Bank Reconciliation

Bank reconciliation

A statement which brings into

agreement the cash balance per
book (ledger) and the cash balance
per bank (bank statement). It is usually
prepared monthly because the bank
releases the bank statement at the
end of every month.
A bank reconciliation is necessary only
for demand or checking account.
Demand deposit or checking
account
This is the current account or
checking account or commercial
deposit where deposits are
covered by deposit slips and where
funds are withdrawable on
demand by drawing checks
against the bank.
A demand deposit is noninterest
bearing since it is withdrawable on
demand.
Bank statement

A monthly report provided by the bank to its

depositor showing the cash balance per bank at
the beginning of the month, the deposits
acknowledged, the checks paid, other charges
and credits and the daily cash balance per bank
during the month.
The bank statement is the exact copy of
depositors ledger in the records of bank.
Together with the bank statement, attached
thereto are the depositors cancelled checks and
any debit/credit memoranda.
Cancelled Checks

These are checks issued by the depositor and

paid by the bank during the month.
These are called cancelled checks because they
are literally cancelled by stamping or punching to
show that they have been paid.
The debtor-creditor
relationship between the
bank and the depositor
When a depositor put his money on
a bank there exist already a
debtor-creditor relationship
between the depositor and the
bank. This debtor-creditor
relationship is best shown by the
journal entries in the books of the
bank and the depositor:
To record collection and
the subsequent deposit:
Depositor Bank
Cash xxx Cash xxx
AR xxx Company X xxx

As you can see in the entry on the part of the bank, Company X is
credited. This is done because the account Company X represents
the obligation/liability of the bank to the depositor. Note that the
normal balance of liability is credit. Thus if the account Company X
is credited, by the bank it means that the account of the depositor
is increased and when the account is debited it means that it was
decreased.

The two accounts have equal or the same balances because they
are reciprocal accounts. This means that when one account is
debited, the other is credited or vice versa because they reflect the
same items or transactions. (continuation on next slide)
o Thus, if no errors are committed between the two parties
they will reflect equal and same balances.
o But very frequently, there are items on the depositors
book that do not appear on the bank records as of the
same date. For instance, checks issued by the depositor
are not yet presented for payment to the bank or
deposits may have been made after the bank records
are sent out to the depositor.
o And less frequently, there are items on the bank records
which do not appear on the depositors book. For
instance, the service charge charged by the bank to
the depositor and the proceeds received by the bank in
behalf of the depositor.
o Because of this, it becomes necessary to prepare a
bank reconciliation.
Reconciling items

Book reconciling items:

a) Credit memos
b) Debit memos
c) Errors made in the book

o Bank reconciling items:

a) Deposits in transit
b) Outstanding checks
c) Errors made by bank
Credit memos

Refer to items other than deposits credited by the

bank to the account of the depositor but not yet
recorded by the depositor. It increases the bank
balance.
Examples:
a) Notes receivable collected by bank in favor of
the depositor
b) Proceeds of bank loan
c) Matured time deposits
Debit memos

Refer to items other than checks paid by the bank

which are charged and debited by the bank to the
account of the depositor. It decreases the bank
balance.
Examples:
a) NSF or no sufficient fund checks/DAIF or drawn against
insufficient fund checks returned by bank because of
insufficiency of fund.
b) Technically defective checks checks returned by
bank because of absence of signature or
countersignature, erasures not countersigned,
mutilated checks, conflict between amount in words
and amount in figures.
c) Bank service charges
d) Reduction of loan
Deposits in transit

Are collections already recorded by the depositor

as cash receipts but not yet reflected on the bank
statement.
It includes:
a) Collections already forwarded to the bank but
too late to appear on the bank statement.
b) Undeposited collections or those still in the hands
of the depositor. These are cash on hand
awaiting delivery to the bank.
Outstanding checks

Are checks already recorded by the depositor as

cash disbursements but not yet reflected on the
bank statement.
It includes:
a) Checks drawn and already given to the payee
but not yet presented for payment.
b) Certified checks a check wherein the bank
already stamped the word accepted or
certified on its face indicating sufficiency of
the fund. Certified checks should be deducted
to the outstanding checks (if included) because
they are no longer outstanding.
Forms of bank reconciliation

a) Adjusted balance method the book and the

bank balance are brought to a correct cash
balance that must appear on the balance
sheet.
b) Book to bank method book balance is adjusted
to the bank balance.
c) Bank to book method bank balance is adjusted
to equal the book balance.

The first method is preferred over the other two.

 Adjusted balance method

Book balance xx Bank balance xx

Add: Credit memos xx Add: Deposits in transit xx
Total xx Total xx
Less: Debit memos xx Less: Outstanding checks
Adjusted book balance xx
xx Adjusted bank balance
xx
Note: Errors will have to be analyzed for proper treatment. But
errors are reconciling items of the party which committed them.
Book to bank method

Book balance xx
Add: Credit memos xx
Outstanding checks xx xx
Total xx
Less: Debit memos xx
Deposits in transit xx xx
Bank Balance xx

o Note: The treatment to book reconciling items is

still the same however, the treatment to bank
reconciling items is reversed.
Bank to book method

Bank balance xx
Add: Debit memos xx
Deposits in transit xx xx
Total xx
Less: Credit memos xx
Outstanding checks xx xx
Book Balance xx

o Note: The treatment to bank reconciling items is

still the same however, the treatment to book
reconciling items is reversed.
Adjusting entries:

Note: only book reconciling items require adjusting

entries on the book of the depositor.

o To record the note collected by bank:

Cash in bank xxx
Notes Receivable xxx
o To record NSF check:
Accounts receivable xxx
Cash in bank xxx
o To record the bank service charge:
Bank service charge xxx
Cash in bank xxx
 Thank you!
Feel free to ask if you have
any questions