Unit 8: Bank Reconciliation Statements

Lesson 8.1
Bank Reconciliation Statements
Contents
Introduction 1
Learning Objectives 2
Quick Look 3
Learn the Basics 5
Two Sections of Bank Reconciliation Statement 8
Types of Bank Reconciliation Statement 9
Single-Date Balance Reconciliation 9
Four-Column Reconciliation 9
Forms of Bank Reconciliation Statement 9
Adjusted Balance Method 10
Bank Balance Reconciled with Book Balance (Bank-to-Book Method) 10
Book Balance Reconciled with Bank Balance (Book-to-Bank Method) 10
Reconciling Items 11
Bank Reconciling Items 11
Book Reconciling Items 12
Items That Require Attention in Solving Cash Problems 14
Customers’ Not Su cient Funds (NSF) Checks 14
Customers’ Postdated Checks (PDCs) 14
Company’s Postdated Checks (PDCs) 14
Undelivered or Unreleased Checks 16
Company’s Certified Checks 16
Compensating Balances 16
Computation of Deposits in Transit 16
Computation of Outstanding Checks 17
Case Study 17
Keep in Mind 18
Try This 20
Practice Your Skills 22
Challenge Yourself 23
Bibliography 24
Unit 8: Bank Reconciliation Statements

Lesson 8.1

Bank Reconciliation Statements

Introduction

Companies keep almost all of their cash in the bank as part of their control mechanisms.
The bank then provides a bank statement to inform the company of the total deposit
amount. The company also assigns someone to record the transactions to monitor how
much money the company still has.

At the end of a given period, usually a month, the company requests a bank statement and
compares it with its records. The objective is to examine whether the balances are the
same. However, it is expected that there would be discrepancies due to timing differences
and errors. Some transactions may have been missed or incorrectly recorded by either

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party. Thus, bank reconciliation statements are prepared to adjust the records accordingly
and match the company's book with the bank statement or vice versa.

Learning Objectives DepEd Competencies

At the end of this lesson, you should be able to ● Describe the nature of a bank
do the following: reconciliation statement
(ABM_FABM12-IId-10).
● Define bank reconciliation.
● Identify common reconciling items and
● Identify which reconciling items increase describe each of them
(ABM_FABM12-IId-11).
and decrease the cash balance.
● Analyze the effects of the identified
● Compute the overstated or understated reconciling items

amounts in bank and book records. (ABM_FABM12-IId-12).

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Quick Look

The Book and the Bank

Get a partner. One of you will act as the representative of the company and the other of the
bank. The company representative will work on the company's cash records (Book), and the
other will work on the bank statements (Bank). Find the ending balances of the Book and
the Bank.

Book: Write down the following and compute the ending balance.
Beginning balance 3,000
Check from Customer X, deposited in the bank + 12,000
Check payment for the Company's electricity bill for the month – 5,000
Ending balance ?

Bank: Write down the following and compute the ending balance.
Beginning balance 3,000
Check from Customer X, deposited in the bank + 22,000
Check payment for the Company's electricity bill for the month – 6,000
Ending balance ?

Compute how much is the difference between the balances per bank and per book.

Solution:
Step 1: You are asked to compute the difference between the ending balances of the Bank
and Book.

Step 2: The beginning cash balance and the transactions per bank and per book are given.

Step 3: The following formula will be used in solving this problem:

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Step 4: Substitute the values and calculate the difference.

Suppose that you must follow the Book's amount for the check from Customer X, while the
Bank's amount for the check payment for the electricity bill is correct. How much should the
ending balance be?

Solution
Step 1: You are asked to compute how much is the correct ending balance.

Step 2: The beginning balance and the correct amounts of Customer X's check and
electricity bill check payment are given.

Step 3: Use this formula to solve this problem:

Step 4: Substitute the values and calculate the difference.

Questions to Ponder
1. Relate this activity with your experiences. How do you ensure that the money you are
holding (from your allowance or elsewhere) is as it should be and that none is
missing?
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________

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2. What is the importance of comparing the company's cash records with the bank
statement?
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________

3. Why does the cash balance need to be correct? Explain your answer.

__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________

Learn the Basics

You calculated the cash ending balance in the given activity and compared it with your
classmate. When you saw differences in the ending balances, you were unsure which record
should be followed: should it be the Bank's or the Book's?

You were given a scenario where both parties committed an error. When you knew which
transactions were recorded correctly, you recomputed the correct cash balance that
matches both parties' records.

Did you know that what you did is already considered bank reconciliation? You will learn
more about this process in this lesson.

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Figure 1. Determining the need for a bank reconciliation statement

Essential Question

Do bank reconciliation statements have an impact on operations and

growth?

Bank reconciliation analyzes the items and amounts that differ between the cash balance
reported in the bank statement and the balance of the cash in bank account in the ledger.
Such differences in the balances are caused by two factors: timing differences and errors.

Timing differences happen when certain transactions are recorded by the company but not
yet by the bank, or vice versa. On the other hand, either party may commit errors in
recording transactions. These errors are usually due to original entry error, duplication, or
omission.

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Table 1. Common errors in recording transactions

Type of Error Brief Description

Original Entry occurs when the wrong amount is entered or posted in an

account or when the correct amount is entered in the wrong
account

Duplication happens when an accounting entry is posted twice; thus,

duplication occurs

Omission occurs when a transaction was not recorded in the books

As mentioned earlier, the company requests a bank statement to compare it with its records
at the end of the month or any other period desired. Ideally, the balances reflected should be
equal in both records. However, due to timing differences and errors, these amounts
sometimes do not match each other. Thus, the company's employee who is responsible for
the cash records will analyze the records to determine where they differ. The bank statement
is usually more relied upon than book records unless bank errors are identified.

To match the balance reflected in the bank statement, the said employee will adjust its
records by making journal entries that affect cash. The employee-in-charge will prepare a
bank reconciliation statement to report how he or she computed the ending balance.

Check Your Progress

What is the goal of bank reconciliation?

_________________________________________________________________________________

_________________________________________________________________________________

_________________________________________________________________________________

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Two Sections of Bank Reconciliation Statement

The bank reconciliation statement comprises two sections: the Bank Section and Company or
Book Section. The Bank Section starts with the cash balance according to the bank
statement and ends with the adjusted or reconciled balance. The Company or Book Section
starts with the cash balance according to the company’s records and ends with the adjusted
balance.

They are compared to report the exact amount of cash. Thus, at the end of the process, the
adjusted balances in both sections should equal each other.

Closer Look

Components of a Bank Reconciliation Statement

Abel is a sari-sari store owner who records all his cash transactions in a
small notebook. One day, he tried comparing the cash balance in his
notebook with the actual cash in his cashbox. To his surprise, they did not
tally. In his mind, he thought he had failed to record some of the
transactions. However, he could not confirm it because he has no other
means to know whether his records are correct. He is very eager to solve
this problem, so he asked his friend, Mario, who is an accountant.

Mario introduced the concept of bank reconciliation to Abel. According to

Mario, it is good that the store owner keeps his records. However, it may
not be enough because he is still prone to commit errors. He explained
the importance of having something to compare his records with; thus,
he suggested that depositing the money in a bank would be better. The
bank will then provide a bank statement for all his transactions and
ending balance. Abel did the same and was taught by Mario how to
prepare a simple bank reconciliation.

After several months, Abel thanked Mario because although there are still
differences, he can now trace where they come from and adjust them
accordingly. Indeed, the concept of bank reconciliation helped the store

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owner by letting him look closely at the two sections in his bank
reconciliation statement: the bank section, which is the bank statement,
and the book section, which is his records in his small notebook.
Ultimately, he can now identify the items which need corrections.

Types of Bank Reconciliation Statement

There are two types of bank reconciliation statements. They are classified depending on the
amounts being reconciled.

Single-Date Balance Reconciliation

In the Single-Date Balance Reconciliation, the balance per bank and per company's records
are reconciled at the end of the period. It reconciles the records' ending balances as stated in
the books and the bank statement.

Four-Column Reconciliation
Under this type, four columns are assigned for the beginning reconciliation, deposits or
receipts, withdrawals or disbursements, and ending reconciliation. Therefore, not only the
ending balances are being matched but also the beginning balances. It is also known as
proof of cash.

Forms of Bank Reconciliation Statement

Companies may choose from among the three forms of bank reconciliation statements.
Reconciling the balances could be through the Adjusted Balance Method, bank balance
reconciled with book balance, or book balance reconciled with bank balance. The figure
below illustrates the main differences among these methods.

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Figure 2. Forms of bank reconciliation statement

Adjusted Balance Method

When using this form, both bank and book balances are reconciled to match their balances.
It is composed of two sections: the bank section and the book section.

Under the bank section, deposits in transit and erroneous bank charges are added to the
cash balance. In contrast, outstanding checks and erroneous bank credits are deducted,
which results in the adjusted or correct cash balance.

Bank Balance Reconciled with Book Balance (Bank-to-Book Method)

This form is used whenever the balance per bank statement is given, and the accountant
shall determine the balance per book. It is used to know how much cash is recorded in the
company’s books.

Book Balance Reconciled with Bank Balance (Book-to-Bank Method)

This form starts with the unadjusted cash balance per book. It records the transactions
included in the bank statement, which are not yet reflected in the company’s ledger. It ends
with the balance per bank.

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Check Your Progress

Compare and contrast the three methods of bank reconciliation.

_________________________________________________________________________________

_________________________________________________________________________________

_________________________________________________________________________________

Reconciling Items
Reconciling items include transactions not yet recorded or needing adjustment to arrive at
a correct cash balance. They are classified under bank or book reconciling items.

Bank Reconciling Items

The Deposits In Transit (DITs), Outstanding Checks (OCs), and Bank Errors are included under
the bank reconciling items. To have a better view of these items, you may refer to Table 2.

Table 2. Bank reconciling items, their effects, and required action

Bank Reconciling Item Brief Description Effect and Action

Deposits in Transit Those cash received and recorded in Understate the cash
the company’s books but are not yet balance; must be added
reflected in the bank statement
because they did not reach the
cutoff time or are not yet deposited
at the bank statement date

Outstanding Checks The disbursements already recorded Overstate the cash

in the company’s books but are not balance; must be
yet reflected in the bank’s statement deducted
because they have not yet been
presented to the bank for payment

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Bank Errors Those wrong amounts recorded by May either understate or

the bank due to original entry error, overstate the cash
duplication, or omission balance depending on
the nature of
transactions; must either
be added or deducted

Check Your Progress

Which bank reconciling items overstate and understate the cash balance?
_________________________________________________________________________________

_________________________________________________________________________________

_________________________________________________________________________________

Book Reconciling Items

The debit memos (DMs), credit memos (CMs), and book errors are included under the book
reconciling items. Table 3 is provided below for your better understanding.

Table 3. Book reconciling items, their effects, and required action

Book Reconciling Brief Description Effect and Action

Item

Credit Memos the deposits or receipts shown in Understate the cash

the bank statement but are not yet balance; must be added
recorded in the books

Debit Memos the withdrawals or disbursements Overstate the cash balance;

reflected in the bank statements must be deducted
but are not yet recorded in the
books

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Book Errors Those wrong amounts recorded by May either understate or

the company due to original entry overstate the cash balance
error, duplication, or omission depending on the nature of
transaction; must either be
added or deducted

Closer Look

Reconciling Book Errors

The accountant of ABC Company is preparing its bank reconciliation
statement for February. Upon comparing her records with the bank
statement, she was surprised because it was overstated by ₱90,000.

Thus, she examined each transaction and discovered that the bank
correctly recorded a ₱10,000 payment from Customer X, but she
recorded it as ₱100,000.

To reconcile with the balance per bank, she made an adjusting entry by
debiting Accounts Receivable and crediting Cash for ₱90,000.

Check Your Progress

Which book reconciling items overstate and understate the cash balance?
_________________________________________________________________________________

_________________________________________________________________________________

_________________________________________________________________________________

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Items That Require Attention in Solving Cash Problems

Aside from the reconciling items discussed in the previous section, other items that affect the
cash balance should be considered.

Customers’ Not Sufficient Funds (NSF) Checks

Sometimes, a customer makes a check payable to the company but is not sufficiently
funded by the said customer's bank account. When the company deposits the check into its
bank account, it records the amount as part of the cash receipts. However, the company will
only learn that the check "bounced" once the bank forwards a bank statement. The
company will realize that the bank did not clear the payment; therefore, the amount is not
reflected in the bank statement. The company would need to adjust its record by deducting
the amount earlier recorded in the cash receipts.

If the customer redeposits the check to the bank, no adjusting entry is necessary if the
customer did it within the same accounting period. Other terms for NSF Checks are DAUD
(Drawn Against Uncleared Deposits) and DAIF (Drawn Against Insufficient Funds).

Customers’ Postdated Checks (PDCs)

Some transactions involve postdated checks. These are checks issued by customers to the
company with dates that differ from the purchase date. For example, a customer purchased
an item on August 2, but the date stated in the check is August 7, or five days later.

The amount should not be part of the company's cash in such instances. If the accounting
staff included a postdated check in its records, it should be adjusted by deducting such an
amount. No adjusting entry is necessary when it is not recorded upon receipt.

Company’s Postdated Checks (PDCs)

Companies may also issue post dated checks, delivered to the payees and recorded in the
books, but the date indicated is later than the reporting date. Therefore, it should still be part
of the company’s cash. If the company already recorded this, then the company's cash
balance is understated and the accountant will have to adjust this by adding the amount
back.

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Closer Look

Two Perspectives on PDCs

On March 1, the Hunger Company ordered 100 meal packs from The
Foodie Company to be delivered after a week. The former issued a
₱10,000 check dated April 5.

On March 2, The Foodie Company ordered the needed ingredients from

its supplier, Farmer Company. On the same day, The Foodie Company
issued a check amounting to ₱6,000, dated April 2.

Listed below are the cash records made by Foodie Company’s accountant
for the two checks mentioned:

Date Description Receipts Disbursements

March 1 Received check from the ₱10,000

Hunger Company (Date: April 5)

March 2 Issued a check payable to the ₱6,000

Farmer Company (Date: April 2)

On March 31, the manager learned about this and called the accountant's
attention. Upon review, the accountant realized that she had made
mistakes and made the following notes:
● March 1 transaction involves a PDC from a customer. It is not yet
part of the company's cash and overstates the balance. It should be
deducted.
● March 2 transaction involves a PDC of the company. Although
already delivered to the supplier, it should still be part of the
company's cash. Therefore, the balance is understated, and the
accountant must add ₱6,000 to correct it.

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Unit 8: Bank Reconciliation Statements

Undelivered or Unreleased Checks

These are checks issued by the company, recorded in the books, but are not yet delivered to
the payees. Whether the check is postdated or not, it should be part of the company’s cash.
Recording an unreleased check as a deduction would understate the company’s cash.
Therefore, the accountant will adjust this by adding back the amount.

Company’s Certified Checks

These are checks issued by the company and verified by the bank to have sufficient funds.
They should be excluded from the total outstanding checks since these checks were already
charged to the depositor's account by the bank.

Compensating Balances
There are instances when a company agrees with the bank to maintain a minimum balance
in its account as collateral for a loan. This minimum balance is the compensating balance.
Generally, compensating balances are part of the company's cash unless the amount is
restricted. When a compensating balance is restricted, it shall be excluded from the cash. It
shall be reported as either a current or noncurrent asset, depending on the nature of the
loan.

Computation of Deposits in Transit

An accounting staff computes the deposits in transit by comparing the total cash receipts
recorded in the books and the total deposits reflected in the bank statement. Receipts
reflected in the books but not in the bank statement are considered deposits in transit.
When the book and bank made no errors, you can use the general formula below to
compute the deposits in transit for a given period:

Deposits in transit, beginning of the month xx

Add: cash receipts reflected in the books (does not include charges
to the cash account resulting from bank credit memos in the
previous month) xx
Total xx
Deduct: deposits during the month per bank statement (does not
include bank credit memos for the current month) xx
Deposits in transit, end of the month xx

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Computation of Outstanding Checks

Outstanding checks may be computed by comparing the total cash disbursements per
book and the total withdrawals reflected in the bank statement. The disbursements reflected
in the books but not in the bank statement are considered outstanding checks. When the
book and bank made no errors, you may use the general formula below to compute the
outstanding checks for a given period:

Outstanding checks, beginning of the month xx

Add: checks drawn by the company during the month (does not
include credits for bank debit memos of the previous
month) xx
Total xx
Deduct: checks paid by the bank during the month (does not
include bank debit memos for the current month) xx
Outstanding checks, end of the month xx

Case Study

When Negligence Results in Dismissal

For verification, auditors may require city accountants to accomplish Bank
Reconciliation Statements (BRS). In the case at the bar, the city accountant's
failure to produce such BRS for 14 years (1999-2013) amounted to gross
negligence of his duty. Thus, he was dismissed from office. In 2017, such
dismissal was sustained by the Court of Appeals (CA)

During the 2013 annual audit of the city, the auditor discovered a massive
discrepancy between the city's cash records and bank statements
amounting to ₱4.109 million. Because of this, the auditor requested the
mayor to assign someone in the position to prepare the BRS. The
government also investigated inexistent bank accounts.

In 2016, a complaint about gross negligence was filed by the Field

Investigation Office (FIO) of the Office of the Ombudsman against the mayor

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and accountant. A year later, the accountant was found guilty, dismissed
from service, forfeited her retirement benefits, and permanently
disqualified from holding public office.

City accountant's dismissal over 14-year records backlog

a rmed.
Benjamin Pulta, “City accountant's dismissal over 14-year
records backlog affirmed,” (Philippine news Agency,
November 03, 2021),
https://www.pna.gov.ph/articles/1158626, last accessed on
May 08, 2022.

Keep in Mind

● Bank reconciliation analyzes a company’s cash transactions by comparing its records

with the bank statement. It aims to arrive at a correct cash balance. It could be a
reconciliation of the ending balances or the reconciliation of receipts, disbursements,
and beginning and ending balances.
● Reconciling items may either be bank or book reconciling items. The figure summarizes
the reconciling items and the actions needed to correct them.

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● In solving cash problems, one must note the following:

○ Not Sufficient Fund Checks
○ Postdated Checks
○ Unreleased Checks
○ Compensating Balances
○ Certified Checks
○ Deposits in Transits
○ Outstanding Checks
The effect on cash depends on the nature of the transaction. To correct the cash
balance, the accountant shall adjust the account accordingly.

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Unit 8: Bank Reconciliation Statements

Try This

A. Identification. Identify whether the item is a Bank or Book Reconciling Item. Write
your answer in the space provided.

Bank Reconciling Item Book Reconciling Item

___________________________ 1. Deposits are recorded by the company as receipts

but are not yet reflected in the bank statement
because the checks did not reach the cutoff time.

___________________________ 2. Disbursements were recorded twice by the

company’s accountant.

___________________________ 3. The bank collected the proceeds of a note on behalf

of the company.

___________________________ 4. The bank reflected charges in the bank statement.

___________________________ 5. Checks are recorded by the company as

disbursements but are not yet presented to the bank
for payment.

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B. Matching Type. Match the words in column A with the words in column B.

Column A Column B

_______________ 1. Bank interest is listed in a. Bank error

the bank statement
under deposits.

_______________ 2. The bank makes charges b. Book error

for the repayment of a
loan.

_______________ 3. The bank recorded a c. Credit memo

deposit to ABC company
under ABB’s bank
account.

_______________ 4. The company accountant d. Debit memo

recorded a check
amounting to ₱10,000 as
₱100,000.

_______________ 5. A check has already been e. Outstanding check

deducted from the cash
records of the company
but is not yet reflected in
the bank statement.

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Practice Your Skills

Analyzing the Reconciling Items

Simon is the new accountant of JKL Company and is preparing the bank reconciliation
statement of the company. He is a fresh graduate and relatively unfamiliar with some items
noted in the cash records. As his colleague who is more familiar with preparing the
statement, he asked for your help in identifying the nature of some accounts:

A. Deposits in transit totaled ₱13,635.

B. Charges by a bank included a customer’s check amounting to ₱6,500, which was
returned because of insufficient funds (NSF).
C. The company did not record bank charges amounting to ₱180.
D. Check No. 126, which was paid to a supplier, was erroneously recorded in the check
register as ₱10,500 instead of ₱10,800.
E. ₱5,000 was erroneously debited by the bank from JKL’s account.

1. Which items are considered bank reconciling items?

_____________________________________________________________________________________________

_____________________________________________________________________________________________

_____________________________________________________________________________________________

2. How much will the total bank reconciling items be?

3. Which items are considered book reconciling items?

_____________________________________________________________________________________________

_____________________________________________________________________________________________

_____________________________________________________________________________________________

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4. How much shall be added to or deducted from cash due to the error committed by the
company in Item D? (Indicate if addition or deduction)

5. Suppose that the unadjusted cash balance of the company equals ₱23,000. How much
shall be the adjusted cash balance?

Challenge Yourself

Listed below are the items noted by the accountant of QRS Company:
A. Cash received from Customer D was recorded as ₱22,000 instead of ₱20,000.
B. The company discovered ₱230 interest from bank notes upon checking the bank
statement.
C. Debit memos amounted to ₱34,000.

1. How much is the understatement or overstatement in cash due to Item A? (Indicate

whether understated or overstated)

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2. What kind of book reconciling item is the one described in Item B?

_________________________________________________________________________________________

_________________________________________________________________________________________

_________________________________________________________________________________________

3. Suppose that the unadjusted cash balance per book is equal to ₱45,000. How much
shall be the adjusted ending cash balance?

Bibliography
Pulta, Benjamin. “City accountant's dismissal over 14-year records backlog affirmed.”
Philippine news Agency, November 03, 2021.
https://www.pna.gov.ph/articles/1158626, last accessed on May 08, 2022.

Robles, Nenita S. “Cash and Cash Equivalents/Reconciliation of Bank Balances.” Essay. In

The Intermediate Accounting Series 1, edited by Patricia M Empleo, 2013th ed., 1:54–68.
Mandaluyong, Philippines: Millennium Books, Inc., 2013.

Robles, Nenita S. “Cash and Cash Equivalents.” Essay. In Practical Accounting 1, 2016th ed.,
3–9. Mandaluyong City, Philippines: Millennium Books, Inc., 2016.

Warren, Carl S, James M Reeve, and Jonathan E Duchac. “Sarbanes-Oxley, Internal Control,
and Cash/Bank Reconciliation.” Essay. In Accounting, Philippine ed., 318–18. Shenton
Way, Singapore: Cengage Learning Asia Pte LTd, 2010.

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