When preparing a bank reconciliation, outstanding checks should be:

• A. Added to the bank statement balance
• B. Subtracted from the bank statement balance
• C. Subtracted from the book balance
• D. Added to the book balance

Answer: (B)

Verified step by step guidance

1. Understand the concept of outstanding checks: Outstanding checks are checks issued by the company but not yet cleared or processed by the bank. These checks reduce the company's available cash balance.
2. Identify the purpose of a bank reconciliation: A bank reconciliation is performed to ensure that the company's book balance matches the bank statement balance by accounting for timing differences and errors.
3. Determine the impact of outstanding checks on the bank statement balance: Since the bank has not yet processed these checks, the bank statement balance will appear higher than the actual cash available. Therefore, outstanding checks need to be subtracted from the bank statement balance.
4. Clarify why outstanding checks are not added to the book balance: The book balance already reflects the issuance of these checks, so no adjustment is needed to the book balance for outstanding checks.
5. Apply the adjustment during reconciliation: Subtract the total amount of outstanding checks from the bank statement balance to reconcile it with the book balance.