Bank Reconciliation

Kinds of Bank Deposits:

- Demand Deposit
- 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.
- Only one which is necessitated to do bank reconciliation
- Saving Deposit
- Passbook is required when making deposits and withdrawals
- The bank may sometimes need a notice of withdrawal, especially when the
amount drawn is big
- Interest bearing
- Time deposit
- Similar to savings but with higher interest
- Evidenced by a formal agreement embodied in an instrument called certificate of
deposit
- Time deposit cannot be withdrawn any time before maturity date without any
penalties.

Bank reconciliation
- A statement which bring into agreement the cash balance per bbook and cash balance
per bank
- Necessary due to difference from both
- Requires bank statement and depositor’s ledger
- Prepared monthly, because the bank provides depositor with a monthly bank statement
(not all companies comply, but is ideal)
- Components:
- Cash balance beginning
- The deposits made by depositor and acknowledged by the bank
- Checks drawn by the depositor and paid by the bank.
- Bank statement attachments:
- Depositor’s cancelled checks - checks issued by the depositor and paid by the
bank during the month
- Debit or credit memoranda
- Cash Receipts = company, Deposits = bank
- Cash disbursements = comapny, Withdrawals = bank
- Cash in bank on the point of view of the depositor is an asset. Thus, increases are on
debit and decreases are on credit.
- Cash in bank on the point of view of the depositor is a liability. Thus, increases are on
credit and decreases are on debit. (money is not owned by the bank, they were asked to
take care of it)
Depositor vs bank
Transactions
a. Receipts
- book/company debits
- Bank credits
b. Disbursements
- book/company credits
- Bank debits
Entries
a. Collection of AR
- Depositor
Cash (in bank) xxx
AR xxx
- Bank
Cash xxx
Company X xxx
b. Payment of Accounts Payable
- Depositor
Accounts payable xxx
Cash xxx
- Bank
Company X xxx
Cash xxx

Reconciling Items
1. Bank Reconciling items
a. Deposits in transit - DIT
b. Outstanding checks - OC
c. errors
2. Book Reconciling items
a. Credit memos - CM
b. Debit memos - DM
c. Errors

Bank Reconciling Items

- Deposits in Transit
- Collections already recorded by the depositor as cash receipts but not yet
reflected on the bank statement
- Include:
a. Collections already forwarded to the bank for deposit but too late to
appear in the bank statement
b. Undeposited collections or those still in the hands of the depositor
- Must be added to the unadjusted bank balance
- Outstanding Checks
 - Checks already recorded by the depositor as cash disbursements but not yet
reflected on the bank system
- Include
- checks drawn and already given to payees but not yet presented for
payment
- Exclude
- Certified check from the outstanding check
- Certified checks are those stamped by the bank as certified due to
availability of Cash funds

Book Reconciling items

- Credit memos
- Refers to items not representing deposits credited by the bank to the account of
the depositor but not yet recorded by the depositor as cash receipts
- Increase bank balance
- Examples
1. Notes collected by the bank in favor of the depositor (customer payments
directly paid to the bank)
2. Proceeds of bank loan
3. Matured time deposit
- Debit memos
- Refer to 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
depositor as cash disbursement
- Decrease the bank balance
- Examples:
1. NSF checks - returned by the bank due to insufficient funds.
2. Technically defective check - problem with signature, mutilated check,
incoherence with text and numerical amount
3. Bank service charges - charges for interest as well as other charges
4. Reduction of loan - amount deducted from the current account in payment
for the loan of the bank to the depositor

Errors - wrong amount or wrong account

Forms of bank reconciliation

a. Adjusted balance method
b. Book to bank method
c. Bank to book method
Adjusted balance method
- Steps:
1. Determine balance per book and balance per bank
2. Trace the cash rescei[ts to the bank statement to ascertain whether there are
deposits not yet acknowledged by the bank.
3. Trace the checks issued to the bank to ascertain whether there are checks not
yet presented for payment.
4. The bank statement should be examined to determine whether there are bank
credits or bank debits not yet recorded buthe depositor.
5. Watch out for errors
6. Compute the adjusted balances
7. Make the formal bank reconciliation statement
8. Prepare the adjusting entries

Book to bank balance method

- Starts with the balance per book and end with the balance per bank
-

Bank to book balance method

- Starts with the per bank balance and ends with the per book balance