6 BANK RECONCILIATION

Technical Knowledge

• To understand the need for a bank reconciliation.

• To know the reconciling items affecting the cash in bank per ledger.
• To know the recociling items affecting the cash in bank per bank statement.
• To be able to prepare a bank reconciliation.
• To be able to prepare the necessary adjusting entries to reconcile the cash in
bank per ledger with the cash in bank perr bank statement.

A. Bank Deposits
There are three kinds of bank deposits, namely:

a. Demand deposit - This is the current account or checking account or commercial

deposit where deposits are covered by deposit slips and where funds are witdrawable
on demand by drawing checks against the bank. A demand deposit is noninterrest
bearing.

b. Savings deposit - The depositor is given a passbook upon the initial deposit. The
passbook is required when making deposits and withdrawals. Savings deposit is
interest bearing.

c. Time deposit - This 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.

B. What is Bank Reconciliation?

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

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

Actually, the bank statement is an exact copy of the depositor's edger in the record of the
bank. 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 frequently, there are items on the depositor's book which do not appear on the bank
records as of the same date and less frequently, there are items on the bank records which
do not appear on the depositor's book. In the light of the foregoing, it becomes necessary to
prepare a bank reconciliation.
C. Reconciling Items

1. Book reconciling items;

a. Credit memos
b. Debit memos
c. Errors

2. Bank reconciling items

a. Deposit in transit
b. Outstanding check
c. Errors

D. Credit Memos
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. Credit memos have the
effect of increasing the bank balance.
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.

E. Debit Memos
Debit memos refers 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 disbursement. These have the effect of decreasing the bank balance.
Examples;
a. NSF or no sufficient fund checks
b. Technically defective check
c. Bank service charge
e. Reduction of loan

F. Deposits in Transit

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.

G. Outstanding check
 Outstanding checks are checks already recorded by the depositor as cash disbursement
but not year reflected on the bank statement.

Outstanding checks include:

a. Checks drawn and already given to payee 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.

Certified checks should be deducted from the total outstanding checks because they
are no longer outstanding for bank reconciliation purposes.

H. Forms of Bank Reconciliation

a. Adjusted balance method

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

Bank Balance xx
Add: Deposits in transit xx
Total xx
Less: Outstanding checks xx
Adjusted bank balance xx

b. Book to bank method

Book balance xx
Add: Credit memos xx
Outstanding checks xx xx
Total xx
Less: Debit memos xx
Deposit in transit xx xx
Bank balance per bank statement xx

c. Bank to book method

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

The cash records of Xerox Company show the following for the month of January of current year:

CASH RECEIPTS CASH DISBURSEMENTS

Jan. 5. 60,000 Jan. 6. Check No. 721

13 20,000 7 Check No. 722
25 30,000 10 Check No. 723
31. 40,000 14 Check No. 724
150,000 28 Check No. 725
31 Check No. 726

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

Cash in Bank - First Bank

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

Balance 50,000

Bank Statement - First Bank

In account with : No. 775 FIRST BANK
Xerox Company Jakarta, Indonesia
Jakarta
Date Check No Withdrawals Deposits

Jan. 6 60,000
8 721 5,000
11 722 10,000
12 723 18,000
14 20,000
17 724 2,000
26 30,000
26 15,000 CM
30 5,000 RT
30 1,000 SC
Code:
CM - Credit Memo SC - Service Charge
DM - Debit Memo RT - Returned Check

The following data are gathered in connection with the CM/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 Xerox 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.
Adjusted balance method

Xerox Company
Bank Reconciliation
January 31, 2017

Balance per book $

Add : Note collected by bank
Total
Less: NSF check $ 5,000
Service charge 1,000
Adjusted book balance $

Balance per bank statement $

Add : Deposit in Transit
Total $
Less : Outstanding checks
Check No. 725 $ 37,000
Check No. 726 28,000
Adjusted bank balance $

Book to bank method

Xerox Company
Bank Reconciliation
January 31, 2017

Balance per book $

Add : Note collected $ 15,000
Outstanding checks
Check No. 725 $ 37,000
Check No. 726 28,000 65,000
Total $
Less: NSF check $ 5,000
Service Charge 1,000
Deposit in Transit 40,000
Balance per bank statement $

Bank to book method

Xerox Company
Bank Reconciliation
January 31, 2017

Balance per bank $

Add: Deposit in transit $ 40,000
NSF check 5,000
Service charge 1,000
Total $
Less: Outstanding check
Check No. 725 $ 37,000
Check No. 726 28,000 65,000
Note collected by bank 15,000
Balance per book $
=
 5,000
10,000
18,000
2,000
37,000
28,000
100,000

Balance

60,000
55,000
45,000
27,000
47,000
45,000
75,000
90,000
85,000
84,000

y 26 represents proceeds of note collected by the bank in favor

check of customer deposited previously but returned by the bank

 50,000
15,000
65,000

6,000
59,000

84,000
40,000
124,000

65,000
59,000

50,000

80,000
130,000

46,000
84,000

84,000

46,000
130,000
80,000
50,000
 6 LEARNING CHECK
1. Explain the three kinds of bank deposits.

2. What is a bank reconciliation?

3. What is a bank statement?

4. What are credit memos?

5. What are debit memos?

6. What are deposits in transit?

7. What are outstanding checks?

8. Define a certified check.

9. What is the treatment of certified check for bank reconciliation?

10. Explain the three forms of bank reconciliation.

6 problems
Problem 6-1 Multiple Choice
1. A bank reconciliation is

a. A formal financial statement that lists all of the bank account balances of
an entity.
b. A merger of two banks that previously were competitors.
c. A statement sent by the bank to depositor on a monthly basis.
d. A schedule that accounts for the differences between an entity's cash
balance shown on its bank statement and the cash balance shown in its
general ledger.

2. Which of the following items must be added to the cash balance per ledger in
preparing a bank reconciliation which ends with adjusted cash balance?

a. Note receivable collected by bank in favor of the depositor and credited to

the account of the depositor.
b. NSF customer check.
c. Service charge.
d. Erroneous bank debit.

3. Which of the following must be deducted from the bank statement balance in
preparing a bank reconciliation which ends with adjusted cash balance?

a. Deposit in transit
b Outstanding checks.
c. Reduction of loan charged to the account of the depositor
d. Certified check

4. In preparing a bank reconciliation, interest paid by the bank on the account is

a. Added to the bank balance.

b. Subtracted from the bank balance..
c. Added to the book balance.
d. Subtracted from the book balance.

5. In preparing a monthly bank reconciliation, which of the following items would be

added to the balance per bank statement to arrive at the correct cash balance?

a. Outstanding checks
b. Bank service charge
c. Deposit in transit
d. A customer's note collected by the bank on behalf of the depositor.

6. Which of the following statements is false?

a. A certified check is a liability of the bank certifying it.

b. A certified check will be accepted by many persons who would not otherwise
accept a personal check.
c. A certified check is one drawn by a bank upon itself.
d. A certified check should not be included in the total outstanding checks.
 7. Bank statements provide information about all of the following except

a. Checks cleared during the period.

b. NSF checks
c. Bank charges for the period.
d. Errors made by the depositor

8. If the balance shown on a company's bank statement is less than the correct
cash balance and neither the company nor the bank has made errors, there
must be

a. Deposits credited by the bank but not yet recorded by the company.
b. Outstanding checks.
c. Deposits in transit.
d. Bank charges not yet recorded by the company.

9. If the cash balance shown on a company's accounting records is less than the
correct cash balance and neither the company nor the bank has made any
errors, there must be

a. Deposits credited by the bank but not yet recorded by the company.
b. Deposits in transit.
c. Outstanding checks.
d. Bank charges not yet recorded by the company.

10. What is the adjusting entry for a customer NSF check?

a. Debit cash and credit accounts receivable

b. Debit accounts receivable and credit cash
c. Debit service charge and credit cash
d. No adjustment is necessary

Problem 6-2
Information pertaining to Graceland Corporation appears below:

Balance per bank statement, July 31 $ 6,200,000

Balance per ledger, July 31 3,750,000
Deposit of July 30 not recorded by bank 1,400,000
Debit memo-service charges 50,000
Credit memo-collection of note by bank for Graceland 1,500,000
Outstanding checks ?

An analysis of the cancelled checks returned with the bank statement reveals the following:

a. Check for purchase of equipment was drawn for $300,000 but was recorded as
$200,000.
b. The management wrote a check for travelling expenses of $500,000 while out of town.
The check was not recorded.

Required:
Compute for the amount of outstanding checks as of July 31.
Problem 6-3
The following bank reconciliation is presented for Cheezy Company for the month of
November '2017:

Balance per bank statement, November 30 $ 3,600,000

Deposit in transit 800,000
Total 4,400,000
Outstanding checks $ 1,200,000
Bank credit recorded in error 200,000 (1,400,000)
Balance per book, November 30 3,000,000

Data per bank statement for the month of December 2016 follow:

December deposits (including note collected at $1,000,000

for Cheezy Company) $ 5,500,000

December disbursements (NSF, $350,000 and service

charge, $50,000) 4,400,000

All items that were outstanding as of November 30 cleared through the bank in December
including the bank credits. In addition, $500,000 in checks were outstanding and deposits of
$700,000 were in transit as of December 31, 2016.

Required:
What is the balance of cash per ledger on December 31, 2016?

Problem 6-4
The following information pertains to the records of Abbot Company:

ABBOT COMPANY
Check
Date No. Withdrawals 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 SC 2,000 108,000

FIRST CENTURY BANK

Dec. 1 100,000 Dec.Check No. 101 5,000

21 50,000 6 102 15,000
27 10,000 8 103 40,000
31 80,000 8 104 10,000
10 105 30,000
14 106 25,000
28 107 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 company on December 26.

Required:
a. Prepare bank reconciliation using adjusted balance method.
b. Adjusting entries to correct the cash balance.

Problem 6-5
Irish Company keeps all if its cash in a checking account. An examination for the company's
accounting records and bank statement for the month ended June 30, 2017 revealed the following
information:

● The cash balance per book on June 30 is $8,500,000.

● A deposit of $1,000,000 that was placed in the bank's night depository on June 30 does not
appear on the bank statement.

● The bank statement shows on June 30, the bank collected note for Irish Company and was
credited the proceeds of $950,000 in the company's bank account.

● Checks outstanding on June 30 amount to $300,000.

● Irish Company discovered that a check written in June for $200,000 in payment of an account
payable had been recorded in the company's records as $20,000.

● Included with the June bank statement was NSF check for $250,000 that the company
received from customers on June 26.

● The bank statement shows a $20,000 bank charge for June.

Required:
How much is the cash balance to be shown on the statement of financial position on
June 30, 2017?

Problem 6-6
As of June 30, 2017, the bank statement of Angel Company had an ending balance of $3,735,000.
The following data were assembled in the course of reconciling the bank balance:

● The bank erroneously credited Angel Company for $31,000 on June 22.

● During the month, the bank charged back NSF checks amounting to $23,000 of which $8,000
had been redeposited on June 25.

● Collection for June 30 totaling $103,000 was deposited the following month.

● Checks outstanding as of June 30 were $302,000.

● Note collected by the bank for Angel Company was $81,000 and the corresponding bank
charge was $5,000.

Required:
Compute for the adjusted bank balance on June 30, 2017.
Problem 6-7
Orient Company had the following bank reconciliation on March 31, of the current year:

Balance per bank statement, March 31 $ 4,650,000

Add: Deposit in Transit 1,000,000
Total $ 5,650,000
Less: Outstanding checks 1,250,000
Balance per book, March 31 $ 4,400,000

Data per bank statement for the month of April follow:

Deposits $ 6,000,000
Disbursements 5,000,000

All reconciliation items on March 31 cleared through the bank in April. Outstanding checks at
April 30 totaled $750,000 and deposit in transit amounted to $1,500,000.

Required:
Compute for the amount of cash receipts per book in April.

Problem 6-8
In reconciling the bank account of Northern Company on December 31, 2016, the following
information is obtained:

Cash balance per ledger $ 5,000,000

Cash balance per bank statement 5,500,000
Proceeds of bank loan discounted on November 1, for one year at 14% 516,000
Undeposited collections on December 31 300,000
Check of Northwest Company had been incorrectly deducted by bank
from Northern Company 50,000
Check of Northern in payment of an account payable had been recorded by
the depository as $20,000. The correct amount is 200,000

The ledger account for cash was the only cash account kept by the company. It included a
petty cash account comprised of the following items:

Currency and coins 4,000

Supplies 2,000
Transportation 3,000
Postage 1,000 10,000

Deposit of Northwest Company credited to Northern Company account 130,000

Deposit of December 27 omitted from bank statement. 150,000
Outstanding checks 544,000

Required:
1. Prepare bank reconciliation on December 31, 2016.
2. Prepare one journal entry only necessary to adjust the cash account.

Problem 6-9
Magnate Company's newly hired assistant prepared the following bank reconciliation on March 31,
2017:
 Book balance $ 1,405,000
Add: March 31, deposit $ 750,000
Collection of note 2,500,000
Interest on note 150,000 3,400,000
Total $ 4,805,000
Less: Magnum Company's deposit to our accoun 1,100,000
Bank service charge 5,000 1,105,000
Adjusted book balance $ 3,700,000

Bank balance $ 5,630,000

Add: Error on check No. 175 45,000
Total $ 5,675,000
Less: Preauthorized payment for light and water 245,000
NSF 220,000
Outstanding checks 1,650,000 2,115,000
Adjusted bank balance $ 3,560,000

Check No. 175 was made for the proper amount of $249,000 in payment of account. However
it was entered in the cash payment journal as $294,000. Magnate Company authorized the bank
to automatically pay its light and water bills as submitted directly to the bank.

Required:
a. Prepare a corrected bank reconciliation.
b. Prepare the necessary adjusting entries on March 31, 2017.

Problem 6-10
The following ledger account is a copy of the bank account in the ledger of Supersonix Company:

First Bank International

Dec. 1. Balance 100,000 Dec.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 First Bank International by Supersonix
Company:

Date Checks Deposits Balance

Dec. 1. Balance 130,000

768 10,000
1. 771 20,000
4. 772 5,000
6. 773 35,000 30,000
12. 774 15,000 40,000
12. 776 52,000
24. 1,042 8,000 50,000
28. NSF 10,000 45,000 CM
28. BSC 5,000
a. The Supersonix Company reconciled its bank balance on November 30. with two checks,
No. 768 for $10,000 and No. 770 for $20,000 outstanding.

b. Check No. 1042 was drawn by Superstar Company. The bank charged it in error to the
account of Supersonix Company.

c. Check No. 776 was correctly drawn for $52,000 in payment of account. The amount $25,000
was entered in the books of original entry.

d. The credit on December 28 represents the proceeds of a $50,000 note, less collection fee of
$5,000 collected by the bank and credited to the account.

e. The NSF was received from a customer in payment of account.

Required:
1. Prepare a bank reconciliation statement as of December 31.
2. Prepare entries in general journal form to adjust the books of Supersonix Company.