Receivables Defined

Accounts receivable are amounts that customers owe the company for normal credit purchases. Since accounts receivable are generally collected within two months of the sale, they are considered a current asset and usually appear on balance sheets below short‐term investments and above inventory.

Notes receivable are amounts owed to the company by customers or others who have signed formal promissory notes in acknowledgment of their debts. Promissory notes strengthen a company's legal claim against those who fail to pay as promised. The maturity date of a note determines whether it is placed with current assets or long‐term assets on the balance sheet. Notes that are due in one year or less are considered current assets, and notes that are due in more than one year are considered long‐term assets.

Accounts receivable and notes receivable that result from company sales are called trade receivables, but there are other types of receivables as well. For example, interest revenue from notes or other interest‐bearing assets is accrued at the end of each accounting period and placed in an account named interest receivable. Wage advances, formal loans to employees, or loans to other companies create other types of receivables. If significant, these nontrade receivables are usually listed in separate categories on the balance sheet because each type of nontrade receivable has distinct risk factors and liquidity characteristics.

Receivables of all types are normally reported on the balance sheet at their net realizable value, which is the amount the company expects to receive in cash.

Read More

Discounting Notes Receivable

Just as accounts receivable can be factored, notes can be converted into cash by selling them to a financial institution at a discount. Notes are usually sold (discounted) with recourse, which means the company discounting the note agrees to pay the financial institution if the maker dishonors the note. When notes receivable are sold with recourse, the company has a contingent liability that must be disclosed ni the notes accompanying the financial statements. A contingent liability is an obligation to pay an amount in the future, if and when an uncertain event occurs.

The discount rate is the annual percentage rate that the financial institution charges for buying a note and collecting the debt. The discount period is the length of time between a note's sale and its due date. The discount, which is the fee that the financial institution charges, is found by multiplying the note's maturity value by the discount rate and the discount period.







Suppose a company accepts a 90‐day, 9%, $5,000 note, which has a maturity value (principal + interest) of $5,110.96. In this example, precise calculations are made by using a 365‐day year and by rounding results to the nearest penny.







If the company immediately discounts with recourse the note to a bank that offers a 15% discount rate, the bank's discount is $189.04







The bank subtracts the discount from the note's maturity value and pays the company $4,921.92 for the note.


Maturity Value

$5,110.96


Discount

(189.04)


Discounted Value of Note

$4,921.92


The company determines the interest expense associated with this transaction by subtracting the discounted value of the note from the note's face value plus any interest revenue the company has earned from the note. Since the company discounts the note before earning any interest revenue, interest expense is $78.08 ($5000.00 ‐ $4,921.92). The company records this transaction by debiting cash for $4,921.92, debiting interest expense for $78.08, and crediting notes receivable for $5,000.00.







Suppose the company holds the note for 60 days before discounting it. After 60 days, the company has earned interest revenue of $73.97.







Since the note's due date is 30 days away, the bank's discount is $63.01. The bank subtracts the discount from the note's maturity value and pays the company $5,047.95 for the note.








Maturity Value

$5,110.96


Discount

(63.01)


Discounted Value of Note

$5,047.95


The company subtracts the discounted value of the note from the note's face value plus the interest revenue the company has earned from the note to determine the interest expense, if any, associated with discounting the note. In this example, the interest expense equals $26.02.


Note's Face Value + Interest Revenue Earned

$5,073.97


Discounted Value of Note

(5,047.95)


Interest Expense

$ 26.02


The company records this transaction by debiting cash for $5,047.95, debiting interest expense for $26.02, crediting notes receivable for $5,000.00, and crediting interest revenue for $73.97.

Read More

Recording Notes Receivable Transactions

Customers frequently sign promissory notes to settle overdue accounts receivable balances. For example, if a customer named D. Brown signs a six‐month, 10%, $2,500 promissory note after falling 90 days past due on her account, the business records the event by debiting notes receivable for $2,500 and crediting accounts receivable from D. Brown for $2,500. Notice that the entry does not include interest revenue, which is not recorded until it is earned.





If a customer signs a promissory note in exchange for merchandise, the entry is recorded by debiting notes receivable and crediting sales.







A company that frequently exchanges goods or services for notes would probably include a debit column for notes receivable in the sales journal so that such transactions would not need to be recorded in the general journal. A separate subsidiary ledger for notes receivable may also be created. If the amount of notes receivable is significant, a company should establish a separate allowance for bad debts account for notes receivable.

When a note's maker pays according to the terms specified on the note, the note is said to be honored. Assuming that no adjusting entries have been made to accrue interest revenue, the honored note is recorded by debiting cash for the amount the customer pays, crediting notes receivable for the principal value of the note, and crediting interest revenue for the interest earned. The total interest on a six‐month, 10%, $2,500 note is $125, so if D. Brown honors her note, the entry includes a $2,625 debit to cash, a $2,500 credit to notes receivable, and a $125 credit to interest revenue.







If some of the interest has already been accrued (through adjusting entries that debited interest receivable and credited interest revenue), then the previously accrued interest is credited to interest receivable and the remainder of the interest is credited to interest revenue.

When the maker of a promissory note fails to pay, the note is said to be dishonored. The dishonored note may be recorded in one of two ways, depending upon whether or not the payee expects to collect the debt If payment is expected, the company transfers the principal and interest to accounts receivable, removes the face value of the note from notes receivable, and recognizes the interest revenue. Assuming D. Brown dishonors the note but payment is expected, the company records the event by debiting accounts receivable from D. Brown for $2,625, crediting notes receivable for $2,500, and crediting interest revenue for $125.







If D. Brown dishonors the note and the company believes the note is a bad debt, allowance for bad debts is debited for $2,500 and notes receivable is credited for $2,500. No interest revenue is recognized because none will ever be received.







If interest on a bad debt had previously been accrued, then a correcting entry is needed to remove the accrued interest from interest revenue and interest receivable (by debiting interest revenue and crediting interest receivable). Although interest revenue would have been overstated in the accounting periods when the interest was accrued and would be understated in the period when the correcting entry occurs, efforts to amend prior statements or recognize the error in footnotes on forthcoming statements are not necessary except in rare situations where the bad debt changes reported revenue so much that the judgment of those who use financial statements is materially affected by the disclosure.

Read More

Notes Receivable

Companies classify the promissory notes they hold as notes receivable. A simple promissory note appears below.





The face value of a note is called the principal, which equals the initial amount of credit provided. The maker of a note is the party who receives the credit and promises to pay the note's holder. The maker classifies the note as a note payable. The payee is the party that holds the note and receives payment from the maker when the note is due. The payee classifies the note as a note receivable.

Calculating interest. Notes generally specify an interest rate, which is used to determine how much interest the maker of the note must pay in addition to the principal. Interest on short‐term notes is calculated according to the following formula:







For example, interest on a four-month, 9%, $1,000 note equals $30.







When a note's due date is expressed in days, the specified number of days is divided by 360 or 365 in the interest calculation. You may see either of these figures because accountants used a 360‐day year to simplify their calculations before computers and calculators became widely available, and many textbooks still follow this convention. In current practice, however, financial institutions and other companies generally use a 365‐day year to calculate interest. Therefore, you should be prepared to calculate interest either way.

The interest on a 90‐day, 12%, $10,000 note equals $300 if a 360‐day year is used to calculate interest, and the interest equals $295.89 if a 365‐day year is used.











Even when a note's due date is not expressed in days, adjusting entries that recognize accrued interest are often calculated in terms of days. Suppose a company holds a four‐month, 10%, $10,000 note dated October 19, 20X2. If the company uses an annual accounting period that ends on December 31, an adjusting entry that recognizes 73 days of accrued interest revenue must be made on December 31, 20X2. To determine the number of days in this situation, subtract the date of issue from the number of days in October and then add the result to the number of days in November and December (31 ‐ 19 = 12; 12 + 30 + 31 = 73). Notice that when you count days, you omit the note's issue date but include the note's due date or, in this situation, the date that the adjusting entry is made. Assuming the interest calculation uses a 365‐day year, the accrued interest revenue equals $200.







The adjusting entry debits interest receivable and credits interest revenue.







Interest on long‐term notes is calculated using the same formula that is used with short‐term notes, but unpaid interest is usually added to the principal to determine interest in subsequent years. For example, a two‐year, 10%, $10,000 note accrues $1,000 in interest during the first year. The principal and first year's interest equal $11,000 when compounded, so $1,100 in interest accrues during the second year.

Read More

Factoring Receivables

Companies sometimes need cash before customers pay their account balances. In such situations, the company may choose to sell accounts receivable to another company that specializes in collections. This process is called factoring, and the company that purchases accounts receivable is often called a factor. The factor usually charges between one and fifteen percent of the account balances. The reason for such a wide range in fees is that the receivables may be factored with or without recourse. Recourse means the company factoring the receivables agrees to reimburse the factor for uncollectible accounts. Low percentage rates are usually offered only when recourse is provided.

Suppose a company factors $500,000 in accounts receivable at a rate of 3%. The company records this sale of accounts receivable by debiting cash for $485,000, debiting factoring expense (or service charge expense) for $15,000, and crediting accounts receivable for $500,000.







In practice, the credit to accounts receivable would need to identity the specific subsidiary ledger accounts that were factored, although to simplify the example this is not done here.

Read More

Estimating Bad Debts—Allowance Method

Percentage of total accounts receivable method. One way companies derive an estimate for the value of bad debts under the allowance method is to calculate bad debts as a percentage of the accounts receivable balance. If a company has $100,000 in accounts receivable at the end of an accounting period and company records indicate that, on average, 5% of total accounts receivable become uncollectible, the allowance for bad debts account must be adjusted to have a credit balance of $5,000 (5% of $100,000).

Unless actual write‐offs during the just‐completed accounting period perfectly matched the balance assigned to the allowance for bad debts account at the close of the previous accounting period, the account will have an existing balance. If write‐offs were less than expected, the account will have a credit balance, and if write‐offs were greater than expected, the account will have a debit balance. Assuming that the allowance for bad debts account has a $200 debit balance when the adjusting entry is made, a $5,200 adjusting entry is necessary to give the account a credit balance of $5,000.







If the allowance for bad debts account had a $300 credit balance instead of a $200 debit balance, a $4,700 adjusting entry would be needed to give the account a credit balance of $5,000.

Aging method. In general, the longer an account balance is overdue, the less likely the debt is to be paid. Therefore, many companies maintain an accounts receivable aging schedule, which categorizes each customer's credit purchases by the length of time they have been outstanding. Each category's overall balance is multiplied by an estimated percentage of uncollectibility for that category, and the total of all such calculations serves as the estimate of bad debts. The accounts receivable aging schedule shown below includes five categories for classifying the age of unpaid credit purchases.







In this example, estimated bad debts are $5,000. If the account has an existing credit balance of $400, the adjusting entry includes a $4,600 debit to bad debts expense and a $4,600 credit to allowance for bad debts.







Percentage of credit sales method. Some companies estimate bad debts as a percentage of credit sales. If a company has $500,000 in credit sales during an accounting period and company records indicate that, on average, 1% of credit sales become uncollectible, the adjusting entry at the end of the accounting period debits bad debts expense for $5,000 and credits allowance for bad debts for $5,000.







Companies that use the percentage of credit sales method base the adjusting entry solely on total credit sales and ignore any existing balance in the allowance for bad debts account. If estimates fail to match actual bad debts, the percentage rate used to estimate bad debts is adjusted on future estimates.

Read More

Evaluating Accounts Receivable

Business owners know that some customers who receive credit will never pay their account balances. These uncollectible accounts are also called bad debts. Companies use two methods to account for bad debts: the direct write‐off method and the allowance method.

Direct write‐off method. For tax purposes, companies must use the direct write‐off method, under which bad debts are recognized only after the company is certain the debt will not be paid. Before determining that an account balance is uncollectible, a company generally makes several attempts to collect the debt from the customer. Recognizing the bad debt requires a journal entry that increases a bad debts expense account and decreases accounts receivable. If a customer named J. Smith fails to pay a $225 balance, for example, the company records the write‐off by debiting bad debts expense and crediting accounts receivable from J. Smith.







The Internal Revenue Service permits companies to take a tax deduction for bad debts only after specific uncollectible accounts have been identified. Unless a company's uncollectible accounts represent an insignificant percentage of their sales, however, they may not use the direct write‐off method for financial reporting purposes. Since several months may pass between the time that a sale occurs and the time that a company realizes that a customer's account is uncollectible, the matching principle, which requires that revenues and related expenses be matched in the same accounting period, would often be violated if the direct write‐off method were used. Therefore, most companies use the direct write‐off method on their tax returns but use the allowance method on financial statements.

Allowance method. Under the allowance method, an adjustment is made at the end of each accounting period to estimate bad debts based on the business activity from that accounting period. Established companies rely on past experience to estimate unrealized bad debts, but new companies must rely on published industry averages until they have sufficient experience to make their own estimates.

The adjusting entry to estimate the expected value of bad debts does not reduce accounts receivable directly. Accounts receivable is a control account that must have the same balance as the combined balance of every individual account in the accounts receivable subsidiary ledger. Since the specific customer accounts that will become uncollectible are not yet known when the adjusting entry is made, a contra‐asset account named allowance for bad debts, which is sometimes called allowance for doubtful accounts, is subtracted from accounts receivable to show the net realizable value of accounts receivable on the balance sheet.

If at the end of its first accounting period a company estimates that $5,000 in accounts receivable will become uncollectible, the necessary adjusting entry debits bad debts expense for $5,000 and credits allowance for bad debts for $5,000.







After the entry shown above is made, the accounts receivable subsidiary ledger still shows the full amount each customer owes, the balance of the control account (accounts receivable) agrees with the total balance in the subsidiary ledger, the credit balance in the contra asset account (allowance for bad debts) can be subtracted from the debit balance in accounts receivable to show the net realizable value of accounts receivable, and a reasonable estimate of bad debts expense is recognized in the appropriate accounting period.

When a specific customer's account is identified as uncollectible, it is written off against the balance in the allowance for bad debts account. For example, J. Smith's uncollectible balance of $225 is removed from the books by debiting allowance for bad debts and crediting accounts receivable. Remember, general journal entries that affect a control account must be posted to both the control account and the specific account in the subsidiary ledger.







Under the allowance method, a write‐off does not change the net realizable value of accounts receivable. It simply reduces accounts receivable and allowance for bad debts by equivalent amounts.



Before writing off J. Smith's account

After writing off J. Smith's account

Accounts Receivable

$100,000

$99,775


Less: Allowance for Bad Debts

(5.000)

(4.775)


Net Realizable Value

$95,000

$95,000



Customers whose accounts have already been written off as uncollectible will sometimes pay their debts. When this happens, two entries are needed to correct the company's accounting records and show that the customer paid the outstanding balance. The first entry reinstates the customer's accounts receivable balance by debiting accounts receivable and crediting allowance for bad debts. As in the previous example, the debit to accounts receivable must be posted to the general ledger control account and to the appropriate subsidiary ledger account.







The second entry records the customer's payment by debiting cash and crediting accounts receivable. Most companies record cash receipts in a cash receipts journal. Since a special journal's column totals are posted to the general ledger at the end of each accounting period, the posting to J. Smith's account is the only one shown with the cash receipts journal entry in the illustration below.







In the future when management looks at J. Smith's payment history, the account's activity will show the eventual collection of the amount owed.

If you use the general journal for the entry shown in the immediately previous cash receipts journal, you post the entry directly to cash and accounts receivable in the general ledger and also to J. Smith's account in the accounts receivable subsidiary ledger.

Read More

The Petty Cash Fund

Companies normally use checks to pay their obligations because checks provide a record of each payment. Companies also maintain a petty cash fund to pay for small, miscellaneous expenditures such as stamps, small delivery charges, or emergency supplies. The size of a petty cash fund varies depending on the needs of the business. A petty cash fund should be small enough so that it does not unnecessarily tie up company assets or become a target for theft, but it should be large enough to lessen the inconvenience associated with frequently replenishing the fund. For this reason, companies typically establish a petty cash fund that needs to be replenished every two to four weeks.

Companies assign responsibility for the petty cash fund to a person called the petty cash custodian or petty cashier. To establish a petty cash fund, someone must write a check to the petty cash custodian, who cashes the check and keeps the money in a locked file or cash box. The journal entry to record the creation of a petty cash fund appears below.







Most companies would record this entry—or any other entry that credits cash—in the cash disbursements special journal, but the illustrations use the general journal to eliminate journal columns that are not relevant to this discussion and to conform with this subject's presentation in most textbooks.

Whenever someone in the company requests petty cash, the petty cash custodian prepares a voucher that identifies the date, amount, recipient, and reason for the cash disbursement. For control purposes, vouchers are sequentially prenumbered and signed by both the person requesting the cash and the custodian. After the cash is spent, receipts or other relevant documents should be returned to the petty cash custodian, who attaches them to the voucher. All vouchers are kept with the petty cash fund until the fund is replenished, so the total amount of the vouchers and the remaining cash in the fund should always equal the amount assigned to the fund.

When the fund requires more cash or at the end of an accounting period, the petty cash custodian requests a check for the difference between the cash on hand and the total assigned to the fund. At this time, the person who provides cash to the custodian should examine the vouchers to verify their legitimacy. The transaction that replenishes the petty cash fund is recorded with a compound entry that debits all relevant asset or expense accounts and credits cash. Consider the journal entry below, which is made after the custodian requests $130 to replenish the petty cash fund and submits vouchers that fall into one of three categories.







Notice that the petty cash account is debited or credited only when the fund is established or when the size of the fund is increased or decreased, not when the fund is replenished.

If the voucher amounts do not equal the cash needed to replenish the fund, the difference is recorded in an account named cash over and short. This account is debited when there is a cash shortage and credited when there is a cash overage. Cash over and short appears on the income statement as a miscellaneous expense if the account has a debit balance or as a miscellaneous revenue if the account has a credit balance. In the journal entry below, the vouchers total $130 but the fund needs $135, so the entry includes a $5 debit to the cash over and short account.







If the vouchers total $130 but the fund needs only $125, the journal entry includes a $5 credit to the cash over and short account.

Read More

Credit Card Sales

Retail companies, which sell merchandise in small quantities directly to consumers, often receive a significant portion of their revenue through credit card sales. Some credit card receipts, specifically those involving credit cards issued by banks, are deposited along with cash and checks made payable to the company. The company receives cash for these credit card sales immediately. Because banks that issue credit cards to customers handle billing, collections, and related expenses, they usually charge companies between 2% and 5% of the sales price. This fee is deducted when the receipts are deposited in the company's bank account, so these credit card receipts are slightly more complicated to record than other types of cash deposits. If a company deposits credit card receipts totaling $1,000 and the fee is 3%, the company makes a compound entry that debits cash for $970, debits credit card expense for $30 (3% of $1,000), and credits sales for $1,000.






Some credit card receipts must be treated as receivables rather than cash. For example, many gas stations and department stores provide customers with credit cards that can be used to buy goods or services only at the issuer's place of business. When a customer makes a purchase, the company must debit the customer's account and credit the sales account. There are also some major credit cards that are not issued by banks, and receipts from these cards must be sent to the credit card company for reimbursement rather than deposited at a bank. After submitting credit card receipts totaling $1,000 directly to a credit card company, the company that makes the sale records the entry by debiting accounts receivable and crediting sales.







The credit card company deducts their fee before paying the company that made the sale. Upon receiving payment, the company that made the sale debits cash, debits credit card expense, and credits accounts receivable.







Recording credit card expenses after receiving payment, as in the example above, is convenient because a compound journal entry is all that is needed. However, if the sale occurs during one accounting period and the payment is not received until the next accounting period, an adjusting entry must be made, if the amount of credit card expense is significant, to prevent the matching principle from being violated. The matching principle requires that expenses be recognized during the same accounting period as the revenues they help to generate. If the payment in the previous example had not yet been received at the close of an accounting period, the company would make an adjusting entry that debits credit card expense for $30 and credits accounts receivable for $30.







Then, after the payment arrives, cash is debited for $970 and accounts receivable is credited for $970.

Read More

Bank Reconciliation

Banks usually send customers a monthly statement that shows the account's beginning balance (the previous statement's ending balance), all transactions that affect the account's balance during the month, and the account's ending balance.





The ending balance on a bank statement almost never agrees with the balance in a company's corresponding general ledger account. After receiving the bank statement, therefore, the company prepares a bank reconciliation, which identifies each difference between the company's records and the bank's records. The normal differences identified in a bank reconciliation will be discussed separately. These differences are referred to as reconciling items. A bank reconciliation begins by showing the bank statement's ending balance and the company's balance (book balance) in the cash account on the same date.

Vector Management Group Bank Reconciliation April 30, 20X8


Bank statement balance

$ 8,202

Book balance

$ 6,370


Deposits in transit. Most companies make frequent cash deposits. Therefore, company records may show one or more deposits, usually made on the last day included on the bank statement, that do not appear on the bank statement. These deposits are called deposits in transit and cause the bank statement balance to understate the company's actual cash balance. Since deposits in transit have already been recorded in the company's books as cash receipts, they must be added to the bank statement balance. The Vector Management Group made a $3,000 deposit on the afternoon of April 30 that does not appear on the statement, so this deposit in transit is added to the bank statement balance.

Vector Management Group Bank Reconciliation April 30, 20X8


Bank statement balance

$8,202

Book balance

$6,370


Add: Deposits in transit




Outstanding checks. A check that a company mails to a creditor may take several days to pass through the mail, be processed and deposited by the creditor, and then clear the banking system. Therefore, company records may include a number of checks that do not appear on the bank statement. These checks are called outstanding checks and cause the bank statement balance to overstate the company's actual cash balance. Since outstanding checks have already been recorded in the company's books as cash disbursements, they must be subtracted from the bank statement balance.

Vector Management Group Bank Reconciliation April 30, 20X8


Bank statement balance

$8,202

Book balance

$6,370


Add: Deposits in transit




Less: Outstanding checks


1552

$1,057


1564

245


1565

108


1570

359


1571

802



Adjusted bank balance


Automatic withdrawals and deposits. Companies may authorize a bank to automatically transfer funds into or out of their account. Automatic withdrawals from the account are used to pay for loans (notes or mortgages payable), monthly utility bills, or other liabilities. Automatic deposits occur when the company's checking account receives automatic fund transfers from customers or other sources or when the bank collects notes receivable payments on behalf of the company.

Banks use debit memoranda to notify companies about automatic withdrawals, and they use credit memoranda to notify companies about automatic deposits. The names applied to these memoranda may seem confusing at first glance because the company credits (decreases) its cash account upon receiving debit memoranda from the bank, and the company debits (increases) its cash account upon receiving credit memoranda from the bank. To the bank, however, a company's checking account balance is a liability rather than an asset. Therefore, from the bank's perspective, the terms debit and credit are correctly applied to the memoranda. If this still seems confusing, you may want to review the chart on page 19 and think about how the company classifies their account as an asset while the bank classifies the company's account as a liability.

A credit memorandum attached to the Vector Management Group's bank statement describes the bank's collection of a $1,500 note receivable along with $90 in interest. The bank deducted $25 for this service, so the automatic deposit was for $1,565. The bank statement also includes a debit memorandum describing a $253 automatic withdrawal for a utility payment. Unlike deposits in transit or outstanding checks, which are already recorded in the company's books, automatic withdrawals and deposits are often brought to the company's attention for the first time when the bank statement is received. On the bank reconciliation, add unrecorded automatic deposits to the company's book balance, and subtract unrecorded automatic withdrawals.

Vector Management Group Bank Reconciliation April 30,20X8


Bank statement balance

$8,202

Book balance

$6,370


Add: Deposits in transit



Add: Note collection plus interest less bank fee

$1,565






Less: Outstanding checks


1552

$1,057


1564

245


1565

108


1570

359


1571

802


1572

1,409

(3,980)


Adjusted bank balance



Because reconciling items that affect the book balance on a bank reconciliation have not been recorded in the company's books, they must be journalized and posted to the general ledger accounts. The $1,565 credit memorandum requires a compound journal entry involving four accounts. Cash is debited for $1,565, bank fees expense is debited for $25, notes receivable is credited for $1,500, and interest revenue is credited for $90.







If the Vector Management Group had previously made adjusting entries to accrue all of the interest revenue (by debiting interest receivable and crediting interest revenue), then interest receivable rather than interest revenue would need to be credited for $90 in the journal entry shown above.

The automatic withdrawal requires a simple journal entry that debits utilities expense and credits cash for $253.







Interest earned. Banks often pay interest on checking account balances. Interest income reported on the bank statement has usually not been accrued by the company and, therefore, must be added to the company's book balance on the bank reconciliation. The final transaction listed on the Vector Management Group's bank statement is for $18 in interest that has not been accrued, so this amount is added to the right side of the following bank reconciliation.

Vector Management Group Bank Reconciliation April 30,20X8


Bank statement balance

$8,202

Book balance

$6,370


Add: Deposits in transit



Add: Note collection


plus interest


less bank fee

$1,565


Interest earned

18







Less: Outstanding checks


1552

$1,057


1564

245


1565

108


1570

359


1571

802


1572

1,409

(3,980)


Adjusted bank balance


The interest revenue must be journalized and posted to the general ledger cash account. In the journal entry below, cash is debited for $18 and interest revenue is credited for $18.







Bank service charges. Banks often require customers to pay monthly account fees, check printing fees, safe‐deposit box rental fees, and other fees. Unrecorded service charges must be subtracted from the company's book balance on the bank reconciliation. The Vector Management Group's bank statement on page 120 includes a $20 service charge for check printing and a $50 service charge for the rental of a safe‐deposit box.

Vector Management Group Bank Reconciliation April 30,20X8


Bank statement balance

$8,202

Book balance

$6,370


Add: Deposits in transit



Add: Note collection


plus interest


less bank fee

$1,565


Interest earned

18








Less: Outstanding checks



1564

245

Safe-deposit box


1565

108

rental

50


1570

359


1571

802


1572

1,409

(3,980)


Adjusted bank balance



Although separate journal entries for each expense can be made, it is simpler to combine them, so bank fees expense is debited for $70 and cash is credited for $70.







NSF (not sufficient funds) checks. A check previously recorded as part of a deposit may bounce because there are not sufficient funds in the issuer's checking account. When this happens, the bank returns the check to the depositor and deducts the check amount from the depositor's account Therefore, NSF checks must be subtracted from the company's book balance on the bank reconciliation. The Vector Management Group's bank statement includes an NSF check for $345 from Hosta, Inc.

Vector Management Group Bank Reconciliation April 30,20X8


Bank statement balance

$8,202

Book balance

$6,370


Add: Deposits in transit



Add: Note collection


plus interest


less bank fee

$1,565


Interest earned

18








Less: Outstanding checks



1564

245

Safe-deposit box


1565

108

rental

50


1570

359

NSF Hosta, Inc.

345


1571

802


1572

1,409

(3,980)


Adjusted bank balance



Since the NSF check has previously been recorded as a cash receipt, a journal entry is necessary to update the company's books. Therefore, a $345 debit is made to increase the accounts receivable balance of Hosta, Inc., and a $345 credit is made to decrease cash.







Errors. Companies and banks sometimes make errors. Therefore, each transaction on the bank statement should be double‐checked. If the bank incorrectly recorded a transaction, the bank must be contacted, and the bank balance must be adjusted on the bank reconciliation. If the company incorrectly recorded a transaction, the book balance must be adjusted on the bank reconciliation and a correcting entry must be journalized and posted to the general ledger. While reviewing the bank statement, Vector Management Group discovers that check #1569 for $381, which was made payable to an advertising agency named Ad It Up, had been incorrectly entered in the cash disbursements journal for $318. This error is a reconciling item because the company's general ledger cash account is overstated by $63.

Vector Management Group Bank Reconciliation April 30,20X8


Bank statement balance

$8,202

Book balance

$6,370


Add: Deposits in transit



Add: Note collection


plus interest


less bank fee

$1,565


Interest earned

18








Less: Outstanding checks


1552

$1,057

Check printing

20


1564

245

Safe-deposit box


1565

108

rental

50


1570

359

NSF Hosta, Inc.

345


1571

802

Error check#1569

63

731


1572

1,409

(3,980)


Adjusted bank balance

Adjusted book balance



When all differences between the ending bank statement balance and book balance have been identified and entered on the bank reconciliation, the adjusted bank balance and adjusted book balance are identical.

Since the Vector Management Group paid Ad It Up $63 more than the books show, a $63 debit is made to decrease the accounts payable balance owed to Ad It Up, and a $63 credit is made to decrease cash.

Read More