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BANK RECONCILIATION

BANK RECONCILIATION
A statement which brings into agreement
the cash balance per book (ledger) and the
cash balance per bank (bank statement). It
is usually prepared monthly because the
bank releases the bank statement at the
end of every month.
A bank reconciliation is necessary only for
demand or checking account.
DEMAND DEPOSIT OR CHECKING
ACCOUNT
This is the 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.
A demand deposit is noninterest bearing
since it is withdrawable on demand.
BANK STATEMENT
A monthly report provided by the bank to its
depositor showing the cash balance per bank at the
beginning of the month, the deposits
acknowledged, the checks paid, other charges and
credits and the daily cash balance per bank during
the month.
The bank statement is the exact copy of
depositors ledger in the records of bank.
Together with the bank statement, attached thereto
are the depositors cancelled checks and any
debit/credit memoranda.
CANCELLED CHECKS
These are checks issued by the depositor and paid
by the bank during the month.
These are called cancelled checks because they
are literally cancelled by stamping or punching to
show that they have been paid.
THE DEBTOR-CREDITOR RELATIONSHIP BETWEEN
THE BANK AND THE DEPOSITOR
When a depositor put his money on a bank
there exist already a debtor-creditor
relationship between the depositor and the
bank. This debtor-creditor relationship is
best shown by the journal entries in the
books of the bank and the depositor:

TO RECORD COLLECTION AND THE
SUBSEQUENT DEPOSIT:
Cash xxx
AR xxx
Cash xxx
Company X xxx
Depositor Bank
As you can see in the entry on the part of the bank, Company X is
credited. This is done because the account Company X represents the
obligation/liability of the bank to the depositor. Note that the normal
balance of liability is credit. Thus if the account Company X is credited, by
the bank it means that the account of the depositor is increased and when
the account is debited it means that it was decreased.

The two accounts have equal or the same balances because they are
reciprocal accounts. This means that when one account is debited, the
other is credited or vice versa because they reflect the same items or
transactions. (continuation on next slide)
o Thus, if no errors are committed between the two parties they
will reflect equal and same balances.
o But very frequently, there are items on the depositors book
that do not appear on the bank records as of the same date.
For instance, checks issued by the depositor are not yet
presented for payment to the bank or deposits may have been
made after the bank records are sent out to the depositor.
o And less frequently, there are items on the bank records which
do not appear on the depositors book. For instance, the
service charge charged by the bank to the depositor and the
proceeds received by the bank in behalf of the depositor.
o Because of this, it becomes necessary to prepare a bank
reconciliation.
RECONCILING ITEMS
Book reconciling items:
a) Credit memos
b) Debit memos
c) Errors made in the book

o Bank reconciling items:
a) Deposits in transit
b) Outstanding checks
c) Errors made by bank
CREDIT MEMOS
Refer to items other than deposits credited by the
bank to the account of the depositor but not yet
recorded by the depositor. It increases the bank
balance.
Examples:
a) Notes receivable collected by bank in favor of
the depositor
b) Proceeds of bank loan
c) Matured time deposits
DEBIT MEMOS
Refer to items other than checks paid by the bank which
are charged and debited by the bank to the account of
the depositor. It decreases the bank balance.
Examples:
a) NSF or no sufficient fund checks/DAIF or drawn
against insufficient fund checks returned by bank
because of insufficiency of fund.
b) Technically defective checks checks returned by
bank because of absence of signature or
countersignature, erasures not countersigned,
mutilated checks, conflict between amount in words
and amount in figures.
c) Bank service charges
d) Reduction of loan
DEPOSITS IN TRANSIT
Are collections already recorded by the depositor
as cash receipts but not yet reflected on the bank
statement.
It includes:
a) Collections already forwarded to the bank but too
late to appear on the bank statement.
b) Undeposited collections or those still in the hands
of the depositor. These are cash on hand awaiting
delivery to the bank.
OUTSTANDING CHECKS
Are checks already recorded by the depositor as
cash disbursements but not yet reflected on the
bank statement.
It includes:
a) Checks drawn and already given to the payee but
not yet presented for payment.
b) Certified checks a check wherein the bank
already stamped the word accepted or certified
on its face indicating sufficiency of the fund.
Certified checks should be deducted to the
outstanding checks (if included) because they are
no longer outstanding.

FORMS OF BANK RECONCILIATION
a) Adjusted balance method the book and the
bank balance are brought to a correct cash
balance that must appear on the balance sheet.
b) Book to bank method book balance is adjusted
to the bank balance.
c) Bank to book method bank balance is adjusted
to equal the book balance.

The first method is preferred over the other two.

ADJUSTED BALANCE METHOD
Book balance xx
Add: Credit memos xx
Total xx
Less: Debit memos xx
Adjusted book balance xx
Bank balance xx
Add: Deposits in transit xx
Total xx
Less: Outstanding checks xx
Adjusted bank balance xx

Note: Errors will have to be analyzed for proper treatment. But errors
are reconciling items of the party which committed them.
BOOK TO BANK METHOD
Book balance xx
Add: Credit memos xx
Outstanding checks xx xx
Total xx
Less: Debit memos xx
Deposits in transit xx xx
Bank Balance xx

o Note: The treatment to book reconciling items is still the
same however, the treatment to bank reconciling items is
reversed.
BANK TO BOOK METHOD
Bank balance xx
Add: Debit memos xx
Deposits in transit xx xx
Total xx
Less: Credit memos xx
Outstanding checks xx xx
Book Balance xx

o Note: The treatment to bank reconciling items is still the
same however, the treatment to book reconciling items is
reversed.

ADJUSTING ENTRIES:
Note: only book reconciling items require adjusting
entries on the book of the depositor.

o To record the note collected by bank:
Cash in bank xxx
Notes Receivable xxx
o To record NSF check:
Accounts receivable xxx
Cash in bank xxx
o To record the bank service charge:
Bank service charge xxx
Cash in bank xxx
THANK YOU!
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ANY QUESTIONS