(Intermediate Accounting 1A)

LECTURE AID
Chapter 3 BANK RECONCILIATION

Learning Objectives
• Define cash and identify the items that can be
included in the “Cash and Cash Equivalents”
classification.
• Understand the accounting for petty cash
funds and cash shortages/overages.
• Understand the basic internal controls for
cash.
• Prepare a bank reconciliation.
• Prepare a proof of cash.
INTERMEDIATE ACCTG 1A (by:
MILLAN)
 BANK RECONCILIATION STATEMENT

A bank reconciliation statement is a report

that is prepared for the purpose of bringing
the balances of cash, per book records and
per bank statement into agreement.

INTERMEDIATE ACCTG 1A (by:

MILLAN)
Bank reconciliation is prepared on a monthly
basis immediately upon receipt of the monthly
bank statement from the bank.

INTERMEDIATE ACCTG 1A (by:

MILLAN)
A bank statement is a report issued by a bank
that shows the deposits and withdrawals
during the period and the cumulative balance
of a depositor’s bank account.

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MILLAN)
Bank reconciliation

Balance per books, end. xx Bal. per bank statement, end. xx

Add: Credit memos (CM) xx Add: Deposits in transit (DIT) xx
Less: Debit memos (DM) (xx) Less: Outstanding checks (OC) (xx)
Add/Less: Book errors xx Add/Less: Bank errors xx
Adjusted balance xx Adjusted balance xx

INTERMEDIATE ACCTG 1A (by:

MILLAN)
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.
INTERMEDIATE ACCTG 1A (by:
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Credit memos are additions (bank credits)
made by the bank to the depositor’s bank
account but not yet recorded by the depositor.

INTERMEDIATE ACCTG 1A (by:

MILLAN)
 Examples of Credit Memos
1. Collections made by the bank on behalf of
the depositor.
2. Interest income earned by the deposit.
3. Proceeds from loan directly credited or
added by the bank to the depositor’s
account.
4. Unrolled – over matured time deposits
transferred by the bank to the entity’s
account.
INTERMEDIATE ACCTG 1A (by:
MILLAN)
Debit memos are deductions (bank debits)
made by the bank to the depositor’s bank
account but not yet recorded by the depositor.

INTERMEDIATE ACCTG 1A (by:

MILLAN)
 Examples of Debit Memos

1. Bank service charges representing bank charges

for fees, interest, penalties and surcharges.
2. 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.
INTERMEDIATE ACCTG 1A (by:
MILLAN)
3. Automatic debits, such as when the
depositor and the bank agree that the bank
will make automatic payments or bills on
behalf of the depositor.
4. Payment of loans which the entity
(depositor) agreed to be made out directly
from its bank account.

INTERMEDIATE ACCTG 1A (by:

MILLAN)
Book errors – errors committed by the depositor
(e.g. erroneous recording in the books of accounts).
Deposits in transit – are deposits made but not yet
credited by the bank 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.
INTERMEDIATE ACCTG 1A (by:
MILLAN)
Outstanding checks – are checks drawn and
released to payees but are not yet encashed
with the bank. Outstanding check excludes
the following:
1. Certified checks – are already deducted
from the account, thus, they are no longer
outstanding.

INTERMEDIATE ACCTG 1A (by:

MILLAN)
2. Stale checks (checks that are 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.

INTERMEDIATE ACCTG 1A (by:

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Credit, debit memos, and book errors
are referred to as book reconciling items.
The depositor should make reconciling
entries for these items.

INTERMEDIATE ACCTG 1A (by:

MILLAN)
Deposits in transit, outstanding checks,
and bank errors are referred to as bank
reconciling items. The depositor does not
make reconciling entries for these items.

INTERMEDIATE ACCTG 1A (by:

MILLAN)
As per book records

Cash, beg. Check Collections

Disbursements
Cash, end

INTERMEDIATE ACCTG 1A (by:

MILLAN)
As per bank records

Withdrawals Cash, beg.

Cash, end Deposits

INTERMEDIATE ACCTG 1A (by:

MILLAN)
Proof of cash - Per books
Nov. 30 Receipts Disbursements Dec. 31
Per books xx xx
CM
November xx (xx)
December xx xx
DM
November (xx) (xx)
December xx (xx)
Book errors:
November
December
Adjusted balances xx xx xx xx

INTERMEDIATE ACCTG 1A (by:

MILLAN)
 General guidelines
The proof of cash is similar to a T-account.
PROOF OF CASH T – ACCOUNT

Nov. 30 + Receipts = Disbursements + Dec. 31

Per books 60 + 30 = 20 + 70
ADD: CM
November xx xx
December xx xx
LESS: DM Cash in bank
November xx xx
December xx xx
Nov. 30 60
Book errors: Receipts 30 20 Disbursements
November 70 Dec. 31
December
Adjusted bal. xx + xx = xx + xx
INTERMEDIATE ACCTG 1A (by:
MILLAN)
General guidelines:
The “Nov. 30” and “Dec. 31” columns follow the regular
bank reconciliation format.

Nov. 30 Receipts Disbursements Dec. 31

Per books 60 xx xx 70
ADD: CM
November 25 xx
December xx 35
LESS: DM
November (65) xx
December xx (95)
Book errors:
November
December
Adjusted bal. 20 xx xx 10
INTERMEDIATE ACCTG 1A (by:
MILLAN)
General guidelines:
The “Receipts” and “Disbursements” columns pertain to the
current month only - in this illustration, the month of December.
Nov. 30 Receipts Disbursements Dec. 31
Per books xx xx xx xx
ADD: CM
November xx xx
December xx xx
LESS: DM
November xx xx
December xx xx
Book errors:
November
December
Adjusted bal. xx xx xx xx
INTERMEDIATE ACCTG 1A (by:
MILLAN)
 General guidelines:
CREDIT MEMO: LAST MONTH (November)
• The November credit memo is a collection last month. However,
it is only recorded this month (i.e., December).
• Therefore, it is deducted from the “Receipts” column because
only the receipts in December should be included in this column.
Nov. 30 + Receipts = Disbursements + Dec. 31
Per books 60 + 30 = 20 + 70
ADD: CM Notice that
EQUILIBRIUM
November 25 + (25) = + is maintained.
December xx xx
LESS: DM
November xx xx
December xx xx
Book errors:
November
December
Adjusted bal. xx + xx = xx + xx
INTERMEDIATE ACCTG 1A (by:
MILLAN)
General guidelines:
CREDIT MEMO: THIS MONTH (December)
• The December credit memo is a collection this month. However,
it is not yet recorded this month (it will only be recorded next
month).
• Therefore, it is added in the “Receipts” column because it is an
unrecorded receipt in December.
Nov. 30 + Receipts = Disbursements + Dec. 31
Per books 60 + 30 = 20 + 70
ADD: CM
November 25 + (25) =
December + 35 = + 35
LESS: DM
November xx xx
December xx xx
Book errors:
November
December
INTERMEDIATE ACCTG 1A (by:
Adjusted bal. xx + xx MILLAN)
= xx + xx
General guidelines:
• The proof of cash is completed as follows:

Nov. 30 Receipts Disbursements Dec. 31

Per books 60 30 20 70
ADD: CM
November 25 (25)
December 35 35
LESS: DM
November (65) (65)
December 95 (95)
Book errors:
November
December
Adjusted bal. 20 40 50 10

INTERMEDIATE ACCTG 1A (by:

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 APPLICATION OF CONCEPTS
 

PROBLEM 6: FOR CLASSROOM DISCUSSION

INTERMEDIATE ACCTG 1A (by: MILLAN)

 OPEN FORUM
QUESTIONS????
REACTIONS!!!!!

INTERMEDIATE ACCTG 1A (by: MILLAN)

 END
INTERMEDIATE ACCTG 1A (by: MILLAN)