Cash and cash equivalents
A bank reconciliation CPA exam item is testing which of two jobs each reconciling item does: items the bank does not know about yet — deposits in transit, outstanding checks — adjust the bank balance and need no journal entry. Items the company does not know about yet — service charges, an NSF check, interest credited — adjust the book balance and each one requires an entry. Applying a book-side item to the bank side is the error that produces a wrong number from a correct-looking reconciliation.
| Blueprint group | FAR-II-A |
| Area weight | 30–40% |
| Approx. share of the exam | 3.9% |
What the Blueprint asks for here
At this group the Blueprint expects a candidate to determine the amount of cash and cash equivalents reported on the balance sheet, to prepare a bank reconciliation and to prepare the journal entries the reconciliation requires.
This is our paraphrase, not the Blueprint’s wording. verbatim quote pending The authoritative representative-task text is in the AICPA Blueprints, which are published free — download them and read the group directly. We will not print a quotation we have not taken from the source document.
Bank reconciliation CPA exam items: cash and cash equivalents in FAR
Why this group is worth its weight
Cash is the first group in Area II and the one candidates skip fastest, on the assumption that a bank reconciliation is bookkeeping rather than examinable accounting. What is examinable is the classification decision underneath it: what counts as cash, what counts as a cash equivalent, and which reconciling items change the reported balance. Those are three separate judgements and only one of them is arithmetic.
The two sides do different work
A reconciliation moves the bank balance and the book balance toward the same figure, and the two columns are not symmetric. Bank side: deposits in transit are added, outstanding checks are subtracted, and a bank error is corrected — none of these needs an entry, because the company already recorded them correctly. Book side: service charges, NSF checks returned, interest earned and collections the bank made on the company’s behalf are recorded now, and each one is a journal entry. The adjusted balances agree, and that agreed figure is the cash reported on the balance sheet.
What counts as cash in the first place
Cash equivalents are short-term, highly liquid investments readily convertible to known amounts of cash and so near maturity that interest rate risk is insignificant — conventionally an original maturity of three months or less, measured from the date the entity acquired it, not from the date it was issued. Restricted cash is not reported as unrestricted cash. A compensating balance the entity is not free to spend is disclosed and, where the restriction is legally binding, classified outside cash. A post-dated check received from a customer is a receivable.
Where the exam puts the trap
Almost always in the direction of an adjustment. An outstanding check has already been deducted in the books and not yet by the bank, so it comes off the bank side; candidates who reason from “we spent it” add it back. A deposit in transit is the mirror image. The reliable defence is to stop reasoning about the transaction and ask a mechanical question instead: does the bank know about this yet, or does the company?
The standard this group is examined on is published by the standard setter: FASB Accounting Standards Codification. The Blueprint coordinates and weight ranges above come from the AICPA Blueprints. What is ours, and labelled as ours, is the reading, the practice item and the misconception tags.
A practice item
our own practice item Written by us against the public Blueprint. It is not an AICPA question and it is not taken from any review course.
A company is preparing its 31 December bank reconciliation. The bank statement balance is $12,400. Deposits in transit are $2,300 and outstanding checks total $3,150. The bank statement also shows a service charge of $45 and a customer’s NSF check of $600, neither of which has been recorded in the company’s books.
What is the adjusted (true) cash balance at 31 December?
| A | $11,550 | correct |
| B | $10,905 | |
| C | $13,250 | |
| D | $12,400 |
The rule
The adjusted cash balance is reached from both directions. The bank balance is increased by deposits in transit and reduced by outstanding checks, because the bank has not yet recorded them. The book balance is adjusted for items the company has not yet recorded, such as service charges, NSF checks returned and amounts collected by the bank, and each of those adjustments requires a journal entry. The two adjusted balances agree, and that is the amount reported as cash.
The arithmetic
Bank side: $12,400 + $2,300 − $3,150 = $11,550. The $45 service charge and the $600 NSF check are book-side adjustments and do not touch this column; they reduce the company’s book balance to the same $11,550 and require journal entries. Subtracting them from the bank column as well double-counts them and gives $10,905.
What we would ask you first
This is the part of the product that is hard to show without an account, so here it is directly: for each wrong option above, the opening question our tutor asks — before any explanation — targeting the specific mistake that option represents. Choosing B ($10,905) and choosing D ($12,400) are different errors and deserve different first questions.
If you chose B — book_items_applied_to_bank
“You have subtracted the service charge and the NSF check from the bank column. The bank already knows about both of those — they are on its statement. Whose records are missing them?”
If you chose C — reconciling_signs_reversed
“Your two adjustments are the right size and the wrong way round. Ask it mechanically: has the bank recorded the deposit in transit yet, and has it recorded the outstanding checks?”
If you chose D — unadjusted_balance_used
“That is the balance printed on the bank statement, before any reconciliation at all. The question is asking for the figure the two columns agree on. What has to happen to the bank column first?”
To be precise about what happens next: the exchange is a rate limit, not a gate. Answering well gets you to the full worked explanation in three or four exchanges; answering badly still gets you there. And if you would rather skip it, asking three times gets you the walkthrough.
Common questions
Which bank reconciliation items require a journal entry?
Only the book-side ones: items the bank has recorded and the company has not, such as service charges, NSF checks returned, interest credited and amounts the bank collected on the company's behalf. Deposits in transit and outstanding checks adjust the bank column only and require no entry, because the company already recorded them.
What qualifies as a cash equivalent?
A short-term, highly liquid investment that is readily convertible to a known amount of cash and so near maturity that interest rate risk is insignificant — conventionally an original maturity of three months or less measured from the date the entity acquired the investment, not from the date it was issued.
Misconception tags in this group
These are the labels our diagnosis attaches when a wrong answer matches a known pattern. They are worth reading even if you never use the product — naming your own error is most of the work.
book_items_applied_to_bank— Applying service charges or an NSF check to the bank column as well as the book column, double-counting them.reconciling_signs_reversed— Adding outstanding checks and subtracting deposits in transit.unadjusted_balance_used— Reporting the bank statement balance as the cash balance.restricted_cash_included— Reporting restricted cash or a legally binding compensating balance inside unrestricted cash.maturity_from_issue_date— Testing the three-month cash equivalent window from the issuer's date rather than from the date of acquisition.