Final answer:
To determine the true cash balance, deposits in transit should be added to and outstanding checks should be subtracted from the unadjusted bank balance. This corrects for the timing differences between the company's records and the bank statement, ensuring accurate financial reporting.
Step-by-step explanation:
To determine the true cash balance, the correct approach is to add deposits in transit and subtract outstanding checks from the unadjusted bank balance. This method is a part of the bank reconciliation process which ensures that a company's cash records are correct. When performing a bank reconciliation, the deposits in transit are added because they have been recorded in the company's cash records but are not yet reflected on the bank statement. On the other hand, outstanding checks are subtracted because they have been written and recorded in the company's cash records but have not yet cleared the bank.
Following this process, you will reconcile the cash balance per book with the cash balance per bank. This is to ensure all cash items are accounted for, and the records are accurate for financial reporting purposes. Remember, the balances may differ due to timing differences in recording transactions by the bank and the company.