The Vanishing Deposit: Timing vs. Error
On June 30, Ridgeway Supply Co. receives its bank statement. The bank balance is $18,420; the company's Cash ledger balance is $16,905. The bookkeeper, Dana, prepares a reconciliation and finds the following: (1) outstanding checks total $2,310; (2) a customer's check for $640 was deposited but returned NSF and has not yet been recorded in the ledger; (3) the bank collected a $1,200 note plus $45 interest on the company's behalf, credited to the account but not yet recorded; (4) bank service charges of $20 appear on the statement; (5) a deposit of $875 made on June 29 does not appear on the statement. Dana's manager wants the ledger adjusted only for items that represent real changes in the company's cash position, not timing differences.
1. Which reconciling items require adjusting journal entries to the company's Cash ledger, and which do not? Explain the reasoning for each.
Read the worked answer
Require adjusting entries (real changes to cash):
- NSF check $640 - the deposit did not actually clear; cash is reduced and the customer's receivable is reinstated. Debit Accounts Receivable $640, credit Cash $640.
- Note collection $1,200 + interest $45 - the bank collected cash the company had not recorded. Debit Cash $1,245, credit Notes Receivable $1,200 and Interest Revenue $45.
- Service charges $20 - a real reduction in cash. Debit Bank Service Charge Expense $20, credit Cash $20.
Do NOT adjust (timing differences only):
- Outstanding checks $2,310 - already recorded in the ledger; they simply haven't cleared the bank yet.
- Deposit in transit $875 - already recorded in the ledger; the bank just hasn't posted it.
Rule: adjust the books only for items the bank knows about that the company does not (or errors). Timing items reconcile bank balance to book balance but leave the ledger alone.
2. Compute the adjusted (true) cash balance and show that both the bank side and the book side reconcile to the same figure.
Read the worked answer
Bank side: Bank statement balance $18,420
- Deposit in transit $875 − Outstanding checks $2,310 = Adjusted bank balance $16,985
Book side: Ledger balance $16,905 − NSF check $640
- Note collection $1,200
- Interest $45 − Service charges $20 = $16,905 − 640 + 1,245 − 20 = $16,985
Both sides agree at $16,985, confirming the reconciliation is complete. The adjusted balance - not the raw ledger balance - is the figure reported as Cash on the June 30 balance sheet.