Week 5 Answer Key

Cash Management & Reconciliations (Return to Syllabus)

Detailed Instructor Answer Key — Bank reconciliations, cash controls, fraud detection, and petty cash.

Concept 1

Purpose of a Bank Reconciliation — Instructor Answer

A bank reconciliation ensures that the Cash account in the general ledger matches the balance reported by the bank. It identifies timing differences, bank fees, NSF checks, errors, and potential fraudulent activity.

It is one of the most essential internal controls because cash is highly vulnerable to theft and error.

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Concept 2

Bank Side vs. Book Side Differences

Bank Side (No Journal Entry Required)

Deposits in transit
Outstanding checks
Bank errors

Book Side (Journal Entry Required)

Bank service fees
Interest earned
NSF customer checks
EFT withdrawals or deposits
Book errors

Concept 3

Bank Reconciliation — Sample Solution

Given:

Bank balance: $12,500
Book balance: $11,950
Outstanding checks: $2,100
Deposits in transit: $900
Bank fee: $35
NSF check: $260
Interest earned: $25

A. Bank Side

$12,500 + 900 − 2,100 = $11,300

B. Book Side

$11,950 − 35 − 260 + 25 = $11,300

Adjusted Bank Balance = Adjusted Book Balance = $11,300 ✔

Concept 4

Required Journal Entries

Bank Service Fee

Bank Service Charges .......... Dr 35
    Cash ......................................... Cr 35

NSF Check Returned

Accounts Receivable ............ Dr 260
    Cash ......................................... Cr 260

Interest Earned

Cash .............................................. Dr 25
    Interest Revenue ....................... Cr 25

Concept 5

Petty Cash — Sample Solution

Petty Cash Fund: $300
Cash on Hand: $47
Receipts: $240

Replenishment Amount

$240 (equal to receipts)

Over/Short Calculation

Expected Cash = 300 − 240 = 60
Actual Cash = 47 → Short $13

Journal Entry

Office Supplies ............... Dr 80
Postage Expense ............. Dr 110
Meals Expense ................. Dr 50
Cash Over and Short ....... Dr 13
    Cash .................................. Cr 253

Concept 6

Common Bank Reconciliation Errors

Omitting deposits in transit
Adding outstanding checks instead of subtracting
Recording NSF checks incorrectly
Using bank fees on the wrong side of reconciliation
Mistakenly adjusting for bank errors on book side

Concept 7

Fraud Red Flags in Cash

Missing deposits
Unexplained cash shortages
Altered or forged checks
Lapping (AR fraud)
Unauthorized bank withdrawals
Repeated stale-dated checks

Discussion

Discussion Prompt — Instructor Model Answer

Bank reconciliation is critical because it confirms that recorded cash matches the bank’s records, ensuring that all cash receipts and disbursements are valid, authorized, and accurate. Without monthly reconciliations, businesses may experience cash shortages, fraudulent withdrawals, inaccurate financial statements, IRS penalties, and uncorrected bookkeeping errors.

Summary

Week 5 Summary — Instructor Version

Students must demonstrate the ability to complete full bank reconciliations, record book-side adjustments, reconcile petty cash, and identify fraud red flags. These skills protect financial integrity and strengthen internal controls.

Next: Week 6 — Payroll Accounting & Employer Obligations.