Question

In preparing a bank reconciliation, what happens to the amount of a canceled check that is omitted from the journal?

1) It is subtracted from the balance per company's records.
2) It is added to the balance per company's records.
3) It is ignored and does not affect the balance per company's records.
4) It is recorded separately in a different journal entry.

Answer 1

When a canceled check is omitted in the journal during bank reconciliation, it should be subtracted from the balance per company's records to avoid overstating the cash balance.

Step-by-step explanation:

In preparing a bank reconciliation, if a canceled check is omitted from the journal, the correct action is option 1) It is subtracted from the balance per company's records. This is because a canceled check represents a payment that has been made but not yet recorded in the company's books. So in reconciling the bank statement with the company's records, the amount of the canceled check should be deducted from the company's book balance to arrive at the true amount of cash available. If this step is not performed, the company's cash balance would be overstated, as it would not reflect checks that have actually been cashed and cleared by the bank.