In preparing a bank reconciliation, how should a credit memorandum from the bank (such as for a note collected by the bank) be treated?

• A. Add it to the bank statement balance as a deposit in transit.
• B. Add it to the book (company) balance and record it as an increase to Cash in the company’s records.
• C. Deduct it from the book (company) balance and record it as a decrease to Cash in the company’s records.
• D. Deduct it from the bank statement balance as an outstanding check.

Answer: (B)

Verified step by step guidance

1. Understand that a credit memorandum from the bank represents an amount collected by the bank on behalf of the company, such as a note receivable collected directly by the bank.
2. Recognize that this credit memorandum increases the company's cash balance because the bank has received money that belongs to the company.
3. Since the bank has already recorded this increase, but the company's books may not yet reflect it, the adjustment should be made to the book (company) balance, not the bank statement balance.
4. To adjust the book balance, add the amount of the credit memorandum to the company's cash account, reflecting the increase in cash due to the bank's collection.
5. Record the increase in cash in the company's accounting records by debiting Cash and crediting the appropriate account (such as Notes Receivable), ensuring the books match the bank's records.