BANK RECONCILATION

Bank sends a report of the transactions and balances of the depositor’s account.
However, the company should also have a cash record for its internal use. That record is the
Cash account’s general ledger. The company’s cash balance should tally with the bank’s
balance. Thus, all transactions of banks with regards to depositor’s account must be
accounted by the company and recorded in the company’s book. Hence, bank reconciliation
is the process of reconciling the bank’s balance with the company’s book balance.

This is the process by which the bank account balance in an entity’s books of account is
reconciled to the balance reported by the financial institution in the most recent bank
statement. Any difference between the two figures needs to be examined and, if appropriate,
rectified. (https://en.m.Wikipedia.org/wiki/Bank_reconciliation)

This is the process of matching the balances in an entity’s accounting records for a cash
account to the corresponding information on a bank statement. The goal of this process is to
ascertain the differences between the two, and to book changes to the accounting records as
appropriate.
(http//www.accountingtools.com/articles/2017/5/17/bank-reconciliation)

Bank Statement is a monthly report of the bank to the depositor showing:

a. The balance per bank at the beginning.
b. The deposits made by the depositor and acknowledged 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.

Reasons why the bank balance is not the same as the book balance
Timing difference is one of the main reasons why the bank balance doesn’t tally with the
book balance. Bank reconciliation is prepared at the end of the month. However, there are
last minute transactions that the bank records to the depositor’s account, and there are
transactions the company records but not presented with the bank. 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:
 1. Book reconciling items:
a. Credit Memos
b. Debit Memos
Errors
c.
2. Bank reconciling items:
a. Deposits in transit
b. Outstanding checks
c. Errors

1. 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 the 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.

2. Debit memos – refer to items not representing checks paid by the 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. The debit memos have the effect of decreasing the bank
balance.

Examples:
a. NSF or no sufficient fund checks – These are checks deposited but returned by the
bank because of insufficiency of fund. The other name for NSF is DAIF or “drawn
against insufficient fund”.
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 not countersigned, 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

3. Deposits in transit – are collections already recorded by the depositor as cash receipts
but not yet reflected on the bank statement.

Examples:
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.

4. Outstanding checks – are checks already recorded by the depositor as cash

disbursements but not yet reflected on the bank statement.

Examples:
a. Checks drawn and already given to payees but not yet presented for payment.
b. Certified checks – is one where the bank has 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 (if included
therein) because they are no longer outstanding for bank reconciliation purposes.

FORMS OF BANK RECONCILIATION

1. 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.
2. 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.
3. 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.
Note: If the problem is silent, use adjusted balance method.
Bank Reconciliation Format – Adjusted Balance

The reconciliation format is as follows:

BOOK BANK

Unadjusted ending balance Pxxx Unadjusted ending balance Pxxx

Add: Bank credits xxx Add: Deposit in Transit xxx

Book error, if any xxx Bank error, if any xxx
Total xxx Total xxx
Less: Bank debit (xxx) Less: Outstanding check (xxx)
Book error, if any (xxx) Bank error, if any (xxx)
Adjusted balance xxx Adjusted balance xxx
Again, the adjusted balance of Book and Bank

should be equal.

Illustrative Problem:
The cash records of Koro Company show the following for the month of January.

CASH RECEIPTS CASH DISBURSEMENTS

Jan-05 P60000 Jan-06 Check No. 721 P5,000

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

28
P150,000 Check No. 725 37,000

31 Check No. 726 28,000

 P100,000

The general ledger of the company shows the cash in bank account for January as follows:

Cash in bank - BDO

Jan. 31 CR 150,000 Jan. 31 CD 100,000
The balance of the cash in bank on the depositor’s book is ₱50,000.

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

In account with: No. 775

BDO
Caloocan City Manila, Philippines
Date Check # 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

The following data are gathered in connection with the CM and DM appearing on the bank
statement:
a. The CM of ₱15,000 on January 26 represents proceeds of note collected by the bank
in favor of the
Company.
 b. The RT of ₱5,000 represents check of customer deposited previously but returned by
the bank because of “no sufficient fund” or NSF.

Requirements:
1.Determine the deposits in transit and outstanding checks.
2.Prepare the bank reconciliation statement using the following methods:
a. Adjusted Balance Method
b. Book to Bank Method
c. Bank to Book Method
SOLUTION:
Requirement 1
To determine the deposits in transit compare the credits of the bank statement and debits on
the book of Koro.
In the bank statement of Koro Company:
In account with: No. 775
BDO

Caloocan City Manila, Philippines

Date Check # 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

In the books of Koro Company:

Cash in Bank

Jan-05 P60,000 Jan-06 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

28 Check No. 725 37,000

31 Check No. 726 28,000

₱150,000 ₱100,000
Jan-31 ₱50,000

Answer: The amount of deposits in transit is ₱40,000. The cash that the Koro Company
already deposited based on books, but not yet reflected on the bank statement.

To determine the outstanding checks compare the debits of the bank statement and credits
on the book of Koro.
In the bank statement of Koro Company:

In account with: No. 775

BDO

Caloocan City Manila, Philippines

Date Check # 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

Cash in Bank

Jan-05 P60,000 Jan-06 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

 28 Check No. 725 37,000

31 Check No. 726 28,000

₱150,000 ₱100,000
Jan-31 ₱50,000

Answer: The amount of outstanding checks is ₱65,000 (₱37,000 + ₱28,000). The amount that
the bank deducted in the Koro bank account but not yet known by the Koro Company, or not yet
reflected to the books. Requirement 2

A. ADJUSTED BALANCE METHOD:

KORO COMPANY
BANK RECONCILIATION
JANUARY 31, 2020

Balance per book P50,000

Add: Note collected by the bank P15,000
Total P65,000
Less: NSF customer check P5,000
Service charge 1,000 6,000
Adjusted book balance P59,000

Balance per bank P84,000

Add: Deposit in Transit 40,000
Total P124,000
Less: Outstanding check
Check no. 725 37,000
Check no. 726 28,000 65,000
Adjusted bank balance P59,000

B. BOOK TO BANK METHOD:

KORO COMPANY
BANK RECONCILIATION
JANUARY 31, 2020

Balance per book P50,000

Add: Note collected by the bank P15,000
Outstanding checks No. 725 P37,000
No. 726 28,000 65,000 80,000
Total P130,000
Less: NSF customer check 5,000
Service charge 1,000
Deposit in Transit 40,000 46,000
Balance per bank P84,000

A. BANK TO BOOK METHOD:

KORO COMPANY
BANK RECONCILIATION
JANUARY 31, 2020

Balance per bank P84,000

Add: Deposit in Transit P40,000
NSF customer check 5,000
Service charge 1,000 46,000
Total P130,000
Less: Outstanding check
Check no. 725 P37,000
Check no. 726 28,000 65,000
Note collected by bank 15,000 80,000
Balance per book P50,000

Take note:
1. The bank deposits are equivalent to book debits while bank withdrawals are equivalent to
book credits.
2. The bank reconciliation will be prepared once the Bank Statement is received.
3. Take note that the book balance and bank balance must be equal.