The $660.40 Gap the Owner Wants to Plug
You are reconciling the September 30 bank account for Cedar & Co. Landscaping LLC, a cash-basis single-member LLC. The bank statement shows $18,442.10; the ledger shows $17,781.70. You find: outstanding checks #1043 ($620.00) and #1049 ($215.40); a $45.00 bank service charge that never made it into the ledger; a customer check for $1,250.00 that the bank returned NSF on September 29 and charged back, though the ledger still shows the deposit; check #1041 for $310.00 entered twice; and a $900.00 deposit keyed as $90.00. The owner wants the books closed tonight and asks whether the $660.40 difference "just gets written off to miscellaneous expense."
1. Build the reconciliation from both sides and state the correct September 30 cash balance. For each item, say which side it adjusts and why.
Read the worked answer
Bank side $18,442.10 − $620.00 − $215.40 = $17,606.70
Outstanding checks go on the bank side because the ledger has already deducted them and the bank has not yet presented them. Both amounts must still be outstanding at month end - confirm they clear in October, or they may be stale checks that need to go back to unclaimed property.
Book side $17,781.70 − $1,250.00 (NSF charged back) − $45.00 (fee) + $310.00 (duplicate check removed) + $810.00 (deposit keyed $90 instead of $900) = $17,606.70
Why book side: the bank already knows about the NSF and the fee; it is the ledger that is missing them. The duplicate check and the transposed deposit are ledger errors that the bank never saw.
Result: cash is $17,606.70 and the $660.40 gap is fully explained. There is nothing to plug. A reconciliation that does not land at zero has an unexplained item, and the correct response is to keep hunting, not to create an account for the residue.
2. Give the correcting journal entries. Which, if any, would you handle differently if these books lived in QuickBooks Online instead of a spreadsheet?
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- Bank fee: Dr Bank Service Charges 45.00 / Cr Checking 45.00
- NSF check: Dr Accounts Receivable - [customer] 1,250.00 / Cr Checking 1,250.00. The sale is still valid; the money is not. Rebill or pursue collection, and add any returned-check fee the bank charged.
- Duplicate check #1041: Dr Checking 310.00 / Cr [the original expense or asset account] 310.00 - reverse only the second line, not the original.
- Deposit keyed as $90: Dr Checking 810.00 / Cr [Income or Customer Credits] 810.00
In QuickBooks Online: do not delete a transaction that has already cleared the bank - that breaks the reconciliation history and the audit trail. Use a journal entry, or edit the original transaction and note the reason. For the duplicate check, voiding is preferable to deleting because void leaves a trace. Attach the September statement to the reconciliation and leave a memo on each correcting entry referencing the reconciling item. If the NSF check is later collected, apply the receipt against the receivable - do not credit income twice.
3. The owner insists on writing the difference to Miscellaneous Expense. How do you respond, and what do the two recording errors tell you about the client's controls?
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Response: explain that the $660.40 is not unexplained - it is four specific items, two of which (the duplicate check and the $900/$90 transposition) are errors that will keep happening until the process changes. A plug does not correct the underlying ledger, so October's reconciliation starts from a wrong number and next month's gap will be bigger. Then show the owner the one-page rec with the four items listed; the objection usually disappears once the gap has names attached.
Control weaknesses:
- No check-number sequence review - a duplicate entry is trivially caught by scanning the register for repeated check numbers.
- No second look at deposits. A $900 deposit keyed as $90 is a keystroke error that a deposit-to-statement comparison catches immediately.
- The reconciliation is happening late enough that the client believed a plug was normal.
Recommend: monthly (not quarterly) reconciliations, a check-register review for number gaps and repeats before each rec, and a policy on returned checks - including whether to keep accepting personal checks from that customer.