In preparing a bank reconciliation, how should credit memos from the bank (such as interest earned or notes collected by the bank) be treated?

• A. Add them to the bank statement balance because they increase the bank’s recorded cash balance but not the company’s books.
• B. Deduct them from the book (company) balance because they represent decreases in the company’s cash.
• C. Ignore them in the reconciliation because they are already included in both the bank statement and the company’s cash account.
• D. Add them to the book (company) balance because they increase the company’s cash and must be recorded on the books.

Answer: (D)

Verified step by step guidance

1. Understand that credit memos from the bank, such as interest earned or notes collected by the bank, represent increases in the company's cash balance that the company has not yet recorded.
2. Recognize that the bank statement already reflects these increases, but the company's books may not, so the book balance needs adjustment.
3. In the bank reconciliation process, these credit memos should be added to the book (company) balance to align the company's records with the bank's records.
4. Formally, the adjustment can be represented as: \(\text{Adjusted Book Balance} = \text{Book Balance} + \text{Credit Memos}\).
5. This step ensures that the company's cash account accurately reflects all cash inflows recognized by the bank but not yet recorded by the company.