Before going over this module, the learner must answer the PRE-TEST in order for the teacher to

assess Recognition of Prior Learning (RPL) and pin point specific topics that need emphasis during
the discussion.

PRE-TEST

Identification:

1. Simplest bank account.

2. Rarely earn interest because of the fast turnover of transactions.
3. These accounts are investment placements.
4. It is a bank form filled up by the depositor.
5. It is a bank form filled up by account holder.

Module 9 –Bank Reconciliation Statement (Bank Statement / Bank Reconciliation)

Learning Outcome(s):

At the end of the lesson, the learner is able to:

1. describe the nature of a bank reconciliation statement;

2. analyse the effects of the identified reconciling items;
3. Prepare a bank reconciliation statement.

BANK STATEMENT

A bank statement is a detailed transaction history of the account over the reporting
period (figure 6). It is a report prepared by the bank for those accounts that do not
have passbooks. The statement informs the account holders of all transactions that occur during the reporting
period. The frequency of reporting is generally monthly. The bank statement is usually sent by the bank
through the courier services together with the debit and credit memos and the cancelled checks.

Deposits are recorded on the bank statement per deposit slip to make it easier for the account holder to
follow. Cancelled checks are all the issued checks that the bank honoured or paid. Checks that are paid by the
bank during the period are sent back to the account holder together with the bank statement. The reference
column for check payments refers to the check numbers.

 BANK RECONCILIATION

A bank reconciliation statement is a document that matches the cash balance on a company’s balance
sheet to the corresponding amount on its bank statement. Reconciling the two accounts helps determine if
accounting changes are needed. Bank reconciliations are completed at regular intervals to ensure that the
company’s cash records are correct. They also help detect fraud and any cash manipulations.

I. Bank II. Books

Unadjusted balance Pxxx

Unadjusted balance Pxxx
 Add: reconciling items xxx
Add: reconciling items xxx

Less: reconciling items xxx

Less: reconciling items xxx

Adjusted balance Pxxx

Adjusted balance Pxxx

Figure 7: Bank Reconciliation Format

Reasons for Difference Between Bank Statement and Company’s Accounting Record

When banks send companies a bank statement that contains the company’s beginning cash balance,
transactions during the period, and ending cash balance, almost always the bank’s ending cash balance and
the company’s ending cash balance are not the same. Some reasons for the difference are:

 Deposits in transit: Cash and checks that have been received and recorded by the company but have
not yet been recorded on the bank statement.
 Outstanding checks: Checks that have been issued by the company to creditors but the payments
have not yet been processed.
 Bank service fees: Banks deduct charges for services they provide to customers but these amounts
are usually relatively small.
 Interest income: Banks pay interest on some bank accounts.
 Not sufficient funds (NSF) checks: When a customer deposits a check into an account but the account
of the issuer of the check has an insufficient amount to pay the check, the bank deducts from the
customer’s account the check that was previously credited. The check is then returned to the
depositor as an NSF check.

Nowadays, many companies use specialized accounting software in bank reconciliation to reduce the amount
of work and adjustments required and to enable real-time updates.

Bank Reconciliation Procedure:

1. On the bank statement, compare the company’s list of issued checks and deposits to the checks
shown on the statement to identify uncleared checks and deposits in transit.
2. Using the cash balance shown on the bank statement, add back any deposits in transit.
3. Deduct any outstanding checks.
4. This will provide the adjusted bank cash balance.
5. Next, use the company’s ending cash balance, add any interest earned and notes receivable amount.
6. Deduct any bank service fees, penalties, and NSF checks. This will arrive at the adjusted company
cash balance.
7. After reconciliation, the adjusted bank balance should match with the company’s ending adjusted cash
balance.

Example: XYZ Company is closing its books and must prepare a bank reconciliation for the
following items:

 Bank statement contains an ending balance of $300,000 on February 28, 2018, whereas the
company’s ledger shows an ending balance of $260,900
 Bank statement contains a $100 service charge for operating the account
 Bank statement contains interest income of $20
 XYZ issued checks of $50,000 that have not yet been cleared by the bank
 XYZ deposited $20,000 but this did not appear on the bank statement
 A check for the amount of $470 issued to the office supplier was misreported in the cash payments
journal as $370.
 A note receivable of $9,800 was collected by the bank.
  A check of $520 deposited by the company has been charged back as NSF.

Amount Adjustment to Books

Ending Bank Balance P300,000
Deduct: Uncleared cheques -50,000 None
Add: Deposit in transit 20,000 None
Adjusted Bank Balance 270,000
Ending Book Balance 260,900
Deduct: Service charge -100 Debit expense, credit cash
Add: Interest income 20 Debit cash, credit interest income
Deduct: Error on check -100 Debit expense, credit cash
Add: Note receivable 9,800 Debit cash, credit notes receivable
Deduct: NSF check -520 Debit accounts receivable, credit cash
Adjusted Book Balance 270,000

Bank Reconciliation Statement

After recording the journal entries for the company’s book adjustments, a bank reconciliation statement
should be produced to reflect all the changes to cash balances for each month. This statement is used by
auditors to perform the company’s year-end auditing.

If you are maintaining a checking account with a bank, I guess you are familiar with bank reconciliation. You
always receive a bank statement with attachments, didn't you? All checks you issued and paid by the bank are
attached with stamped cancelled. You will also find attached thereto, debit and credit memos that have
affected your account balance. What do you call these items? Did you notice that as always, your cash
balance per your record does not agree or balance with that shown in the statement?

At the end of every month, comparing the cash records of the depositor with the bank statement received
from the bank will bring forth the following reconciling items:

1. Book reconciling items:

Per Bank Per accounting book

Unadjusted balance Xxx Unadjusted balance Xxx

Add: Add:

Deposit in transit Xxx Credit memo Xxx

Interest income

Collection received by the bank xxx

Less: Less:

Outstanding checks Xxx Debit memo Xxx

Bank fees Xxx

 NSF check received Xxx

Adjusted balance xxx Adjusted balance xxx

a) Credit memos. What are credit memos? Credit memos have the effect of increasing the bank balance.
They are items credited by the bank to the account of the depositor but not yet recorded by the depositor as
cash receipts.
A typical example of a credit memo is a note collected by the bank in favour of the depositor and credited to
the account of the depositor. Other good examples are matured time deposits transferred by the bank to the
current account of the depositor and proceeds of bank loan credited to the depositor's account.
 The journal entry to record the credit memo in the accounting books is:
Cash xxx
Accounts Receivable xxx
b) Debit memos. What about debit memos? Debit memos have the effect of decreasing the bank balance.
They refer to items 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. Typical examples are, as follows:

a. NSF or non sufficient fund checks - checks deposited but returned by the bank for insufficiency of
funds.

b. Technically defective checks - checks deposited but returned for having no signature or
countersignature, erasures not countersigned, mutilated checks, or the amount in figures conflicts with the
amount in words.

c. Bank services charges - charges for interest, collection, check book and penalty.

d. Reduction for loan- decrease in current account balance of the depositor deducted by the bank in
payment for loan owed to the bank which has already matured.
 The journal entry to adjust for the debit memo is:
Accounts Payable / Accrued Expenses xxx
Cash xxx
 The preceding are the reconciling items in the book balance of the depositor. These are items that require
adjusting entries on the book of the depositor to bring the cash in bank balance to its correct amount for
balance sheet purposes.

c) Errors. It is common for either the bank or the company’s accountant to make an erroneous entry in their
books. These errors should be carefully analysed and adjustments should be made on the side that committed
the error.

2. Bank reconciling items:

a) Deposits in transit. To proceed with the bank reconciling items, deposit in transit are collections already
recorded by the depositor as cash receipts but not yet reflected on the bank statement.
 Deposit in transit refers to two items: (1) Amount that is deposited in the bank after the cut-off
time; and (2) Amount that is received by the company for deposit but not yet deposited in the bank.

Example 1: Amount that is deposited in the bank after the cut-off time.
June 30, 20x1
1:00 PM ABC Company received a P5,000 check from a customer. Collection was promptly
recorded in the accounting books.
2:30 PM ABC Company deposited the P5,000 check in GHI bank. The teller informed you
that their cut-off time for check deposit is 11:00 AM. Late deposit was stamped on
the deposit slip.
July 1, 20x1 Check deposit was credited in ABC Company’s bank account.
Example 2: Amount that is received by the company but not yet deposited in the bank.
June 30, 20x1
3:00 PM ABC Company received a P15,000 check from a customer.
4:00 PM ABC Company personnel prepared deposit slip for the check.
July 1, 20x1 Check deposit to ABC Company’s bank account.

b) Outstanding checks. Outstanding checks are checks already recorded by the depositor as cash
disbursements but not yet reflected on the bank statement. They include checks drawn and already released
to payees but not yet presented for payment to the bank.

June 28, 20A4 ABC Company issued a P10,000 check in favour of Grace Inc. Check was also
recorded on the accounting books on this date.
June 29, 20A4 ABC Company informed Grace Inc. that their check is ready for pick-up.
June 30, 20A4 The messenger of Grace Inc. picked up the check from the office of ABC Company.
July 1, 20A4 The check was deposited in GHI Bank.
July 3, 20A4 The check cleared through the banking system. The bank deducted P10,000 from
ABC’s checking account.

c) Errors. Errors will have to be analysed for proper treatment. These are reconciling items of the party who
committed them.

References: https://ezinearticles.com/?In-Bank-Reconciliation,-What-Are-Reconciling-Items?&id=4598917
Article Source: http://EzineArticles.com/4598917
https://corporatefinanceinstitute.com/resources/knowledge/accounting/bank-reconciliation/
FUNDAMENTAL of ACCOUNTANCY, BUSINESS and MANAGEMENT 2 Book by Dani Rose C. Salazar. 1 st Edition
https://www.accountancyknowledge.com/bank-reconciliation-statement-problems-and-solutions/

Activity

From the following particulars prepare a Bank Reconciliation Statement to find out the causes of
difference in two balances as on August 31st, 2016 for Four Star (Pvt.) Ltd.

(i) Bank Overdraft as per Bank Statement ………………………………………………………… 17,000

(ii) Check issued but not encashed during the August …..….. …………………………….……2,200
(iii) Dividends on shares collected by bank...…………….… ………………………………..……...2,300
(iv) Interest charged by the bank recorded twice in the Cash Book …………………………… 500
(v) Check deposited as per Bank Statement not entered in Cash Book……………………. 3,400
(vi) Credit side of the Bank column in Cash Book cast short ……………….……….…………. 1,000
(vii) Clubs dues paid by bank as per standing instruction not recorded in Cash Book … 1,200
(viii) Uncredited check due to outstation …………………………………………………………….. 3,900

POST-TEST

The accountant of Jonathan Manufacturing Company was tasked to perform monthly bank
reconciliation. She downloaded the company’s April 30 bank statement that showed a balance of
 P32,400. She also printed the cash ledger from the company’s computerized accounting system. It
contains the ending balance of P8, 350. She also found the following reconciling items:

a. The bank statement showed bank service fee of P800.

b. The bank collected P1, 500 from a note receivable for Jonathan Manufacturing. Also, a collection fee
of P250 was charged.
c. Deposits in transit, P51, 000.
d. Checks outstanding on May 31, P79, 100.
e. The accountant found a check issued to Rhys Corp. for P4, 500 that cleared the bank but was not in
the cash ledger.

Required: Prepare a Bank Reconciliation Statement.

Bank Reconciliation Problem #1

Bank Reconciliation Problem #1