BANK RECONCILIATION

BANK DEPOSIT

• 3 Kinds of Bank deposits:

a. Demand deposit
b. Saving deposit
c. Time deposit
BANK RECONCILIATION

• Company and Bank Recording Transactions

Company X Bank
Collection of accounts:
Cash XX Cash XX
A/R XX Company X XX

Payment in check:
A/P XX Company X XX
Cash XX Cash XX
BANK RECONCILIATION
• Bank Reconciliation- is a statement which brings into agreement the cash balance per book and cash balance per
bank.
• The reconciliation is usually prepared monthly because the bank provides the depositor with the bank statement at
the end of every month.
• A bank statement:
a. The cash balance per bank at the beginning
b. The deposit made by the depositor and acknowledged by the bank
c. The checks drawn by the depositor and paid by the bank.
d. The daily cash balance per bank during the month.
• When the bank statement is received, attached thereto are the depositor’s cancelled checks and any debit or credit
memoranda that have affected the depositor’s account.
RECONCILING ITEMS
• At the end of every month, comparison between the cash records of the depositor and the bank statement
received from the bank will yield the following reconciling items:
1. Book reconciling items:
a. Credit Memos
b. Debit Memos
c. Errors
2. Bank reconciling items:
d. Deposits in transit
e. Outstanding checks
f. Errors
CREDIT MEMOS

• Credit Memos refer to items deposits made directly by the bank to company’s account but not yet
recorded by the depositor as cash receipts.
• The credit memos have the effect of increasing the bank balance.
• Example of credit memo:
a. Note receivable collected by bank for depositor
b. Proceeds of bank loan
c. Matured time deposits of depositor transferred to current account
DEBIT MEMOS
• Debit Memos- refer to charges to the depositor’s account made directly by the bank but not yet recorded by
the depositor as cash disbursements.
• Debit memos have the effect of decreasing the bank balance.
• Examples of debit memo:
a. NSF or no sufficient fund checks- These are checks deposited but returned by the bank because of
insufficiency of fund. The other name for NSF is DAIF or “drawn against insufficient fund”
b. Technically defective checks- returned checks due to technical defects such as absence of signature or
countersignature, erasures not countersigned, mutilated checks, conflict between amount in words and
amount in figures.
c. Bank Service charge- bank charges for collection, interest, checkbook and penalty.
d. Reduction of loan- payment for loan on bank
DEPOSIT IN TRANSIT

• Deposit in Transit- are collections already recorded by the depositor as cash receipts but not yet
reflected on the bank statement.
• Deposit in transit include:
a. Collection 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 CHECK

• Outstanding checks are checks already recorded by the depositor as cash disbursements but not yet
reflected on the bank statement.
• Outstanding checks include:
a. Checks drawn and already given to payee 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” indicating 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.
Certified checks should be deducted from the total outstanding checks (if included therein) they are
the no longer outstanding for bank reconciliation purposes.
ERRORS

• Despite the internal control procedures established by the bank and the company, errors may still arise in either
the bank's records or the company's records. These errors may not be detected until the bank reconciliation is
prepared.
• Bank error: For example, the bank may include in the bank statement a charge for a check written by another
company (say, the company's name is ABC Corporation, but a check written by ABC Trading was erroneously
charged to ABC Corporation's account). Since the bank erroneously deducted the amount of ABC Trading's check
from the account of ABC Corporation, in the bank reconciliation for ABC Corporation, this ABC Trading's check
should be credited or added back to the bank statement balance in order to obtain the correct cash balance.
• Book error: In another situation, the company may have recorded a customer's check for P24,500 whereas the
correct amount is P25,400. A customer's check represents a collection; therefore, the error resulted in an
understatement of cash balance per books for the difference of P900. In order to arrive at the correct cash
balance, the amount of P900 is added to the cash balance per books.
 DEPOSIT IN TRANSIT & OUTSTANDING
CHECKS
DEPOSIT IN TRANSIT OUTSTANDING CHECKS
• To compute Deposit in transit: • To compute Deposit in transit:

DIT, beginning of the month XXX OC, beginning of the month XXX

Add: Add:

Cash receipts reflected in Checks drawn by the company in

Cash book during the month Cash book during the month

(Excluding CM issued by bank in (Exclude debit memos for bank

Previous month) XXX Charges last month) XXX

Less: Less:

Deposit reflected in bank Checks paid by the bank

Statement during the month during the month (exclude bank

(Excluding CM in bank statement Charges this month) (XXX)

This month) (XXX) DIT, end of the month XXX

DIT, end of the month XXX

FORMS OF BANK RECONCILIATION
STATEMENT

• Both bank and book balances are reconciled to a correct balance.

This form is prepared in two sections: thebank statement balance being adjusted to the correct cash
balance in the first section, and the book balance being adjusted to the same corrected cash balance in the
second section. The first section (bank section) reflects items not yet recognized by the bank (e.g. deposits
in transit or outstanding checks) as well as corrections for any errors made by the bank.
FORMS OF BANK RECONCILIATION
STATEMENT

• Bank balance reconciled with book balance.

This form reconciles the bank balance to the unadjusted balance of the depositor's cash account in the
general ledger. This is the form frequently used by many auditors to trace the accounting entries taken up
by the company’s bookeeper.
• Book balance reconciled with bank balance.
This form starts with the cash balance per ledger and reconciled to the balance per bank statement