Bank error

Scenario: On April 31st, 2022, your lemonade stand has a Cash balance of $800. Over the course of the month, they wrote $10,000 in checks, but $200 of those checks haven’t been processed by your local bank. In addition, $170 out of their $20,000 in cash receipts still needs to be deposited in the local bank.

However, on their bank statement, it shows a Cash Balance of $850 and includes the following items not yet recorded by the company: a note receivable collected by the bank for $200, interest earned on that note of $20, and a bank service fee of $50. In addition, the bank accidentally charged your lemonade stand $50 for a service fee that was meant to be on another customer’s account. Lastly, one of your lemonade stand's customer’s checks for $100 returned back with non-sufficient funds.

Prepare the bank reconciliation to correct the ending Cash Balance on April 31st, 2022.

The blue underlined text signals...

  • Considering that the bank accidentally charged your lemonade stand... ➡️ This needs to be corrected from the bank's POV (Bank's Cash Balance) as a Bank error.

Bank's Cash Balance Items

Reconciling ItemDescriptionAdd or Subtract to Cash Balance?
Deposits outstandingDeposits made by the company, not recorded by the bank yet.Add
Checks outstandingChecks written by the company, not recorded by the bank yet.Subtract
Bank errorBank accidentally charges (or forgets to charge) the company.Add / Subtract (it depends)

Follow this process to determine whether to add or subtract the bank error value of $50:

  • Are we dealing with a deposit or a payment? ➡️ The bank accidentally wrote a service fee for us... which is a payment.
  • Was the amount for more or less than it should've been? ➡️ The bank shouldn't have charged us at all! So it was for more than it should've been!

Considering that the bank wrote a payment for more than they should've... we've gotta add that balance back to the Cash Balance from the bank's POV (a.k.a. Bank's Cash Balance)!

Bank error = +$50

Bank's Cash Balance

Per Bank Statement$850
Deposits outstanding$170
Checks outstanding($200)
Bank error$50
Bank Balance per Reconciliation???

Company's Cash Balance

Per General Ledger$800
Company Balance per Reconciliation???
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