BANK RECONCILIATION

JOURNAL ENTRY FOR BANK BOOK

Assume that Company X (Depositor) collected P

10,000 from a customer in settlement of an account.
The collection is deposited at First Bank. The entry
to record the collection and the subsequent deposit is

Cash (Cash in Bank) P 10,000

Accounts receivable 10,000

On the book of the bank, the entry is:

Cash P 10,000
Company X (Demand Deposit) 10,000
JOURNAL ENTRY FOR BANK BOOK
When the bank credits the account of the depositor
(Company X), it recognize its liability to the debtor.
By depositing to the bank by Company X, there exists
a Debtor-Creditor Relationship

Hence, when the account of the depositor is increased

the same is credited.

Let us assume further the Company X issued a check

for P3,000 in payment of an account payable. On the
books of Company X, the entry is:

Accounts payable P 3,000

Cash 3,000
JOURNAL ENTRY FOR BANK BOOK
The entry on the books of the bank is:

Company X (Demand Deposit) P 3,000

Cash 3,000

When a check is issued, the payee (Owner of A/P) will

present it to the bank for payment. The depositor is
instructing the bank to pay the payee out of its
deposit. With this transaction, Company X is
reducing its Demand Deposit in the bank. New bank
balance (P 10,000 – 3,000 = 7,000). The P 7,000 is the
remaining bank balance after check is drawn.
JOURNAL ENTRY FOR BANK BOOK
Two accounts have equal balances

The two accounts have the same balances because

they are reciprocal accounts. This means that when
one account is debited, the other account is credited
or vise 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, the two should have equal or the same
balance.
But very frequently, there are items in the depositors
book which do not appear on the bank records and
vise versa, this are reconciling items. This is time
where Bank Reconciliation is necessary to prepare.
WHAT IS BANK RECONCILIATION?
Bank reconciliation is a statement which brings
into agreement the cash balance per book and cash
balance per bank. It is usually prepared monthly
because the bank provides the depositor with the
bank statement at the end of every month.

Bank statement is a monthly report of the bank to

the depositor showing the cash balance per bank at
the beginning, the deposits acknowledged, checks
paid, other charges and credits and daily cash balance
per bank during the month. The bank statement is an
exact copy of the depositor’s ledger in the records of
the bank.
Reconciling Items

At the end of every month, comparison between the

cash records of depositor and bank statement received
from bank, the following reconciling items are:

Book reconciling items

 Credit memos
 Debit memos
 Errors
Bank reconciling items
 Deposits in transit
 Outstanding checks
 Errors
Book reconciling items

Credit Memos
Credit Memos refers to items not representing
deposits credited by the bank to the depositor but
not yet recorded by the depositor as cash receipts.
They have the effect of increasing the bank balance.

Examples:
 Notes Receivable or Draft 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.
Debit Memos
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. They have effect of decreasing the bank balance.
Examples of debit memos are:
 NSF or No sufficient fund checks – these are checks deposited
but returned by the bank because of insufficiency of funds.
 Technically defective checks – these are checks deposited but
returned by the bank because of technical defects such as;
 Absence of signature
 Countersignature
 Erasures not countersigned
 Mutilated checks
 Conflict between amount in words and amount in figures
 Bank service charges – these include bank charges for interest,
collection, checkbook, penalty, etc.
 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.
Bank reconciling items

Deposit in Transit

Deposit in transit are collections already recorded by the

depositor as cash receipts but not yet reflected on the bank
statement

Deposit in transit include:

 Collections already forwarded to the bank for deposit
but too late to appear in the bank statement.

 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
Outstanding checks are checks already recorded by the
depositor as cash disbursements but not yet reflected on the
bank statement.
Outstanding checks include:
 Checks drawn and already given to payees but not yet
presented for payment.

 Certified checks – a certified check is one where the bank

has stamped on its face the word “accepted” or “certified”
indicating sufficiency of funds. 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 (if included therein) because they are no
longer outstanding for bank reconciliation purposes.
Forms of Bank Reconciliation

 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.

 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.

 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.
Forms of Bank Reconciliation

 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.

 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.

 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.
Treatment of reconciling items

*Credit memos already increased the bank balance but

have no effect on the book balance because the credit
memos are not yet recorded by the depositor. Thus the
book balance is understated in relation to the correct
cash balance. Hence Credit memos are added to
book balance

*Debit memos already decreased the bank balance

but have no effect on the book balance because the debit
memos are not yet recorded by the depositor. Thus book
balance is overstated in relation to the correct cash
balance. Hence, debit memos are deducted from
book balance
Deposit in transit already increased the book
balance but have no effect on the bank balance because
the deposit are not yet recorded by the bank. Thus
bank balance is understated in relation to the correct
cash balance. Hence, deposit in transit are added to
the bank balance.

Outstanding checks already decreased the book

balance but no effect on the bank balance the checks
are not yet paid by the bank. Thus bank balance is
overstated in relation to the correct cash balance.
Hence, outstanding checks are deducted from the
bank balance.
*** Errors are reconciling items of the party which
committed them.