PREPARING A BANK

RECONCILIATION

FUNDAMENTALS OF ACCOUNTANCY, BUSINESS

AND MANAGEMENT 2
 Comparison of Bank Records and
Depositor’s Book
Books of the Depositor Records of the Bank
Amounts deposited Added or debited to the Added or credited to
cash in bank account the account in the
name of the depositor
Amounts withdrawn or Deducted from or Deducted from or
checks issued credited against the debited against the
cash in bank account account in the name of
the depositor

The normal ending Debit balance, treated Credit balance, treated

balance of the deposit as an asset of the as a liability of the bank
depositor
 Bank Reconciliation
What are the steps in making the verifications and
preparing a reconciliation?

•  STEP 1 – Determine cash in bank balance as of the end of

the month. This balance comes from the general ledger of
the depositor after the postings are updated. If the ending
balance is not yet available, it is computed as follows:

Balance as of the beginning of the month Receipts during

the month – Payments during the month = Balance as of the
end of the month
 Bank Reconciliation
What are the steps in making the verifications and preparing
a reconciliation?

• STEP 2 – Compare the book debits shown in the cash

receipts journal with the banks credit as shown in the
statement. Many times several collections are deposited
together and will therefore appear in the bank’s records
as one amount in total.
 Bank Reconciliation
What are the steps in making the verifications and preparing
a reconciliation?

• STEP 3 – Compare the book credits as shown in the

cash payments journal along with the bank debits or
with the actual checks encashed or cleared by the
drawee bank.
 Bank Reconciliation
What are the steps in making the verifications and preparing
a reconciliation?

• After the comparison (Steps 2 and 3), the causes of the

discrepancy the two balances are identified. The causes,
called reconciling items are grouped into two:
• Timing differences – and Errors
 Bank Reconciliation
What are the steps in making the verifications and preparing
a reconciliation?

• Timing Differences – an item or transaction that is

already taken up in the depositor’s books but is not yet
taken up in the bank’s records, or vice-versa.

• Some delays in the recording process are unavoidable

and are not necessarily signs of inefficiencies.
 Timing Differences
What are the examples of timing differences?

• Items already added by the depositor but not yet added to the
bank, such as undeposited collections or unrecorded deposits.

• Items already deducted by the depositor but not yet deducted by

the bank, such as outstanding checks. (Issues checks that are not
yet encashed or cleared by the end of the month.)
 Timing Differences
What are the examples of timing differences?

• Items already added by the bank but not yet added by the
depositor, such as interest earned on the bank deposit.

• Items already deducted by the bank but not yet deducted by

the depositor, such as bank service charges, and checks
deposited but later returned by the bank due to error or
insufficiency of funds on the part of the drawer.
 Timing Differences
Deposit in Transit

• It refers to the amount deposited in the bank after cut-off time

• Amount that is received by the company for deposit but not yet
deposited in the bank

• Undeposited collections.
 Timing Differences
Outstanding Checks

• Issued checks that are not yet encashed or cleared by the end of the
month

• The outstanding checks were already entered by the drawer as payments

but are not yet debited by the drawee bank.

• Because of the outstanding checks, the balance per bank’s records is

temporarily bigger than the balance per books of the drawer.
 Timing Differences
Interest earned on the Bank deposit

• Savings and time deposits generally earn interest that is computed and
credited by the bank to the balance of the depositor, either monthly or
quarterly, depending on the bank’s policy.

• Such interest income is subject to 20% withholding tax.

• Usually, the depositor recognizes the net interest income of the current
period in the early part of the following period.
 Timing Differences
Interest earned on the Bank deposit

• Because in the delay of the recognition of the interest in the books of

the depositor, the balance per bank’s record is temporarily bigger than
the balance reflected in the books of the depositor.
 Timing Differences
Bank Service Charges
• Service fee if the balance of the depositor gets lower than the bank’s
required minimum balance.

• Returned checks, remittances, checkbooks, and other extra services are

subject to service fees.

• As generally agreed upon, the bank debits or charges the account of the
depositor for service fees and sends a debit memorandum, together with
the bank statement, to explain the nature of the fee.
 Timing Differences
Bank Service Charges

• Frequently, the depositor records the services fees after he receives the
current bank’s statement or the bank’s debit memorandum in the following
month. As a result, the balance per bank is temporarily smaller than
balance per books, until the depositor recognizes the service fees as an
expense.
 Timing Differences
Returned Checks

• If a deposited check cannot complete the process of clearing, the payee’s

bank returns the check to the payee. The common reasons why a check
may not clear are:
• There was an error in the check

• The available balance of the drawer is not sufficient to pay for the check
that he issued
 Timing Differences
Returned Checks
• Examples of Check Errors That may Cause to Bounce:

• The check has wrong date

• The amount in words does not tally with the amount in figures

• Signature on the check is somewhat different from what is in the files

of the bank
• The payee indicated on the check is not the same as the depositor
 Timing Differences
Returned Checks
• A bank returns a check to the payee if in the process of clearing, it is found
that the drawer does not have enough available balance to back up the
issued check. If this happens, the check is said to be DAIF (or drawn
against insufficient fund)

• It is also possible that a part of the balance of the drawer represents

uncleared deposit that is not yet available for withdrawal.
 Timing Differences
Returned Checks
• A check that s drawn against uncleared deposit (DAUD) will not be able to complete the process of clearing,
and is returned by the depository bank to the payee.

• A payee may redeposit a returned check so that it may undergo a second process of clearing and is returned
by the depository bank to the payee.

• A payee may redeposit a returned check so that it may undergo a second process of clearing.

• When a payee deposits a customer’s check, cash in bank is debited. When the bank returns the check, the
entry of the deposit, should be reversed.

• A returned or defective check is not part of cash of the payee; instead it is reclassified to accounts receivable.
 BANK RECONCILIATION
ERRORS

• An error arises if an item or transaction is recorded in a manner that it is different

from the way to should be recorded.

• Failure to do what should be done , and doing what should not be done are also
classified as commission of errors.

• Errors committed in the books of the depositor are frequently discovered only when
the bank reconciliation is prepared at the end of the month or in the early part of the
following month.
 BANK RECONCILIATION
ERRORS

• Examples of errors of a depositor:

• Recoding and posting an overstated or understated amount

• A completed transaction was not taken up in the books

• Examples of errors that a bank may commit are:

• Posting a transaction to a wrong subsidiary account

• Posting a transaction that is not properly acknowledged by a depositor

• Posting an overstated or understated amount.

 BANK RECONCILIATION
Bank Reconciliation Statement

• When the balances per book and per bank are regularly and promptly
reconciled there is some form of assurance that the cash transactions
are properly accounted for.

• This is one of the control procedures that give the bank and the
depositor an opportunity to update their records and to discover the
errors committed fraud and/or misappropriation.
 BANK RECONCILIATION
Bank Reconciliation Statement

• For example; if a review of the records reveals that the deposits are
dated too far away from the dates when the cash was received, this
could be an indication that the collections are being diverted for
other purposes.
 BANK RECONCILIATION
Adjusted Balances of the books
and the Bank statement

• This form shows the “should be balance” of the cash in bank account had
there been no timing differences and errors.

• It shows the amount of cash in the bank to be reported in the balance

sheet of the depositor.

• It also clearly identifies the items that require adjustments or corrections

in the books of the depositor.
 BANK RECONCILIATION
Adjusted Balances of the books
and the Bank statement

• The body of the adjusted balance form of bank reconciliation has two
parts;
• Balance per depositor’s books and all the reconciling items that affect the
balance per book
• The balance per bank’s records and all the reconciling items that affect the
balance per bank.
 BANK RECONCILIATION
Adjusted Balances of the books
and the Bank statement

• The body of the adjusted balance form of bank reconciliation has two
parts;
• Balance per depositor’s books and all the reconciling items that affect the
balance per book
• The balance per bank’s records and all the reconciling items that affect the
balance per bank.