How is the adjustment for outstanding checks calculated?

The adjustment for outstanding checks is based on reconciling the bank's cash balance to reflect the true amount available for withdrawal as well as to ensure that the company's records accurately reflect bank transactions. Outstanding checks are checks that have been issued by the company but have not yet cleared the bank. Because these checks have not cleared, they need to be deducted from the bank's reported cash balance to accurately depict the cash that the company has available.

When calculating the adjustment, you take the bank's cash balance and subtract the total amount of the outstanding checks. This provides a clearer picture of the actual funds available to the company since these checks are effectively obligations that have not yet been settled in the bank. By performing this subtraction, the reconciliation ensures that both the bank's and the company’s records align correctly, reflecting a more accurate financial position for the company. Thus, the correct method for adjusting the bank's cash balance is to subtract the outstanding checks amount from it.