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Bank Reconciliation quiz #1

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  • What is the primary purpose of a bank reconciliation?
    The primary purpose of a bank reconciliation is to compare the company's records with the bank statement and adjust for timing differences and errors to ensure both records show the same cash balance.
  • Why are bank reconciliations considered an important internal control over cash?
    Bank reconciliations help detect errors, prevent fraud, and ensure the accuracy of cash records by regularly comparing company records with bank statements.
  • What are deposits in transit in the context of bank reconciliation?
    Deposits in transit are cash receipts recorded by the company but not yet processed or cleared by the bank.
  • How are deposits in transit treated on a bank reconciliation?
    Deposits in transit are added to the bank balance during the reconciliation process.
  • What are outstanding checks in a bank reconciliation?
    Outstanding checks are checks written and recorded by the company but not yet cleared or processed by the bank.
  • How are outstanding checks handled in a bank reconciliation?
    Outstanding checks are subtracted from the bank balance during the reconciliation.
  • What is a bank error, and how is it addressed in a bank reconciliation?
    A bank error is a mistake made by the bank in recording transactions. It is corrected on the bank side of the reconciliation to reflect the accurate balance.
  • What are bank collections in the context of bank reconciliation?
    Bank collections are amounts collected by the bank on behalf of the company, such as direct deposits from customers.
  • How are bank collections recorded during a bank reconciliation?
    Bank collections are added to the book balance because the company may not have recorded them yet.
  • What is an electronic funds transfer (EFT) in bank reconciliation?
    An EFT is an automatic transfer of funds, either received or paid, that may not be recorded in the company's books until the bank statement is reviewed.
  • How are EFT receipts and payments treated in a bank reconciliation?
    EFT receipts are added to the book balance, while EFT payments are subtracted from the book balance.
  • What are service charges in a bank reconciliation?
    Service charges are fees charged by the bank that the company may not have recorded until receiving the bank statement.
  • How are service charges handled in a bank reconciliation?
    Service charges are subtracted from the book balance during reconciliation.
  • What is interest revenue in the context of bank reconciliation?
    Interest revenue is interest earned on the company's bank account, which may not be recorded in the company's books until the bank statement is received.
  • How is interest revenue treated in a bank reconciliation?
    Interest revenue is added to the book balance during reconciliation.
  • What is an NSF check in bank reconciliation?
    An NSF (not sufficient funds) check is a check received from a customer that bounces because the customer does not have enough funds in their account.
  • How are NSF checks handled in a bank reconciliation?
    NSF checks are subtracted from the book balance because the company initially recorded the receipt but did not actually receive the funds.
  • What are book errors in a bank reconciliation?
    Book errors are mistakes made in the company's records, such as recording the wrong amount for a transaction.
  • How are book errors corrected in a bank reconciliation?
    Book errors are adjusted on the book side to reflect the correct transaction amount.
  • Why do the bank statement and company records often show different cash balances before reconciliation?
    Differences arise due to timing lags and errors, such as deposits in transit, outstanding checks, and unrecorded transactions.
  • Which items are typically adjusted on the bank side of a bank reconciliation?
    Deposits in transit, outstanding checks, and bank errors are adjusted on the bank side.
  • Which items are typically adjusted on the book side of a bank reconciliation?
    Bank collections, EFTs, service charges, interest revenue, NSF checks, and book errors are adjusted on the book side.
  • What is the final goal of a bank reconciliation?
    The goal is to ensure the adjusted bank balance equals the adjusted book balance.
  • How does a deposit in transit affect the bank balance during reconciliation?
    It increases the bank balance because the deposit has not yet been recorded by the bank.
  • How does an outstanding check affect the bank balance during reconciliation?
    It decreases the bank balance because the check has not yet been cleared by the bank.
  • How does a bank collection affect the book balance during reconciliation?
    It increases the book balance because the company has not yet recorded the collection.
  • How does a service charge affect the book balance during reconciliation?
    It decreases the book balance because the company has not yet recorded the charge.
  • How does interest revenue affect the book balance during reconciliation?
    It increases the book balance because the company has not yet recorded the interest earned.
  • How does an NSF check affect the book balance during reconciliation?
    It decreases the book balance because the company must reverse the previously recorded receipt.
  • What is the effect of a book error on the reconciliation process?
    Book errors are corrected to ensure the book balance accurately reflects all transactions.
  • What is the effect of a bank error on the reconciliation process?
    Bank errors are corrected to ensure the bank balance accurately reflects all transactions.
  • Why is cash considered the most liquid asset?
    Cash is the most liquid asset because it can be used immediately for transactions without conversion.
  • What is the impact of timing differences on bank reconciliation?
    Timing differences cause discrepancies between the bank statement and company records, requiring adjustments during reconciliation.
  • Why might a company not know about certain bank transactions until receiving the bank statement?
    Some transactions, like bank fees, interest, or direct deposits, are recorded by the bank before the company is aware of them.
  • What is the typical frequency for performing a bank reconciliation?
    Bank reconciliations are typically performed monthly after receiving the bank statement.
  • What is the first step in preparing a bank reconciliation?
    The first step is to obtain the bank statement and the company's cash records for the same period.
  • What should be done if a bank error is discovered during reconciliation?
    The error should be corrected on the bank side to reflect the accurate transaction amount.
  • What should be done if a book error is discovered during reconciliation?
    The error should be corrected on the book side to reflect the accurate transaction amount.
  • How does a company record a bank collection discovered during reconciliation?
    The company records a journal entry to increase cash and recognize the collection.
  • How does a company record a service charge discovered during reconciliation?
    The company records a journal entry to decrease cash and recognize the expense.