In preparing a bank reconciliation, what is the proper treatment of an outstanding check?

• A. Add it to the bank statement balance.
• B. Subtract it from the bank statement balance.
• C. Ignore it, as it has no effect on reconciliation.
• D. Add it to the book balance.

Answer: (B)

Verified step by step guidance

1. Understand the concept of an outstanding check: An outstanding check is a check issued by the company that has not yet been cleared or processed by the bank. It reduces the company's available cash balance but is not yet reflected in the bank statement balance.
2. Identify the purpose of a bank reconciliation: The goal is to reconcile the bank statement balance with the company's book balance by accounting for timing differences and errors.
3. Determine the impact of an outstanding check: Since the check has been issued but not cleared, it represents a deduction from the company's cash balance that the bank has not yet recorded.
4. Adjust the bank statement balance: To account for the outstanding check, subtract its amount from the bank statement balance during the reconciliation process.
5. Ensure proper reconciliation: After subtracting the outstanding check, verify that all other reconciling items (e.g., deposits in transit, bank fees, errors) are accounted for to align the bank statement balance with the book balance.