Final answer:
When performing a bank reconciliation and an error made by the depositor is found, an adjustment must be made to the book balance to reflect the true cash balance. This adjustment accounts for inaccuracies in the company's records and helps maintain accurate financial statements.
Step-by-step explanation:
When performing a bank reconciliation, if an error made by the depositor is found, an adjustment must be made to the book balance to arrive at the true cash balance. This process involves modifying the balance in the company's cash account to reflect the correct amount. Adjustments on the book balance are necessary to account for transactions that have been recorded incorrectly, whether that's due to a mistake in the amount entered, forgetting to enter a transaction, or recording a transaction twice.
Bank reconciliations are an essential part of maintaining accurate financial records and ensuring that a company's financial statements reflect its true financial position. Adjustments to the book balance may also include bank fees or interest earned that the company has not yet recorded. Keeping precise records helps in avoiding common misperceptions regarding cash availability and financial health of a business.
The process of bank reconciliation involves two sets of records of the cash transactions: the bank statement and the company's own records (book balance). The goal is to reconcile or match the two balances by adding or deducting items that are present in one set of records but not in the other (M1 and M2). This may include outstanding checks, deposits in transit, bank fees, and errors in recording transactions.