AFC AFC Bank Reconciliation 1 — Questions and Answers
Question 1: What is the primary purpose of preparing a bank reconciliation?
- To increase the cash balance in the ledger
- To identify and explain differences between the bank statement balance and the book balance (Correct answer)
- To record interest earned automatically
- To eliminate all outstanding checks
Correct answer: To identify and explain differences between the bank statement balance and the book balance
A bank reconciliation compares the company's cash book balance with the bank statement balance to ensure accuracy and catch errors or unrecorded items.
Question 2: A deposit in transit is best described as:
- A deposit recorded by the bank but not yet by the company
- A deposit recorded by the company but not yet by the bank (Correct answer)
- An electronic funds transfer pending approval
- A deposit held by the bank as collateral
Correct answer: A deposit recorded by the company but not yet by the bank
Deposits in transit are amounts the company has recorded in its books but that have not yet appeared on the bank statement.
Question 3: On a bank reconciliation, outstanding checks are:
- Added to the bank balance
- Deducted from the bank balance (Correct answer)
- Added to the book balance
- Deducted from the book balance
Correct answer: Deducted from the bank balance
Outstanding checks have been recorded in the company's books but have not yet cleared the bank, so they are subtracted from the bank statement balance.
Question 4: A bank service charge of $25 appears on the bank statement but has not been recorded in the company's books. How is this handled in the bank reconciliation?
- Add $25 to the bank balance
- Deduct $25 from the bank balance
- Add $25 to the book balance
- Deduct $25 from the book balance (Correct answer)
Correct answer: Deduct $25 from the book balance
Bank service charges reduce cash; since the company hasn't recorded them yet, they must be deducted from the book balance to reconcile.
Question 5: Interest earned on a checking account appears on the bank statement but has not been recorded by the company. This item should be:
- Deducted from the bank balance
- Added to the bank balance
- Deducted from the book balance
- Added to the book balance (Correct answer)
Correct answer: Added to the book balance
Interest earned increases cash and appears on the bank statement first; it must be added to the book balance since the company hasn't recorded it yet.
Question 6: After completing a bank reconciliation, journal entries are required for items that adjust:
- The bank balance only
- The book balance only (Correct answer)
- Both the bank balance and the book balance
- Neither balance, only a memo is needed
Correct answer: The book balance only
Only adjustments to the book (company ledger) balance require journal entries; bank-side differences are corrected by the bank when items clear.
AFC AFC Bank Reconciliation 1
What is the primary purpose of preparing a bank reconciliation?