Bank Reconciliation

Valix, C. T. et al. Intermediate Accounting Volume 1. (2019). Manila:

GIC Enterprises & Co.; Inc.
Bank Deposits
Demand Deposit
Current account / Checking
Account / Commercial Deposit
where deposits are covered by
deposit slips and where funds
are withdrawable on demand
by drawing checks against the
bank
Non-interest bearing
For bank reconciliation
Kinds of Bank Deposits
Savings Deposit
Depositor is given a passbook
upon initial deposit; passbook
is required when making
deposits and withdrawals
Interest-bearing
Time Deposit
Evidenced by a formal
agreement embodied in an
instrument called Certificate
of Deposit; may be pre-
terminated or withdrawn on
demand or after a certain
period of time agreed upon.
Interest-bearing
What is a bank reconciliation?
(refer to page 49 for sample)

A statement which brings into agreement the two reciprocal accounts/records:

❑ the cash balance per book
❑ the cash balance per bank as shown in the bank statement provided by the
bank at the end of each month
Bank Statement
(refer to page 57 for sample)

A monthly report of the bank to the depositor showing:

1. The cash balance per bank at the beginning
2. The deposits made by the depositor and acknowledged by the
bank
3. The checks drawn by the depositor and paid by the bank
(canceled checks)
4. The daily cash balance per bank during the month
Reconciling Items
Book Reconciling Items Bank Reconciling Items
• Credit Memos • Deposits in Transit
• Debit Memos • Outstanding Checks
• Errors • Errors
Credit Memos
❑Items not representing deposits CREDITED by the bank to the account of the
depositor but not yet recorded by the depositor as cash receipts.
❑Have the effect of increasing the bank balance.
❑Typical examples:
1. Notes receivable collected by the bank in favor of the depositor and credited
to the account of the depositor
2. Proceeds of bank loan credited to the account of the depositor
3. Matured time deposits transferred by the bank to the current account of the
depositor
 Credit Memos
Reconciling Item Bank Record Book Record Reconciliation AJE – Books
NR collected by + Bank Not yet + Book CIB
bank recorded BSC
N/R
Interest Income
Proceeds of Bank + Bank Not yet + Book CIB
Loan recorded Loans Payable
Matured time + Bank Not yet + Book CIB
deposit recorded CIB–Time Deposit
transferred to
current account
Debit Memos
❑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 a cash disbursement.
❑Have the effect of decreasing the bank balance.
❑Typical examples:
1. NSF or No Sufficient Fund Checks / DAIF or Drawn Against Insufficient Fund
Checks
2. Technically Defective Checks
3. Bank Service Charges
4. Reduction of Loan
 Debit Memos
Reconciling Item Bank Record Book Record Reconciliation AJE – Books
NSF Check -Bank Not yet -Book A/R
recorded CIB
Technically -Bank Not yet -Book A/R
Defective Check recorded CIB
Bank Service -Bank Not yet -Book BSC
Charge recorded CIB
Reduction of -Bank Not yet -Book Loans Payable
Loan recorded Interest Expense
CIB
Deposits in Transit
❑Collections already recorded by the depositor as cash receipts but not yet reflected on the
bank statement
❑Include:
1. Collections already forwarded to the bank for deposit but too late to appear in the bank
statement
2. Undeposited collections or those still in the hands of the depositor/ cash on hand awaiting
delivery to the bank for deposit
Deposits in Transit

Bank Record Book Record Reconciliation AJE – Books

Not yet recorded +Book +Bank None
 Outstanding Checks
❑Checks already recorded by the depositor as cash disbursements but not yet reflected in the bank
statement.
❑Include:
1. Checks drawn already given to payees but not yet presented for payment.
2. Certified Checks
▪ 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 check.
▪ Should be deducted from the total outstanding checks (if included therein) because they are
no longer outstanding for bank reconciliation purposes.
Outstanding Checks

Bank Record Book Record Reconciliation AJE – Books

Not yet recorded -Book -Bank None
 Some Errors and Their Correction
Error Bank Record Book Record Reconciliation AJE – Books
Understatement Correct Actual Deposit + Book CIB
of Cash Receipts Amount of > A/R
on the books of Deposit Recorded Amount
Depositor of Collection
Understatement Correct Actual Check Drawn - Book A/P
of Checks Drawn Amount of > CIB
by the Depositor Check / Recorded Amount
Payment of Payment
 Some Errors and Their Correction
Error Bank Record Book Record Reconciliation AJE –
Books
Deposit of Actual Deposit Correct - Bank None
another entity < Amount of
credited by the Amount Recorded Deposit
bank to
depositor’s
account
Check of another Actual Check Paid Correct + Bank None
entity charged to < Amount of
the depositor’s Amount Recorded Check /
account Payment
Some Errors and Their Correction

Errors are reconciling items of the party which

committed them.
Forms of Bank Reconciliation
Adjusted Balance Book to Bank Method Bank to Book Method
Method
Book balance and bank Book balance is Bank balance is
balance are brought to a reconciled with the bank reconciled with the book
correct cash balance that balance or the book balance or the bank
must appear on the SFP. balance is adjusted to balance is adjusted to
equal the bank balance. equal the bank balance.
Book / Bank Balance Book Balance Bank Balance
= = =
Correct Balance Bank Balance Book Balance
Forms of Bank Reconciliation
Adjusted Balance Book to Bank Bank to Book
Method Method Method
Book Balance Balance per Book Balance per Bank
+ Credit Memo + Credit Memo + Debit Memo
- Debit Memo + Outstanding Checks + Deposit in Transit
+- Book Error - Debit Memo - Credit Memo
= Adjusted Book Balance - Deposit in Transit - Outstanding Checks
= Bank Balance = Book Balance
Bank Balance
+ Deposit in Transit
- Outstanding Checks
+-Book Error
= Adjusted Bank Balance
General Procedures
(Use problem 2-2 on page 54-55 as illustrative problem)
a) Determine the balance per book and the balance per bank
b) Trace the cash receipts to the bank statement to ascertain whether there are deposits not
yet acknowledged by the bank (Deposit in Transit)
c) Trace the checks issued to the bank statement to ascertain whether there are checks not yet
presented for payment (Outstanding Checks)
d) The bank statement should be examined to determine whether there are bank credits
(Credit Memo) or bank debits (Debit Memo) not yet recorded by the depositor
e) Watch out for errors. Again, errors are reconciling items of the party which committed them.
End of Chapter