BANK RECONCILIATION

Irene Mae C. Guerra, CPA

3 Kinds of Bank Deposits
1. 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. (Noninterest
bearing)

2. Saving Deposit – the depositor is given a passbook upon the initial deposit.
The passbook is required when making deposits and withdrawals. (Interest
bearing)

3. Time Deposit – similar to saving deposit in the sense that it is interest

bearing. This deposit is evidenced by a formal agreement embodied in an
instrument called certificate of deposit. This deposit may be preterminated or
withdrawn on demand or after a certain period of time agreed upon.
Background on opening a demand deposit or checking account
-incidentally a bank reconciliation is necessary only for a demand deposit
or checking account.

- When an account is opened at the bank, the person authorized to draw

checks against the account will be required to sign cards furnished by a
bank (specimen signatures), these will be filed by the bank so that any
teller who may be unfamiliar with a depositor’s signature can test the
authenticity of a check by comparing the depositor’s signature on the
card with the signature on the check.

- if the depositor is a corporation, the bank will request that the director
pass a resolution authorizing certain officers of the corporation as
signatories of checks and that a copy of this resolution be filed with the
bank.
ILLUSTRATION:
Company Z (the depositor) collected P 100,000 from a customer in settlement of an account. The
collection is deposited at PNB Bank. The entry to record the collection in the books of the entity:

Cash 100,000
Accounts Receivable 100,000

On the books of the bank:

Cash 100,000
Company Z 100,000
When the bank credits the account of the depositor, it recognizes its liability to the depositor.
Legally, when a deposit is made, there exist a debtor-creditor relationship between the bank and the depositor,
the bank being the debtor, and the depositor being the creditor.

Assume that Company Z issued a check of P 30,000 in payment of an accounts payable. Books of Company Z,
Accounts Payable 30,000
Cash 30,000
Books of the bank
Company Z 30,000
Cash 30,000
When balances are extracted, Cash in Bank – depositor’s book has a balance of P 70,000
and the Company Z account on the book of the bank has also a balance of P 70,000.

But very frequently, there are items on the depositor’s book which do not appear on the
bank records as of the same date. Ex. 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.

And less frequently, there are items on the bank records which do not appear on the
depositor’s book. Ex. The bank may have charged the depositor’s account with service
charges which the depositor may not know about until a report is received from the bank,
or notes endorsed to the bank for collection have been collected by the bank and credited
to the depositor’s account but notice of collection is not yet received from the bank by the
depositor.

That is why it is necessary to prepare a bank reconciliation.

WHAT IS BANK RECONCILIATION?
- Is a statement which brings into agreement the cash balance per
book and cash balance per bank.
- It is usually prepared monthly because the bank provides the
depositor with the bank statement at the end of every month.

Bank Statement – is a monthly report of the bank to the depositor

showing the cash balance per bank at the beginning, deposits
acknowledged, the checks paid, other charges and credits and daily
cash balance per bank month. It is the exact copy of the depositor’s
ledger in the records of the bank.
When the bank statement is received, attached thereto are the
depositor’s canceled checks and any debit or credit memoranda that
have affected the depositor’s account.
RECONCILING ITEMS

1.BOOK recon items 2. BANK recon items

a. Credit memos a. Deposits in transit
b.Debit memos b. Outstanding checks
c. Errors c. Errors
CREDIT MEMOS
-items not representing deposits credited by the bank to the
account of the depositor but not yet received by the depositor as
cash receipts. The have the effect of increasing bank balance.

Examples:
a.Notes Receivable collected by bank in favor of the depositor and
credited to the amount of the depositor.
b.Proceeds of bank loan credited to the account of the depositor.
c. Matured time deposits transferred by the bank to the current
account of the depositor.
DEBIT MEMOS
-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. The have the effect of decreasing the bank balance.

Examples:
a. NSF or no sufficient fund checks – checks deposited but returned by the bank because of
insufficiency of fund. Other name for NSF is DAIF or “drawn against insufficient fund”.
b. Technically defective checks – checks deposited but returned by the bank because of
technical defects such as absence of signature, erasures not countersigned, mutilated
checks, conflict between amount in words and amount in figures.
c. Bank Service Charge – includes bank charges for interest, collection, checkbook and
penalty.
d. 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
- 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 for deposit but too late to appear in the bank statement.
b. 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
- 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 payees but not yet presented for payment.
b. certified checks – a certified check is one where the bank has stamped on its face the word
“accepted” or “certified” indicated 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. It should be deducted from the total outstanding checks (if
included) because they are no longer outstanding for bank reconciliation purposes.
FORMS OF BANK RECONCILIATION

The following formats may be used in reconciling the bank and book balance.s
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. (this is the preferred
method)

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.
ADJUSTED BALANCE METHOD
Book Balance xx Errors are excluded
Add: Credit Memo xx because there is no
Total xx definite rule made
Less: Debit Memo xx whether these are to be
Adjusted Book Balance xx added or deducted. It
should be analyzed for
Bank Balance xx proper treatment. But
Add: Deposit in Transit xx errors are reconciling
Total xx items of the party which
Less: Outstanding Checks xx committed the mistakes.
Adjusted Bank Balance xx
BOOK TO BANK METHOD

Book balance xx Book recon items are

Add: Credit Memos xx treated the same,
Outstanding Checks xx xx while Bank recon are
Total xx
treated in reversed.
Less: Debit Memos xx
Deposit in transit xx xx
Bank Balance xx
Bank to Book Method

Bank Balance xx Usual bank recon items are

Add: Deposits in transit xx treated in the same manner
Debit Memos xx xx while the book recon items
Total xx are simply reversed,
Less: Outstanding Checks xx
Credit Memos xx xx
Book Balance xx
EXAMPLE:
The cash records of Company A shows the following for the month of January.

Cash Receipts Cash Disbursements

Jan. 5 60,000 Jan 6. Check No. 721 5,000
13 20,000 7 Check No. 722 10,000
25 30,000 10 Check No. 723 18,000
31 40,000 14 Check No. 724 2,000
150,000 28 Check No. 725 37,000
31 Check No. 726 28,000
100,000

The general ledger shows the cash in bank account for January
BANK STATEMENT for January received from BPI

Jan 1 60,000 60,000

Jan 8 721 5,000 55,000
Jan 11 722 10,000 45,000
Jan 12 723 18,000 27,000
Jan 14 20,000 47,000
Jan 17 724 2,000 45,000
Jan 26 30,000 75,000
Jan 26 15,000 CM 90,000
Jan 30 5,000 RT 85,000
Jan 30 1,000 SC 84,000

CODE: CM - Credit Memo DM – Debit Memo SC – Service Charge RT – Returned Check

The following date are gathered in connection with the CM and DM appearing on the
bank statement:

a. The CM of P 15,000 on January 26 represents proceeds of note collected by the bank

in favor of the company.
b. The RT of P 5,000 represents check of customer deposited previously but returned by
the bank because of “no sufficient fund” or NSF
GENERAL PROCEDURES IN PREPARING THE RECONCILIATION
a. Determine the balance per book and the balance per bank
• Cash in Bank account on the book of the depositor has a debit balance
of P 50,000.
• While the bank balance has shown on the bank statement as the final
item, P 84,000.
b. Trace the cash receipts to the bank statement to ascertain whether there
are deposits not yet acknowledged by the bank.
• in the problem the cash receipt of P 40,000 on January 31 does not
appear in the bank statement. (Deposit in Transit)
c. Trace the checks issued to the bank statement to ascertain whether there
are checks not yet presented for payment.
• in the problem the check no. 725 for P37,000 and 726 for P 28,000 do
not appear in the bank statement. (Outstanding Check)
d. The Bank Statement should be examined to determine whether there are
bank credits or bank debits not yet recorded by the depositor.
• - in the problem there is a CM of P 15,000 and DM for returned check of
P 5,000 and service charge of P 1,000.

e. Watch out for errors, Again, errors are reconciling items of the party which
committed them.
• - in the problem, there are no errors committed.
ADJUSTED BALANCE METHOD

Balance per book 50,000

Add: Note collected by the bank 15,000 (a)
Total 65,000
Less: NSF check 5,000 (b)
Service Charge 1,000 6,000
Adjusted Book Balance 59,000

Balance per bank 84,000

Add: Deposit in Transit 40,000
Total 124,000
Less: Outstanding Checks:
Check no. 725 37,000
Check no. 726 28,000 65,000
Adjusted Bank Balance 59,000
Adjusting entries
Only the book reconciling items require adjusting entries on the bank of depositor.

Record the note collected by bank

Cash in Bank 15,000
Notes Receivable 15,000

Returned check or NSF check

Accounts Receivable 5,000
Cash in Bank 5,000

Record the bank service charge

Bank service charge 1,000
Cash in Bank 1,000
BOOK TO BANK METHOD

Balance per book 50,000

Add: Note collected 15,000
Outstanding Checks no. 725 37,000
no. 726 28,000 65,000 80,000
Total 130,000
Less: NSF Check 5,000
Service Charge 1,000
Deposit in transit 40,000 46,000
Balance per bank 84,000
BANK TO BOOK METHOD

Balance per Bank 84,000

Add: Deposit in transit 40,000
NSF Check 5,000
Service Charge 1,000 46,000
Total 130,000
Less: Outstanding Checks:
No. 725 37,000
No. 726 28,000 65,000
Note Collected by bank 15,000 80,000
Balance per book 50,000
SOME ERRORS AND THEIR TREATMENT
Understatement of cash receipts on the book of depositor
for instance, the collection from customer which is deposited amounts to P 10,000 but recorded in
the book only as P 1,000.
There is an understatement of cash receipts of P 9,000 the error is hen added to the book balance and
adjusted as:

Cash in bank 9,000

Accounts receivable 9,000

Understatement of checks drawn by depositor

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

Accounts Payable 18,000

Cash in Bank 18,000
c. Deposits 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.

d. Check of another entity charged to the account of the depositor.

this is and 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.