BANK RECONCILIATIONS

Bank reconciliations are prepared by the bank depositors when they received their monthly bank
statements. The reconciliation is made to determine any required adjustments to the cash
balance.
There are two types of reconciling items:
1. Reconciling items due to delays in the relaying of cash transactions from the books to the
bank, and vice-versa. Some examples:
a. On the part of the bank – deposits in transit, outstanding checks
b. On the part of the books – bank service charges, interest income, NSF customer’s checks

If the delayed cash transaction is a positive transaction like deposits in transit, it is added to
the bank balance; if it is a negative transaction like outstanding checks, it is deducted from the
bank balance.
Interest income is a positive transaction, so it is added to the book balance; bank service
charges and NSF customer’s checks are negative transactions, so they are deducted from the
book balance.

2. Reconciling items due to errors by the books and the bank

The correction of the error depends on the nature of the error. If the books overstated cash
receipts, the correction is deducted from the book balance; and if the books overstated cash
payments, the correction is added to the book balance.

Similarly, if the bank understated a bank deposit, the correction is added to the bank
balance; and if the bank understated a bank payment, the correction is deducted from the
bank balance.

There are three formats of the bank reconciliation statement, namely:

1. Adjusted format
2. Book to bank format
3. Bank to book format
There are two cases to be illustrated. In the first case, no reconciling items are given, so, before
we proceed, the following are the suggested procedures to handle this kind of situation (real life
and work situation.)

1. Locate the unadjusted balances to be reconciled

a. Book balance – Pick it up from the general ledger T – account for “Cash in Bank”
b. Bank balance – Pick it up from the bank statement

2. Determine the deposits in transit by comparing the

a. Previous bank reconciliation statement and the CRJ (Cash Receipts Journal)
against the
b. Deposit entries (credits) of the bank statement

3. Determine the check payments in transit (outstanding checks) by comparing the

a. Previous bank reconciliation statement and the CDJ (Cash Disbursement Journal)
against the
b. Check payment entries (debits) of the bank statement

4. Determine the unrecorded bank CMs (credit memos) by comparing the

a. Previous bank reconciliation statement and new CMS of the bank statement
against the
b. CMs already recorded by the books in the general journal, cash receipts journal,
or directly to the general ledger

5. Determine the unrecorded bank DMs (debit memos) by comparing the

a. Previous bank reconciliation statement and new DMs of the bank statement
against the
b. DMs already recorded by the books in the general journal, cash disbursements
journal, or directly to the general ledger

6. Recheck all additions in the books and in the bank statement. Other errors, if any, can
be detected while performing steps 1, 2, 3, 4, and 5.

The solution for Everlasting Company includes the following:

1. Bank reconciliation statement as of March 31, 2019 using the adjusted format. Adjusting
entries are included.
2. Bank reconciliation statement as of March 31, 2019 using the book to bank format.
3. Four-column bank reconciliation statement or proof of cash using the adjusted format.
 4. Four-column bank reconciliation statement or proof of cash using the book to bank
format.

The next format is the book to bank format. The trick is to reverse the treatment of all bank
reconciling items – a bank addition will now become a deduction, while a bank deduction is
now an addition.

You want to try the third format – bank to book format. The trick is to reverse now the
treatment of all book reconciling items – a book addition is now a deduction, while a book
deduction is now an addition.

The four-column reconciliation will follow the following steps:

1. Column 1 will come from the Feb. 28, 2019 bank reconciliation. Rewrite the additions as
open amounts (no parenthesis); rewrite the deductions as closed amounts (with
parenthesis)
2. Column 4 will come from the March 31, 2019 bank reconciliation. Rewrite also the
additions as open amounts; rewrite the deductions as closed amounts.
3. Column 2 will be the reconciliation of total receipts for the current month. Omitted
receipts will be added; wrong receipts will be deducted. This approach is too academic,
so try arithmetic: column 1 + column 2 = column 3 + column 4. This short-cut is perfect if
columns 1 and 4 were perfectly done.
4. Column 3 will be the reconciliation of total disbursements for the current month. Omitted
disbursements will be added; wrong disbursements will be deducted. This again is a very
academic approach. Try once more your arithmetic: column 1 + column 2 + = column
3 + column 4. This short-cut is also perfect if columns 1 and 4 were perfectly done.

Case 2
In the second case, the cash transactions and reconciling items are summarized in two general
ledger accounts - the first for the books and the second one to the bank. A few additional
information is also given.

The solution of the second case includes:

1. Proof of cash using the adjusted format, including the computation of the missing
outstanding checks, adjusting entries, and documentary proofs of the cash shortage.
 2. Proof of cash using the bank to book format.

+ To remove a July receipt transaction mixed with the August receipts.

+ + To include an additional August receipt transaction.
* To remove a July correction mixed with the August bank credits.
** To correct the August overstated bank debits (caused by the erroneous debit made.)
*** To remove a July correction mixed with the August bank debits.
**** To correct the August overstated bank credits (caused by the erroneous credit made.)

Note that there are two sets of unadjusted book balances at the end – audited and given. It
closes with discrepancies, which tallies with the shortage under the adjusted format.
The adjusting entries as of August 31, 2019 are next page. Bank reconciliation statements are
not substitutes of the general journal, so the preparation of adjusting entries is a requirement
(never optional) of the reconciliation process.

The proof of cash is an audit technique. It is not a legal evidence to prove the cash shortage.
To prove in court the shortage, documentary evidences like official receipts, deposit slips, etc.)
need to be presented and summarized as follows:

COMPOSITION OF CASH
Per PFRS, the definition of cash includes both cash on hand, demand deposits, and cash
equivalents.

Cash on hand includes money and money substitutes which are acceptable by banks as items
of deposit for immediate credit at face value. Money refers to currencies (bills and coins) which
are in circulation and legal tender. Money substitutes refer to any instrument payable in money
like good checks, bank drafts, and money orders.
 Demand deposits include cash in bank placed in a savings account or checking account,
withdrawable anytime by filling up a withdrawal slip, writing out a check, or even through the
ATM.
Cash equivalents are short-term, highly liquid investments. They have to be readily
convertible into cash, and so near maturity that they carry little risk of changing in value due to
interest rate changes. Generally, these will include only those investments with original
maturities of three (3) months or less from the date of purchase by the enterprise. Common
before maturity date, 3-month time deposit, and 3-month money market instrument or
commercial paper.
Unrestricted cash on hand, demand deposits, and cash equivalents available for general
use are presented as the first current asset.

EXCLUSIONS FROM CASH

The following items are usually mistaken as cash. Assuming that the date of the balance sheet is
December 31, 2019, the reasons why they are excluded from cash and their proper accounting
treatment are explained.

Items Reason Proper treatment

Customer’s check dated Unacceptable by banks for
Jan. 10, 2020 immediate deposit or
encashment
Customer’s check marked Deposited then returned by
NSF bank for insufficiency
Pieces of jewelry No face value to fix the
depositor’s credit
Postage stamps Unacceptable by banks
Employees’ IOUs Unacceptable by banks
SMC stock certifiacates Market value is ether higher Investment (short or long-
or lower than par value
Account Receivable
Accounts Receivable
Investment (short or long-
term); Inventory (jeweler’s
business)
Prepaid Expense
Advances to Officers &
Employees
term)
CLASSIFICATION OF CASH

Cash is classified in the balance sheet in four (4) ways:

1. Current asset
2. Long – term investment
3. Other assets
4. Current liabilities

Cash is ordinarily a current asset. It is a current asset when it is available for immediate use.
There are no restrictions as to its withdrawal, but even assuming that there are restrictions with
regards to the way it shall be used, like petty cash fund, it is still classified as a current asset.
Some examples are:

Accepted Account Titles Laymen’s Term

Petty Cash Fund Small money for small expenses
Cash on Hand Undeposited collections
Cash in Bank Checking account; savings account
Cash Equivalent 3-month deposit
Payroll Fund Payroll money
Change Fund Loose bills and coins
Vale Fund Emergency fund

Unless the balance sheet is prepared for special purposes, it is not necessary to use all seven
(7) accounts above. They are all referred to as “ Cash & Cash Equivalents”, the first current asset.

Cash when not available for immediate use, but shall be used in the future are classified as
long-term investments, if they can generate as well extra revenue or income for the business.
They are usually handled by trustees who will invest or convert them into other forms of assets
like stocks and bonds. Some examples are: