BANK RECONCILIATION

Bank Deposits

 Demand deposit – current account or checking account or commercial

deposit where deposits are covered by deposit slips and where funds are
withdrawable on demand by drawing checks against the bank.
 Saving deposit – the depositor is given a passbook upon the initial deposit.
The passbook is required when making deposit and withdrawals.
 Time deposit – similar to saving deposit in the sense that it is interest
bearing. It is evidenced by a formal agreement embodied in an
instrument called certificate of deposit.
Bank Reconciliation

 A statement which brings into agreement the cash balance per book
and cash balance per bank.
 Usually prepared monthly because the bank provides the depositor with
the bank statement at the end of every month.
 A bank statement is a monthly report of the bank to the depositor
showing:
a. The cash 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.
Reconciling Items

1. Book reconciling items:

a.Credit memos
b.Debit memos
c.Errors
2. Bank reconciling items:
a.Deposits in transit
b.Outstanding checks
c.Errors
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.
 Credit memos have the effect of increasing the bank balance.
Examples of credit memos are:

 Notes receivable collected by bank in favor of the depositor and

credited to the account of the depositor.
 Proceeds of bank loan credited to the account of the depositor.
 Matured time deposits transferred by the bank to the current account of
the depositor.
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 disbursement.
 Debit memos have the effect of decreasing the bank balance.
Examples of debit memos are:

 NSF or no sufficient fund check – checks deposited but returned by the

bank because of insufficiency of fund.
 Technically defective checks – checks deposited but returned by the
bank because of technical defects such as absence of signature.
 Bank service charge – bank charges for interest, collection, checkbook
and penalty.
 Reduction of loan – 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.
Deposits in transit

 Collections already recorded by the depositor as cash receipts but not

yet reflected on the bank statement.
Deposits in transit include:

 Collections already forwarded to the bank for deposits but too late to
appear in the bank statement.
 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.
Outstanding checks

 Checks already recorded by the depositor as cash disbursements but not

yet reflected on the bank statement.
Outstanding checks include:

 Checks drawn and already given to payee but not yet presented for
payment.
 Certified checks – 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
because they are no longer outstanding for bank reconciliation purposes.
Forms of bank reconciliation

a. Adjusted balance method – the book balance and the bank balance
are brought to a correct cash balance that must appear on the balance
sheet.
b. Book to bank method – the book balance is reconciled with the bank
balance or the book balance is adjusted to equal the bank balance.
c. Bank to book method – the bank balance is reconciled with the book
balance or the bank balance is adjusted to equal the book balance.
Proforma reconciliation

 Adjusted balance method

Book balance xx Bank balance xx
Add: Credit memos xx Add: Deposits in transit xx
Total xx Total xx
Less: Debit memos xx Less: Outstanding checks xx
Adjusted book balance xx Adjusted bank balance xx
Some errors and their correction

 Understatement of cash receipts on the book of the depositor. For

example, the collection from customer which is deposited amounts to
₱10,000 but recorded in the books only as ₱1,000. There is an
understatement of cash receipt of ₱9,000. The error is added to the book
balance and adjusted as follows:

Cash in bank 9,000

Accounts receivable 9,000
Some errors and their correction

 Understatement of checks drawn by the depositor. For example, a check

in payment of account payable amounting to ₱20,000 is recorded in the
book as ₱2,000. There is an understatement of cash disbursement and a
consequent overstatement of book balance in the amount of ₱18,000.
The error is deducted from the book balance and adjusted, as follows:

Accounts payable 18,000

Cash in bank 18,000
Some errors and their correction

 Deposit of another entity is credited by the bank to the account of the

depositor. This is a deduction from the bank balance because it
erroneously increased the account balance of the depositor in the bank.
No adjustment is necessary on the book of the depositor.
Some errors and their correction

 Check of another entity charged to the account of the depositor. This is

an addition to the bank balance because it erroneously decreased the
account balance of the depositor in the bank. No adjustment is
necessary on the book of the depositor.