Final answer:
Outstanding checks, bank service charges, deposits in transit, and interest earned affect different parts of financial statements. Outstanding checks impact the cash balance on the books, service charges reduce the cash account on the income statement, deposits in transit increase the book cash balance, and interest earned increases both revenue and cash balance.
Step-by-step explanation:
When reconciling a bank statement, certain items such as outstanding checks, bank service charges, deposits in transit, and interest earned need to be accounted for. Outstanding checks have not been cashed and therefore do not decrease the bank account balance; they affect the cash balance on the company's books. Bank service charges are expenses that reduce the cash account on the company's income statement. Deposits in transit are funds that have been received and recorded by the company but not yet recorded by the bank; they increase the cash balance on the company's books. Interest earned, typically reported on an income statement, increases the company's revenue and the cash balance on the books.
Further discussion on the role of checks, how stores receive payments, and what overdrafts are can assist in understanding these transactions. Checks are used for payment of goods and services and are processed through financial institutions so merchants can receive funds. An overdraft occurs when an account doesn't have enough funds to cover checks or other withdrawals, leading to potential additional fees.
The bank balance may not represent actual cash due to outstanding items such as loans and securities, which are accounted for as assets but not present as physical cash. In the secondary market, the value of a loan can fluctuate based on the borrower's payment history, changes in economy-wide interest rates, and the financial performance of the borrowing firm.