bad Debt Expense assuming Duncan Company estimates bad debts at (a) 5% of accounts receivable and (b) 5% of accounts receivable but Allowance for Doubtful Accounts had a $1,500 debit balance. 7-47 LO 3  Illustration: Duncan SA reports the following financial information before adjustments. Instructions: Prepare the journal entry to record Bad Debt Expense assuming Duncan Company estimates bad debts at (a) 5% of accounts receivable. Bad Debt Expense 3,000 Allowance for Doubtful Accounts 3,000 €100,000 x 5% = €5,000 - €2,000 = €3,000 7-48 LO 3  Illustration: Duncan SA reports the following financial information before adjustments. Instructions: Prepare the journal entry to record Bad Debt Expense assuming Duncan Company estimates bad debts at (b) 5% of accounts receivable but the Allowance had a $1,500 debit balance. Bad Debt Expense 6,500 Allowance for Doubtful Accounts 6,500 €100,000 x 5% = €5,000 + €1,500 = €6,500 7-49 LO 3  Explain accounting issues related to recognition and valuation of notes receivable. Notes Receivable Supported by a formal promissory note.  Written promise to pay a certain sum of money at a specific future date.  A negotiable instrument.  Maker signs in favor of a Payee.  Interest-bearing (has a stated rate of interest) OR  Zero-interest-bearing (interest included in face amount). 7-50 LO 4  Notes Receivable Generally originate from:  Customers who need to extend payment period of an outstanding receivable.  High-risk or new customers.  Loans to employees and subsidiaries.  Sales of property, plant, and equipment.  Lending transactions (the majority of notes). 7-51 LO 4  Recognition of Notes Receivable Short-Term Long-Term Record at Record at Present Value Face Value, of cash expected less allowance to be collected Interest Rates Note Issued at Stated rate = Market rate Face Value Stated rate > Market rate Premium Stated rate < Market rate Discount 7-52 LO 4  Note Issued at Face Value Illustration: Bigelow SA lends Scandinavian Imports €10,000 in exchange for a €10,000, three-year note bearing interest at 10 percent annually. The market rate of interest for a note of similar risk is also 10 percent. How does Bigelow record the receipt of the note? i = 10% €10,000 Principal PV-OA €1,000 €1,000 €1,000 Interest 0 1 2 3 4 n=3 ILLUSTRATION 7.7 Time Diagram for Note Issued at Face Value 7-53 LO 4  Note Issued at Face Value TABLE 6.4 PRESENT VALUE OF AN ORDINARY ANNUITY OF 1 PV of Interest €1,000 x 2.48685 = €2,487 Interest Received Factor Present Value 7-54 LO 4  Note Issued at Face Value TABLE 6.2 PRESENT VALUE OF 1 PV of Principal €10,000 x.75132 = €7,513 Principal Factor Present Value 7-55 LO 4  Note Issued at Face Value Summary Present value of interest € 2,487 Present value of principal 7,513 Note current market value €10,000 Journal Entries Jan. yr. 1 Notes Receivable 10,000 Cash 10,000 Dec. yr. 1 Cash 1,000 Interest Revenue 1,000 7-56 LO 4  Zero-Interest-Bearing Notes Illustration: Jeremiah Company receives a three-year, $10,000 zero-interest-bearing note. The market rate of interest for a note of similar risk is 9 percent. How does Jeremiah record the receipt of the note? i = 9% $10,000 Principal PV-0A $0 $0 $0 Interest 0 1 2 3 4 n=3 ILLUSTRATION 7.9 Time Diagram for Zero- Interest-Bearing Note 7-57 LO 4  Zero-Interest-Bearing Notes TABLE 6.2 PRESENT VALUE OF 1 PV of Principal $10,000 x.77218 = $7,721.80 Principal Factor Present Value 7-58 LO 4  Zero-Interest-Bearing Notes ILLUSTRATION 7.10 Discount Amortization Schedule— Effective-Interest Method 7-59 LO 4  Zero-Interest-Bearing Notes Prepare the journal entry to record the receipt of the note. Notes Receivable 7,721.80 Cash 7,721.80 7-60 LO 4  Zero-Interest-Bearing Notes Record interest revenue at the end of the first year. Notes Receivable 694.96 Interest Revenue ($7,721.80 x 9%) 694.96 7-61 LO 4  Interest-Bearing Notes Illustration: Morgan Group makes a loan to Marie Co. and receives in exchange a three-year, €10,000 note bearing interest at 10 percent annually. The market rate of interest for a note of similar risk is 12 percent. Prepare the journal entry to record the receipt of the note? i = 12% €10,000 Principal PV-0A €1,000 €1,000 €1,000 Interest 0 1 2 3 4 n=3 7-62 LO 4  Interest-Bearing Notes TABLE 6.4 PRESENT VALUE OF AN ORDINARY ANNUITY OF 1 PV of Interest €1,000 x 2.40183 = €2,402 Interest Received Factor Present Value 7-63 LO 4  Interest-Bearing Notes TABLE 6.2 PRESENT VALUE OF 1 PV of Principal €10,000 x.71178 = €7,118 Principal Factor Present Value 7-64 LO 4  Interest-Bearing Notes Illustration: Record the receipt of the note? Notes Receivable 9,520 Cash 9,520 7-65 LO 4  Interest-Bearing Notes ILLUSTRATION 7.13 Discount Amortization Schedule— Effective-Interest Method 7-66 LO 4  Interest-Bearing Notes Record interest revenue at the end of the first year. Cash 1,000 Notes Receivable 142 Interest Revenue 1,142 7-67 LO 4  Other Issues Related to Receivables Derecognition of Receivables 1. When the receivable no longer has any value; that is, the contractual rights to the cash flows of the receivable no longer exist. 2. When a company transfers (e.g., sells) a receivable to another company, thereby transferring the risks and rewards of ownership to this other company. 7-68 LO 5  Derecognition of Receivables Transfer of Receivables Various reasons for transfer of receivables to another party  Accelerate the receipt of cash.  Competition.  Sell receivables because money is tight.  Billing / collection are time-consuming and costly. Transfer of receivables for cash happens in two ways: 1. Sales of receivables. 2. Secured borrowing. 7-69 LO 5  Sales of Receivables ILLUSTRATION 7.14 Basic Procedures in Factoring Factors are finance companies or banks that buy receivables from businesses for a fee. 7-70 LO 5  Sales of Receivables Sale without Guarantee  Purchaser assumes risk of collection and absorbs any credit losses.  Transfer is outright sale of receivable.  Seller records loss on sale.  Seller uses a Due from Factor (receivable) account to cover probable sales discounts, sales returns, and sales allowances. 7-71 LO 5  Sale without Guarantee Crest Textiles factors €500,000 of accounts receivable with Commercial Factors on a non-guarantee basis. Commercial Factors assesses a finance charge of 3 percent of the amount of accounts receivable and retains an amount equal to 5 percent of the accounts receivable (for probable adjustments). Crest Textiles and Commercial Factors make the following journal entries for the receivables transferred without guarantee. 7-72 LO 5  Sales of Receivables Sale with Guarantee  Seller guarantees payment to purchaser.  Transfer is considered a borrowing—sometimes referred to as a failed sale. Assume Crest Textiles sold the receivables on a with guarantee basis. 7-73 LO 5  Derecognition of Receivables Secured Borrowing Using receivables as collateral in a borrowing transaction. On March 1, 2019, Meng Mills assigns $700,000 of its accounts receivable to Sino Bank as collateral for a $500,000 note. Meng Mills continues to collect the accounts receivable; the account debtors are not notified of the arrangement. Sino Bank assesses a finance charge of 1 percent of the accounts receivable and interest on the note of 12 percent. Meng Mills makes monthly payments to the bank for all cash it collects on the receivables. 7-74 LO 5 7-75  Secured Borrowing Illustration: On April 1, 2019, Prince Company assigns $500,000 of its accounts receivable to the Hibernia Bank as collateral for a $300,000 loan due July 1, 2019. The assignment agreement calls for Prince Company to continue to collect the receivables. Hibernia Bank assesses a finance charge of 2% of the accounts receivable, and interest on the loan is 10% (a realistic rate of interest for a note of this type). Instructions: a) Prepare the April 1, 2019, journal entry for Prince Company. b) Prepare the journal entry for Prince’s collection of $350,000 of the accounts receivable during the period from April 1, 2019, through June 30, 2019. c) On July 1, 2019, Prince paid Hibernia all that was due from the loan it secured on April 1, 2019. 7-76 LO 5  Secured Borrowing Instructions: a) Prepare the April 1, 2019, journal entry for Prince Company. b) Prepare the journal entry for Prince’s collection of $350,000. c) On July 1, 2019, Prince paid Hibernia all that was due from the loan it secured on April 1, 2019. a) Cash 290,000 Finance Charge ($500,000 x 2%) 10,000 Notes Payable 300,000 b) Cash 350,000 Accounts Receivable 350,000 c) Notes Payable 300,000 Interest Expense (10% x $300,000 x 3/12) 7,500 Cash 307,500 7-77 LO 5  Summary of Transfers 7-78 LO 5  Presentation and Analysis General rules in classifying receivables are: 1. Segregate and report carrying amounts of different categories of receivables. 2. Indicate receivables classified as current and non-current in the statement of financial position. 3. Appropriately offset the valuation accounts for receivables that are impaired, including a discussion of individual and collectively determined impairments. 4. Disclose the fair value of receivables in such a way that permits it to be compared with its carrying amount. 5. Disclose information to assess the credit risk inherent in the receivables. 6. Disclose any receivables pledged as collateral. 7. Disclose all significant concentrations of credit risk arising from receivables. 7-79 LO 5  Presentation and Analysis Analysis of Receivables Louis Vuitton reported 2015 net sales of €35,664 million, its beginning and ending accounts receivable balances were €2,274 million an €2,521 million, respectively. The computation of its accounts receivable turnover is as follows. 7-80 LO 5  Presentation and Analysis Analysis of Receivables This Ratio used to:  Assess the liquidity of the receivables.  Measure the number of times, on average, a company collects receivables during the period. 7-81 LO 5  APPENDIX 7A Cash Controls LEARNING OBJECTIVE 6 Explain common techniques employed to control cash. Management faces two problems in accounting for cash transactions: 1. Establish proper controls to prevent any unauthorized transactions by officers or employees. 2. Provide information necessary to properly manage cash on hand and cash transactions. 7-82 LO 6  Using Bank Accounts To obtain desired control objectives, a company can vary the number and location of banks and the types of accounts. ► General checking account ► Collection float ► Lockbox accounts ► Imprest bank accounts 7-83 LO 6  The Imprest Petty Cash System Used to pay small amounts for miscellaneous expenses. Steps: 1. Record the transfer of $300 to petty cash: Petty Cash 300 Cash 300 2. Petty cash custodian obtains signed receipts from each individual to whom he or she pays cash. 7-84 LO 6  The Imprest Petty Cash System Steps: 3. Custodian receives a company check to replenish the fund. Supplies Expense 42 Postage Expense 53 Miscellaneous Expense 76 Cash Over and Short 2 Cash 173 7-85 LO 6  The Imprest Petty Cash System Steps: 4. If the company decides that the amount of cash in the petty cash fund is excessive by $50, it lowers the fund balance as follows. Cash 50 Petty cash 50 7-86 LO 6  Physical Protection of Cash Balances Company should  Minimize the cash on hand.  Only have on hand petty cash and current day’s receipts.  Keep funds in a vault, safe, or locked cash drawer.  Transmit each day’s receipts to the bank as soon as practicable.  Periodically prove the balance shown in the general ledger. 7-87 LO 6  Reconciliation of Bank Balances Schedule explaining any differences between the bank’s and the company’s records of cash. Reconciling Items: 1. Deposits in transit. 2. Outstanding checks. 3. Bank charges Time Lags 4. Bank credits. 5. Bank or depositor errors. 7-88 LO 6  Reconciliation of Bank Balances 7-89 LO 6