Chavez Company most recently reconciled its bank statement. Which of the following items would require an adjustment to the company's cash balance in its accounting records?

• A. A bank service charge not yet recorded in the company's books
• B. An outstanding check listed on the bank statement
• C. A deposit in transit recorded by the company but not yet by the bank
• D. A check error made by the bank in the company's favor

Answer: (A)

Verified step by step guidance

1. Understand the concept of bank reconciliation: Bank reconciliation is the process of comparing the company's accounting records for cash with the bank statement to identify discrepancies and ensure accuracy.
2. Identify the items that require adjustments to the company's cash balance: Adjustments are made for items that affect the company's accounting records but are not yet reflected in the bank statement or vice versa.
3. Analyze each item: A bank service charge not yet recorded in the company's books requires an adjustment because it affects the company's cash balance but has not been accounted for in the records. Outstanding checks and deposits in transit do not require adjustments to the company's books as they are timing differences that affect the bank statement, not the company's records.
4. Consider the check error made by the bank: If the bank made an error in the company's favor, it does not require an adjustment to the company's books unless the company decides to correct the error proactively. This is because the error is on the bank's side, not the company's accounting records.
5. Conclude that the adjustment required is for the bank service charge: The company needs to record the bank service charge in its accounting records to reconcile the cash balance accurately.