INTERMEDIATE ACCOUNTING 1 (AE 15)

LEARNING MATERIAL

UNIT NUMBER/ HEADING: BANK RECONCILIATION STATEMENT

LEARNING OUTCOMES:
At the end of the unit, the students will be able to:
a. Understand the need for a bank reconciliation.
b. Know the reconciling items affecting the cash in bank per ledger.
c. Know the reconciling items affecting the cash in bank per bank statement.
d. Prepare a bank reconciliation.
e. Prepare the necessary adjusting entries to reconcile the cash in bank per
ledger with the cash in bank per bank statement.

INTRODUCTION:

A bank reconciliation statement is a summary of business activity that reconciles financial

details. It ensures that payments have been processed and money has been deposited on the same
date. An accountant prepares the reconciliation statement once a month.

A bank reconciliation statement is a summary of banking and business activity that

reconciles an entity’s bank account with its financial records. The statement outlines the
deposits, withdrawals, and other activities affecting a bank account for a specific period. A
bank reconciliation statement is a useful financial internal control tool used to thwart fraud.

Presentation of Content

Bank deposit

There are three kinds of bank deposits namely, demand deposit, saving deposit and time
deposit.

Demand deposit

The demand deposit is the current account or checking account or commercial deposit where
the deposits are covered by deposit slips where funds are withdrawable on demand by
drawing checks against thebank .

A demand deposit is noninterest bearing

Saving deposit

In a saving deposit, the depositor is given a passbook upon the initial deposit. The passbook
is required when making deposits and withdrawals.

A saving deposit is interest bearing.

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Time deposit

The time deposit is similar to saving deposit in the sense that it is interest bearing

A time deposit is evidenced, however 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Time deposit may be preterminated or withdrawn on demand or after a certain period of time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.

What is bank reconciliation?

Before we answer the question let us have a background on the matter of opening a demand
deposit or checking account

Incidentally, of three kinds of deposit , 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 rquired to sign cards furnished by the bank, to show specimen signatures to
be used on the checks.

These specimen signatures will be filed by the bank so that any teller who maybe unfamiliar
with a depositor’s signature can test the authenticity of a check by comparing the depositot’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.

Let us now illustrate some fundamental transaction affecting the depositor and 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.

Cash(or cash in advance) 100,000

Accounts receivable 100,000

On the books os the bank,the journal entry:

Cash 100,000
Company X 100,000

The journal entry on the books of the bank shows the credi is company X account. This is
made , for our purpose, to facilitate theillustration.

In practice, however, the accountcredited by the bank is demand deposit account but the same
is posted to the subsidiary ledger of company X.

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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 exist a debtor-creditor relationship between the bank
and the depositor, the bank being debtor, and the depositor being the creditor.

Hence,when the account of the depositor is incrased the same is credited.

Let us assume further that company X subsequently issued a check for P30,00 in payment of
an account payable. On the books of company X, the journal entry is.

Account payable 30,000

Cash 30,000

The journal entry on the books of the bank is:

Company X 30,000
Cash 30,000

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 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

Explanation

The two accounts have equal or the same balances because they are reciprocal accounts.

These means that when one account is debited, the other account is credit or vice versa.

The reason for this is that the two accounts cover or reflect the same item 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 in depositor’s book which do not appear on the bank
records as of the same date.

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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 send out to the depositor.

And less frequently, there are items on the bank records which do not appear on the
depositor’s book.

For example:

a. The bank may have charged the depositor’s account with service charges which the
depositor may not know about until a report is received by 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 foregoing, it is necessary to prepare bank reconciliation.

Bank reconciliation

A bank reconciliation is a statement that brings into agreement the cash balance per book and
the cash balance per bank.

The reconciliation is usually prepared monthly because the bank provide the depositor with
the bank statement at the end of every month.

A bank reconciliation is a monthly report of the bank to the depositor showing:

a. The cash balance at the beginning.

b. The deposits made by the depositor acknowledge by the bank.
c. The checks drawn by the depositor and paid by the bank
d. The daily cash balance per bank during the month.
Actually, the bank statement is an exact copy of the depositor’s ledger in the records of the
bank.

Bank reconciliation statement is a report which compares the bank balance as per company’s
accounting records with the balance stated in the bank statement.
It is normal for a company’s bank balance as per accounting records to differ from the
balance as per bank statement due to timing differences. Certain transactions are recorded by
the entity that are updated in the bank’s system after a certain time lag. Likewise, some
transactions are accounted for in the bank’s financial system before the company incorporates
them into its own accounting system. Such timing differences appear as reconciling items in
the Bank Reconciliation Statement.

The purpose of preparing a Bank Reconciliation Statement is to detect any discrepancies

between the accounting records of the entity and the bank besides those due to normal timing
differences. Such discrepancies might exist due to an error on the part of the company or the
bank.
Importance of Bank Reconciliation

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  Preparation of bank reconciliation helps in the identification of errors in the
accounting records of the company or the bank.
 Cash is the most vulnerable asset of an entity. Bank reconciliations provide the
necessary control mechanism to help protect the valuable resource through
uncovering irregularities such as unauthorized bank withdrawals. However, in
order for the control process to work effectively, it is necessary to segregate
the duties of persons responsible for accounting and authorizing of bank
transactions and those responsible for preparing and monitoring bank
reconciliation statements.
 If the bank balance appearing in the accounting records can be confirmed to be
correct by comparing it with the bank statement balance, it provides added
comfort that the bank transactions have been recorded correctly in the
company records.
 Monthly preparation of bank reconciliation assists in the regular monitoring of
cash flows of a business.
Reconciling Item
1. Book Reconciling items:

a. Credit memos
b. Debit memos
c. Errors

2. Bank Reconciling items

a. Deposits in transit
b. Outstanding checks
c.Errors

Credit memos
 Refer 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.

Examples

a. Notes Receivable collected by bank in favor of the depositor and

credited to the account of the depositor.
b. Proceeds of bank loan credited to the account of the depositor
c. Matured time deposits transferred by the bank to the current account of
the depositor.

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
the depositor as cash disbursements.

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 Examples

a. NSF or No sufficient fund checks-These are checks deposited but returned

by the bank because of insufficiency. Another name is “DAIF”
b. Technically defective checks. These are checks deposited but returned by
the bank because of technical defects such as absence of signature or
countersignature,erasures, mutilated checks, conflict between amount in
words and amount in figures.
c. Bank service charge-These include bank charges for
interest,collection,checkbook and penalty.
d. Reduction of loan-This pertains to 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.
Deposit in transit
 Are collections already recorded by the depositor as cash receipts but not
yet reflected on the bank statement.

DIT 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. In
effect, these are cash on hand awaiting delivery to the bank for
deposit.
Outstanding checks
 Are checks already recorded by the depositor as cash disbursements but
not yet reflected on the bank statement.

It include:

a. Checks drawn and already given to payees not yet presented for
payment.
b. Certified checks-is one where the bank stamped on its face the word “
accepted” or “ certified” indicating sufficiency of fund.

Forms of bank Reconciliation0

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.

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c.Bank to book method-Under this method,the bank balance is reconciled with the book
balance or the bank,balance is adjusted to equal the book balance.

Proforma Reconciliation

Adjusted balance method

Book balance xx
Add:Credit memos xx
Total xx
Less:Debit memos xx
Ajusted book balance xx

Bank balance xx
Add;Deposit in transit xx
Total xx
Less:Outstanding Checks xx
Adjusted bank balance xx

Book to bank method

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

Bank balance xx

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Add; Deposit in transit xx
Debit memos xx
Total xx
Less: Outstanding Checks xx
Credit memos xx
Adjusted bank balance xx

Illustration(Please send your answers for these activities tru google drive, save it in the
folder: Bank reconciliation activities)gmail account:melaniemembrot1130@gmail.com

Problem 2-1

Margaret Company provide the following information:

Margaret Company
Date Check No. Withdrawal Deposits 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 DM 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.106 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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 Problem 2-2 Multiple Choice

1. Outstanding checks.
a. Add
To
BOOK
Balance

b. Deduct
From
BOOK
Balance

c. Add
To
BANK
Balance

d. Deduct
From
BANK
Balance
2.
Bank service charge.
a. Add
To
BOOK
Balance

b. Deduct
From
BOOK
Balance

c. Add
To
BANK
Balance

d. Deduct
From
BANK
Balance
3.
Interest credited to bank account.
a. Add
To
BOOK
Balance

b. Deduct
From

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 BOOK
Balance

c. Add
To
BANK
Balance

d. Deduct
From
BANK
Balance

4. Interest charged to bank account.

a. Add
To
BOOK
Balance

b. Deduct
From
BOOK
Balance

c. Add
To
BANK
Balance

d. Deduct
From
BANK
Balance

5. Deposit in transit.
a. Add
To
BOOK
Balance

b. Deduct
From
BOOK
Balance

c. Add
To
BANK
Balance

d. Deduct
From

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 BANK
Balance

6. Bank inadvertently charged your bank account for another company's bank fees.
a. Add
To
BOOK
Balance

b. Deduct
From
BOOK
Balance

c. Add
To
BANK
Balance

d. Deduct
From
BANK
Balance

7. Bank erred by posting another company's credit memo to your company's bank account.
a. Add
To
BOOK
Balance

b. Deduct
From
BOOK
Balance

c. Add
To
BANK
Balance

d. Deduct
From
BANK
Balance

8. Fee charged by bank for returned check.

a. Add
To
BOOK
Balance

b. Deduct
From

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 BOOK
Balance

c. Add
To
BANK
Balance

d. Deduct
From
BANK
Balance

9. A company wrote a check for $76 and it cleared the bank for $76. However, the company
recorded the check in its Cash account as $67. How is the difference of $9 handled on the bank
reconciliation?
a. Add
To
BOOK
Balance

b. Deduct
From
BOOK
Balance

c. Add
To
BANK
Balance

d. Deduct
From
BANK
Balance

10. A company had a receipt of $989 and correctly prepared its bank deposit slip for $989. However,
the company recorded the receipt in its Cash account as $998. How is the difference of $9
handled on the bank reconciliation?
a. Add
To
BOOK
Balance

b. Deduct
From
BOOK
Balance

c. Add
To
BANK
Balance

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 d. Deduct
From
BANK
Balance

11. The bank collected a Note Receivable for the company and credited the company's bank
account for $1,000.
a. Add
Add
To
BOOK
Balance

b. Deduct
From
BOOK
Balance

c. Add
To
BANK
Balance

d. Deduct
From
BANK
Balance

12. A company deposited a check from a customer into its checking account. A few days later
the check was returned with the notation account closed and the bank deducted the amount
on the bank statement.
a. Add
To
BOOK
Balance

b. Deduct
From
BOOK
Balance

c. Add
To
BANK
Balance

d. Deduct
From
BANK
Balance

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 13. .A company's Cash account has a balance of $851 as of October 31. The bank statement for
this account reports a balance of $1,430 as of October 31. There are outstanding checks
totaling $840 and a deposit in transit of $60. The bank statement shows interest earned of
$19, service charges of $30, a customer's returned check of $100, and a check printing fee
of $90. The reconciled Cash balance that should be reported on the company’s balance
sheet as of October 31 is $
__________
.
14. Which of the following items will require a journal entry to the company's books?
a. Bank Service Charge

b. Deposit In Transit

c. Bank Error
15.
Which of the following will NOT require a journal entry to the company's books?
a. Check Printing Charge

b. Outstanding Checks

c. Fee For NSF Check

16.
A company recorded its check #2754 in its accounting records as $98. However, check #2754
was actually written for $89 and it cleared the bank as $89. What adjustment is needed to the
Cash balance per books?
a. Decrease By $9

b. Increase By $9

c. None Needed
17.
A company recorded its August 15 receipts on its books as $165. However, the receipts were
actually $156. The deposit slip for the bank was prepared correctly as $156. What adjustment is
needed to the Cash balance per books?
a. Decrease By $9

b. Increase By $9

c. None Needed

References:

 Valix, C. T., Peralta, J.F & Valix C. A. M. (2019).Intermediate Accounting 1

 https://www.accountingcoach.com/pro2?feature=progress-tracking

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