Question

Indicate whether the firm should add or subtract each item below from its balance of cash or the bank's balance of cash in preparing a bank reconciliation. The first answer is provided as an example.

1) Add to firm's balance of cash
2) Subtract from firm's balance of cash
3) Add to bank's balance of cash
4) Subtract from bank's balance of cash

Answer 1

In a bank reconciliation, adjustments are made to align the firm's recorded balance with the bank statement for accurate financial reporting. This includes adding to or subtracting from the firm's or bank's balance of cash for deposits in transit, outstanding checks, and any bank errors.

Step-by-step explanation:

When preparing a bank reconciliation, a firm must compare its cash records with the bank statement to identify any differences and adjust the cash balance accordingly. This process ensures that the records in the firm's books match the bank's records. Here are the steps to adjust the firm's and the bank's cash balances:

Add to the firm's balance of cash: This includes deposits in transit and any errors that understate the firm's balance, such as an understated deposit.

Subtract from the firm's balance of cash: This includes outstanding checks and any errors that overstate the firm's balance, such as a duplicated entry.

Add to the bank's balance of cash: This includes bank errors that understate the bank's balance when an item is credited incorrectly to another account.

Subtract from the bank's balance of cash: This includes bank errors that overstate the bank's balance, such as a deposit being credited as a higher amount.

Each adjustment helps to align the firm's recorded balance with the bank statement, which is pivotal for accurate financial reporting.