BANK RECONCILIATION
depositor.
Bank Reconciliation Statement
- is a report that is prepared for the purpose of
bringing the balances of cash (a) per records
and (b) per bank statement into agreement
More specifically, bank reconciliations are prepared:
a. Explain the difference between the cash balance
reported on the bank statement and the cash
balance in the accounting books
b. Arrive at the adjusted (correct) cash balance to
be shown in the financial statements
c. Provide information for reconciling journal
entries
Bank reconciliations are prepared on a monthly basis,
immediately upon receipt of monthly bank statements
from banks.
When a business has more than one bank account,
separate bank reconciliations are made for each of those
accounts.
Pro forma bank reconciliation statement
Balance per books, end – the cash balance in the
accounting records as of the end of the current month.
Balance per bank statement, end – the ending cash
balance in the bank statement of the current month.
Credit memos – these are the additions (bank credits)
made by the bank to the depositor’s bank account but
not yet recorded by the depositor.
Examples of credit memos include:
i. Collections made by the bank on behalf of the
depositor.
ii. Interest income earned by the deposit.
iii. Proceeds from loan directly credited or added by
the bank to the depositor’s account.
Debit memos – these are deductions (bank debits)
made by the bank to the depositor’s bank account but
not yet recorded by the depositor.
Examples of debit memos include:
i. Bank service charges representing bank charges
for fees, interest, penalties, and surcharges.
ii. No sufficient funds checks (NSF) or Drawn
against insufficient funds checks (DAIF) – these
are checks deposited and already recorded by
the bank but subsequently returned to the
depositor because the drawer’s fund is
insufficient to pay for the check.
iii. Automatic debits, such as when the depositor
and the bank agree that the bank will make
automatic payments of bills on behalf of the
iv. Payments of loans – this represents payments of
loan which the depositor agreed to be made out
directly from its bank account.
Book errors – errors committed by the depositor (e.g.,
erroneous recording in the accounting books)
Deposits in transit – are deposits already made but
not yet received by the bank, or received by the bank
but not yet credited to the depositor’s bank account.
Deposits in transit often occur when deposits are
mailed to the bank, placed in an overnight depository,
made through check and the check has not yet cleared,
or made after the bank’s cut-off.
Outstanding checks – these are checks drawn and
released to payees but not yet encashed with the bank.
Outstanding checks exclude the following:
 Certified checks – the bank, when certifying
checks, automatically debits (reduces) the
depositor’s account and assumes direct liability
on paying the certified checks to the payee.
Certified checks are already deducted from the
account, thus, they are no longer outstanding.
 Stale checks (checks that remain outstanding for
a relatively long period of time) are reverted
back to cash, meaning they are added back to
the cash balance per books, and are excluded
from outstanding checks.
Bank errors – errors committed by the bank.
 Credit memos, debit memos, and book errors
are referred to as book reconciling items.
 Deposits in transit, outstanding checks, and
bank errors are referred to as bank
reconciling items.
We will determine the reconciling items simply by
comparing the amounts in the ledger and the bank
statement.
 Amounts that are in the ledger but not in the
bank statement are bank reconciling items.
 Amounts that are in the bank statement but not
in the ledger are book reconciling items.
For this purpose, we simply cross-out items that
appear in both the ledger and the bank statement. Items
not crossed-out are the reconciling items.
“Deposit liability” is the account title used by the bank.
This corresponds to the “Cash in bank” account
maintained in the depositor’s books. These two accounts
are the ones we are reconciling in a bank reconciliation.
“Assumed amount”: We will assume these amounts in forma
order to show more clearly the effect of the error on the reconciliation)
ending balance of cash. c. Overstatement  Overstatement  Debit
in bank credit (Deduction
on the pro
Remember the following:
forma
Inverse relationship reconciliation)
 To correct an overstated credit, you need to d. Overstatement  Understatemen  Credit
make a debit. in bank debit t (Addition on
 To correct an overstated debit, you need to the pro forma
make a credit. reconciliation)
Direct relationship
 To correct an understated credit, you need to Basic Internal Controls over cash
make a credit. Internal control is any action taken or process set by
 To correct an understated debit, you need to management that is designed to help the business
make a debit. organization achieve its objectives.
In its basic sense, we use some sort of internal
(In Filipino) control every day. For example, you use an alarm clock
 Kapag sobra ang credit (overstated), magbawas (internal control) so that you could wake up early and
gamit ang debit. not be late for school (objective). You comb your hair
 Kapag sobra ang debit (overstated), magbawas (internal control) so that you would look good when
gamit ang credit. your “crushmate” sees you in school (objective) …etc.
 Kapag kulang ang credit (understated), Inherent risk is normally higher for cash
magdagdag gamit ang credit. compared with other assets because cash is exposed
 Kapag kulang ang debit (understated), more to risk of theft and other types of fraud. Adequate
magdagdag gamit ang debit. and effective internal controls should be in place to
ensure that cash is reasonably safeguarded.
The following are just a few of the internal
BOOK ERRORS
controls businesses use to safeguard their cash:
Nature of error Effect on ending Correction 1. Bank reconciliation – the bank reconciliation is an
balance of cash internal control over cash receipts and cash
a. Understatemen  Understatement  Debit disbursements. It helps reveal errors. As an internal
t in book debit (Addition on control, bank reconciliations must be performed
the pro forma regularly (i.e., every month).
reconciliation).
b. Understatemen  Overstatement  Credit 2. Imprest system – the imprest system requires that
t in book credit (Deduction all cash receipts should be deposited intact and all
on the pro
cash disbursements should be made through checks.
forma
reconciliation) Cash collections are deposited intact within a
c. Overstatement  Overstatement  Credit reasonable period of time from date of collection
in book credit (Deduction and should not be used for any type of
on the pro disbursement. Disbursements should be made
forma through checks and not from cash collections.
reconciliation) Disbursements for small amounts are made through
d. Overstatement  Understatement  Debit the petty cash fund.
in book credit (Addition on The word “petty,” in layman’s terms, means
the pro forma “minor” or “of little significance.” Thus, a petty
reconciliation)
cash fund is money set aside to defray recurring
expenses that are of relatively small amounts and
BANK ERRORS
cannot practically be paid through check. What
Nature of error Effect on ending Correction
constitutes a “small” amount is a matter of company
balance of cash policy. For example, an entity may have a policy that
a. Understatement  Understatemen  Credit all disbursements amounting to P5,000 or more
in bank credit t (Addition on should be made through checks, while
the pro forma disbursements below P5,000 are made through the
reconciliation) petty cash fund.

b. Understatement  Overstatement  Debit Example:

in bank debit (Deduction You have a business – a sportswear store. Under the
on the pro
imprest system, all your collections from sales during
 the say must be deposited intact to the business’
bank account.
You shall prohibit your employees from using
your collections to buy supplies, to get advance
wages, etc. Why? This is so that you can test check
(audit) more efficiently your cash collections. You
can simply compare your sales register with the cash
deposit slip. If you let your employees use the cash
collections, the amount of daily sales would not tally
with the cash deposits. You will need to reconcile
them for the amounts taken by the employees. This
could be very cumbersome and time consuming.
Remember that as a process gets more complicated,
there will be more room for fraud.
A good internal control in place would provide
you (the owner) a reasonable assurance that your
collections are not being embezzled. You can build a
good relationship with your employees, giving them
your trust and confidence. A poor internal control
gives rise to unnecessary doubt, and too much
doubt created bad relationship. The success of a
business organization is founded upon the good
relationship of the people comprising the
organization.
Another requirement of the imprest system is
that all disbursements shall be made through check.
This provides reasonable assurance that all
disbursements are authorized by you because you
will need to sign each check disbursement. This,
however, may not be practicable for small recurring
disbursements. Thus, you will need to establish a
petty cash fund. You will authorize one of your
employees as a petty cash custodian. He or she has
the authority to authorize disbursements from the
petty cash fund. In return, he or she has the sole
responsibility over the fund and is liable for any
shortages.

3. Check Disbursement Voucher (CDV) – a check

disbursement voucher is a report prepared for each
check written. The purpose of the CDV is to provide
reasonable assurance that each check written is
properly authorized. This is because the approver’s
signature must be affixed on each CDV. The
approver is normally the business manager (i.e., sole
proprietor, managing partner, or president/chief
executive officer).

4. Petty Cash Voucher – a petty cash voucher is similar

to the CDV. It is used to provide reasonable
assurance that all disbursements from the petty
cash fund are properly authorized. The party
authorizing the disbursement should not be the one
who either disburses the fund or records the
disbursement in the books of accounts.