Mater Dei College | Tubigon, Bohol | (038)508-8106

College of Accountancy, Business and Management - Business Department

Course Title Intermediate Accounting 1 Course No. AE 103
Instructor Ma. Angelica C. Balatucan, CPA, MSA Schedule 1:00 – 4:00 MTH

Week 3-4
Course Learning Outcome Prepare the current asset section of the statement of financial position

Student Learning Outcomes 1. Identify the reconciling items affecting cash in bank per ledger and per bank
statement
2. Prepare bank reconciliation
3. Journalize adjusting entries

Learning Content
BANK RECONCILIATION

Introduction
This week’s lesson on bank reconciliation is an important topic in cash and cash equivalents. By preparing bank
reconciliation, we will be able to compute the correct cash in bank which is to be accounted for under the cash account.

Lesson Content

Bank Deposits

Three kinds of bank deposits:

▪ Demand deposits – refers to 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 non-interest-bearing.
▪ Saving deposit – it is where a depositor is given a passbook upon the initial deposit. The passbook is required
when making deposits and withdrawals. Withdrawals are made anytime but the bank sometimes may require
notice of withdrawal. A saving deposit is interest-bearing.
▪ Time deposit – is similar to saving deposit in the sense that it is interest-bearing, however, time deposit is
evidenced by a formal agreement embodied in an instrument called certificate of deposit. Time deposit may be
preterminated or withdrawn on demand or after a certain period of time agreed upon.

BANK RECONCILIATION

A bank reconciliation is necessary only for a demand deposit or checking account.

When an account is opened at the bank, the person authorized to draw checks against the account will be required
to sign cards furnished by the bank, to show the specimen signatures to be used on the checks. These specimen
signatures will be filed by the bank so that any teller who may be unfamiliar with a depositor’s signature can test the
authentiticty of a check by comparing the depositor’s signature on the card with the signature on the check.

If the depositor is a corporation, the bank will request that the directors pass a resolution authorizing certain officers
of the corporation as signatories of checks and that a copy of this resolution be filed with the bank.

Assume that Company X (the depositor) collected P100,000 from a customer in settlement of an account. The
collection is deposited at the First Bank.

Books of Company X Books of First Bank

Cash (or cash in bank) 100,000 Cash 100,000
Accounts receivable 100,000 Company X 100,000
When the bank credits the account of the depositor, Company X, it recognizes its liability to the depositor. Legally,
when a deposit is made, there exists a debtor-creditor relationship between the bank and the depositor, the bank
being the debtor, and the depositor being the creditor. Hence, when the account of the depositor is increased the
same is credited.
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 Mater Dei College | Tubigon, Bohol | (038)508-8106
College of Accountancy, Business and Management - Business Department
Assume further that Company X subsequently issued a check for P30,000 in payment of an account payable.

Books of Company X Books of First Bank

Accounts payable 30,000 Company X 30,000
Cash 30,000 Cash 100,000
When a check is issued, the payee will present the same to the bank for payment. The depositor is actually ordering
the bank to pay the payee out of its deposit in the bank. This is the reason the bank debits the account of the depositor
thereby reducing its liability to the depositor. Thus, when the depositor’s account is decreased, the same is debited.

At this point, when the balances are extracted, the cash in bank account on the depositor’s book has a balance of
P70,000 and the Company X account on the book of the bank has also a balance of P70,000.

The two accounts have equal or the same balances because they are reciprocal accounts. This means that when one
account is debited, the other account is crediter or vice versa. The reason for this is that the two accounts cover or
reflect the same items or transactions. Thus if no errors are committed in recording, and the same information has
been recorded by both accounts, the two should have equal or the same balances.

But very frequently, there are items on the depositor’s book which do not appear on the bank records as of the same
date. For example, 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.

For example:
a. The bank may have changed the depositor’s account with service charges which the depositor may not know
about until a report is received from the bank.
b. Notes endorsed to the bank for collection have been collected by the bank and credited to the depositor’s account
but notice of collection is not yet received from the bank by the depositor.

In the light of the foregoing, it becomes necessary to prepare a bank reconciliation.

Definition of a bank reconciliation

Bank reconciliation
- Is a statement which brings into agreement the cash balance per book and cash balance per bank.
- Is usually prepared monthly because ethe bank provides the depositor with the bank statement at the end of every
month
- Is a monthly report of the bank to the depositor showing:
o The cash balance per bank at the beginning
o The deposits made by the depositor and acknowledged by the bank
o The checks drawn by the depositor and paid by the bank
o The daily cash balance per bank during the month
- Is an exact copy of the depositor’s ledger in the records of the bank

When the bank statement is received, attached thereto are the depositor’s cancelled checks and any debit or credit
memoranda that have affected the depositor’s account. The cancelled checks are the checks issued by the depositor and
paid by the bank during the bank. These are called cancelled checks because they are literally cancelled by stamping or
punching to show that they have been paid.

Reconciling Items

At the end of every month, comparison between the cash records of the depositor and the bank statement received
from the bank will yield the following reconciling items:

Book reconciling items Bank reconciling items

Credit memos Deposit in transit
Debit memos Outstanding checks
Errors Errors

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 Mater Dei College | Tubigon, Bohol | (038)508-8106
College of Accountancy, Business and Management - Business Department
Reconciling item Definition
Credit Memos - items not representing deposits
credited by the bank to the account
of the depositor but not yet
recorded by the depositor as cash
receipts.
- have the effect of increasing the
bank balance.
Debit Memos - items not representing checks paid
by bank which are charged or
debited by the bank to the account
of the depositor but not yet
recorded by the depositor as cash
disbursements.
- have the effect of decreasing the
bank balance.
Deposit in transit - Collections already by the
depositor as cash receipts but not
yet reflected on the bank
statement
Outstanding - Checks already recorded by the
checks depositor as cash disbursements
but not yet reflected on the bank
statement
Forms Of Bank Reconciliation
The following formats may be used in reconciling the book balance and the bank balance:
a) Adjusted balance method – Under this method, the book balance and the bank balance are brought to a correct
cash balance that must appear on the balance sheet.
b) Book to bank method - Under this method, the book balance is reconciled with the bank balance or the book
balance is adjusted to equal the bank balance.
c) Bank to book method-Under this method, the bank balance is reconciled with the book balance or the bank
balance is djusted to equal the book balance.
The first method is preferred over the other two.
COURSE LEARNING MODULE | 2nd Semester, 2021-2022
Examples
▪ Notes receivable collected by bank in favor of
the depositor and credited to the account of
the depositor
▪ Proceeds of bank loan credited to the account
of the depositor
▪ Matured time deposits transferred by the bank
to the current account of the depositor.
▪ No Sufficient Fund (NSF) checks – checks
deposited but returned by the bank because of
insufficiency of fund. It is also called as
“Drawn Against Insufficient Fund” (DAIF).
▪ Technically defective checks – checks
deposited but returned by the bank because of
technical defects such as:
▪ Bank service charges – bank charges for
interest, collection, checkbook and penalty.
▪ Reduction of loan – amount deducted from
the current account of the depositor in
payment for loan which the depositor owes to
the bank and which has already matured.
▪ Collections already forwarded to the bank for
deposit but too late to appear in the bank
statement
▪ Cash on hand awaiting delivery to the bank for
deposit – undeposited collections or those still
in the hands of the depositor.
▪ Checks drawn and already given to payees but
not yet presented for payment.
▪ Certified checks – a certified check is one
where the bank stamped on its face the word
“accepted” or “certified” indicating sufficiency
of fund. When the bank certifies a check, the
account of the depositor is immediately
debited or charged to insure the eventual
payment of the check. Certified checks should
be deducted from the total outstanding checks
(included therein) because they are no longer
outstanding for bank reconciliation purposes.
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 Mater Dei College | Tubigon, Bohol | (038)508-8106
College of Accountancy, Business and Management - Business Department
Proforma Reconciliation

Adjusted Balance Method

Book to Bank Method Bank to Book Method

Illustration

The cash records of Company X show the following for the month of January.

CASH RECEIPTS CASH DISBURSEMENTS

Jan. 5 60,000 Jan. 6 Check no. 721 5,000
13 20,000 7 Check no. 722 10,000
25 30,000 10 Check no. 723 18,000
31 40,000 14 Check no. 724 2,000
150,000 28 Check no. 725 37,000
31 Check no. 726 28,000
100,000
The general ledger of the company shows the cash in bank account for January as follows:

Cash in bank – First Bank

Jan. 31 CR 150,000 Jan. 31 CD 100,000

The balance of the cash in bank on the depositor’s book is P50,000.

Bank Statement

The following is the bank statement for January received from the First Bank:

In account with: No. 775

Company X FIRST BANK
Quezon City Manila, Philippines
Date Check no. Withdrawals Deposits Balance
Jan. 6 60,000 60,000
8 721 5,000 55,000
11 722 10,000 45,000
12 723 18,000 27,000
14 20,000 47,000
17 724 2,000 45,000
26 30,000 75,000
26 15,000 CM 90,000
30 5,000 RT 85,000
30 1,000 SC 84,000
Code: CM – Credit Memo; DM – Debit Memo; SC – Service Charge; RT – Returned Check

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 Mater Dei College | Tubigon, Bohol | (038)508-8106
College of Accountancy, Business and Management - Business Department
The following data are gathered in connection with the CM and DM appearing on the bank statement:

a. The CM of P15,000 on January 26 represents proceeds of note collected by the bank in favor of the company.
b. The RT of P5,000 represents check of customer deposited previously but returned by the bank because of ‘no
sufficient fund” or NSF.

GENERAL PROCEDURES IN PREPARING THE RECONCILIATION

a. Determine the balance per book and the balance per bank.
As mentioned earlier, the cash in bank account on the book of the depositor has a debit balance of P50,000. The
bank balance is shown on the bank statement as the final item, P84,000.

b. Trace the cash receipts to the bank statement to ascertain whether there are deposits not yet
acknowledged by the bank.
In the illustrative problem, the cash receipt of P40,000 on danuary 31 does not appear in the bank statement.
This represents deposit in transit.

c. Trace the checks issued to the bank statement to ascertain whether there are checks not yet presented for
payment.
In the ilustrative problem, Check Nos. 725 for P37,000 and 726 for P28,000 do not appear in the bank
statement. These are outstanding checks.

d. The bank statement should be examined to determine whether there are bank eredits or bank debits not
yet recorded by the depositor.
In the illustrative problem there is CM of P15,000 and DM for returned check of P5,000 and service charge of
P1,000.

e. Watch out for errors. Again, errors are reconciling items of the party which committed them. In the
illustrative problem, there are no errors committed.
At this point, a formal reconciliation may be prepared because all the reconciling items have already been
determined.

Adjusted Balance Method

Balance per book 50,000 Adjusting entries:

Add: Note collected by bank 15,000 a. To record the note collected by bank:
Total 65,000 Cash in bank 15,000
Less: NSF customer Check 5,000 Notes Receivable 15,000
Service Charge 1,000 6,000 b. To record the NSF customer check:
Adjusted Book Balance 59,000 Accounts receivable 5,000
Cash in bank 5,000
Balance per bank 84,000 c. To record the bank service charge
Add: Deposit in transit 40,000 Bank service charge 1,000
Total 124,000 Cash in bank 1,000
Less: Outstanding checks
Check no. 725 37,000 In the preparation of adjustments, an item added to
Check no. 726 28,000 65,000 the book balance is debited to cash and an item
Adjusted Bank Balance 59,000 deducted from the book balance is credited to cash.

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 Mater Dei College | Tubigon, Bohol | (038)508-8106
College of Accountancy, Business and Management - Business Department
Book to Bank Method

Balance per book 50,000

Add: Note collected by bank 15,000
Outstanding checks No. 725 37,000
No. 726 28,000 65,000 80,000
Total 130,000
Less: NSF customer Check 5,000
Service Charge 1,000
Deposit in transit 40,000 46,000
Balance per bank 84,000

Bank to Book Method

Balance per bank 84,000

Add: Deposit in transit 40,000
NSF Check 5,000
Service charge 1,000 46,000
Total 130,000
Less: Outstanding checks: No. 725 37,000
No. 726 28,000 65,000
Note collected by bank 15,000 80,000
Balance per book 84,000

Review Questions
Recall the lesson and try to answer the following review questions:
1. Differentiate he three kinds of bank deposits.
2. What is the purpose of a bank reconciliation?
3. What is a bank statement?
4. Explain the three forms of bank reconciliation.

Exercises
Problem 2.1

Zodiac Company provided the following information:

Balance per book, Mar 31 800,000

Cash receipts for April 4,100,000
Cash disbursements for April 3,800,000
Outstanding checks as of April 30 of which no. 1333 had been certified:
No. 1331 40,000
No. 1332 30,000
No. 1333 50,000
No. 1334 60,000
No. 1335 10,000
April debit memos
For bank service charge 5,000
For NSF check 25,000
April credit memo for note collected by bank in the name of Zodiac
60,000
Company
Undeposited collections 270,000
Balance per bank, April 30 1,000,000
Required: Prepare a bank reconciliation on April 30 following the (a) adjusted balance method, (b) book to bank
method and (c) bank to book method.
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 Mater Dei College | Tubigon, Bohol | (038)508-8106
College of Accountancy, Business and Management - Business Department
Problem 2.2

Radiant Company provided the following data for the month of January:

Balance per bank statement, January 31 3,500,000

Collections on January 31 but undeposited 550,000
NSF check received from a customer returned by the bank on February 5 with the January
50,000
bank statement
Checks outstanding on January 31 650,000
Bank debit memo for safety deposit box rental not recorded by depositor 5,000
A creditor’s check for P30,000 was incorrectly recorded in the depositor’s book as 300,000
A customer’s check for P200,000 was recorded by the depositor as 20,000
The depositor neglected to make an entry in its books for a check drawn in payment of an
125,000
accounts payable

Required: Compute the balance in the cash account before corrections and prepare adjusting entries.

Problem 2.3

Apathy Company provided the following information:

Apathy Company
Date Check no. Withdrawal Deposit Balance
Dec. 2 100,000 100,000
18 104 10,000 90,000
20 101 5,000 85,000
22 106 25,000 60,000
27 50,000 110,000
29 10,000 120,000
29 103 40,000 80,000
29 CM 30,000 110,000
31 Service Charge 2,000 108,000

FIRST BANK
Dec 1 Deposit 100,000 Dec 4 Check no. 101 5,000
21 Deposit 50,000 6 Check no. 102 15,000
27 Deposit 10,000 8 Check no. 103 40,000
31 Deposit 80,000 8 Check no. 104 10,000
10 Check no. 105 30,000
14 Check no. 106 25,000
28 Check no. 107 50,000
The credit made by the bank on December 29 represents the proceeds of a note received from a customer which was
given to the bank for collection by the entity on December 26.

Required:
a. Prepare a bank reconciliation using adjusted balance method.
b. Prepare adjusting entries.

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 Mater Dei College | Tubigon, Bohol | (038)508-8106
College of Accountancy, Business and Management - Business Department
Problem 2.4

Sensible Company provided the following ledger account of the cash in bank maintained with Second Bank:

SECOND BANK
Dec 1 Balance 100,000 Dec 1 Check no. 771 20,000
6 Deposit 30,000 4 772 5,000
12 Deposit 40,000 6 773 35,000
24 Deposit 50,000 10 774 15,000
31 Deposit 60,000 14 775 30,000
18 776 25,000
24 777 40,000
The following bank statement was received from the Second Bank by Sensible Company.

Date Check no. Withdrawal Deposit Balance

Dec. 1 Balance 10,000 130,000
1 768 20,000
4 771 5,000
6 772 35,000 30,000
12 773 15,000 40,000
12 774 52,000
24 776 8,000 50,000
28 NSF Check 1042 10,000 45,000 CM
28 Service charge 5,000
Other information
1. Sensible Company reconciled its bank balance on November 30 with two checks, No. 768 for P10,000 and No.
770 for P20,000 outstanding.
2. Check no. 1042 was drawn by Sensitive Company. The bank charged it in error to the account of Sensible
Company.
3. Check no. 776 was correctly drawn for P52,000 in payment of account. The amount P25,000 was entered in
the books of original entry.
4. The bank credit on December 28 represents the proceeds of a P50,000 note, less a collection fee of P5,000
collected by the bank and credited to the account.
5. The NSF check was received from a customer in payment of account.
Required:
a. Prepare a bank reconciliation statement on December 31.
b. Prepare adjusting entries on December 31.

Teacher’s note:
• Answer the lesson exercises of your book. You may request for the solutions through
Messenger for a particular exercise only after you have submitted your own solution for that
problem.
• If you have questions, kindly send me a message via Messenger.
• Solutions will be provided in Week 2 after you have submitted your own solutions.
• Quiz will be conducted on Week 3. Kindly prepare in advance. The quiz schedule will be
announced in the GC within Week 2.

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