Chapter 2

BANK RECONCILIATION

Mrs. Lucia A. Suello, CPA, MBA

 CHAPTER 2
BANK RECONCILIATION
LEARNING OBJECTIVES:
1. Know the different types of deposit.
2. Discuss what is a bank reconciliation.
3. Explain why it is necessary to have a bank
reconciliation.
4. Identify what are the book reconciling
items and bank reconciling items.
5. Differentiate the three method of
preparing bank reconciliation.
6. Enumerate the steps in making a bank
reconciliation.
7. Prepare a bank reconciliation under the
three methods.
 Imprest System

 A system of cash control which

requires all cash receipts should
be deposited intact & all cash
disbursements should be made
by means of check.
 What are the different types of deposit?

 Saving deposit

 Time deposit

 Checking//current/demand deposit
account
 What is a Bank
Reconciliation?
 A schedule explaining any differences
between the balance shown in the bank
statement and the balance shown in the
cash book or cash ledger.
 A statement that brings into agreement
the balance shown on the bank statement
and the balance per book.
 The goal of this process is to ascertain the
differences between the two, and to book
changes to the accounting records as
appropriate.
Objective of Bank Reconciliation
• To reconcile the difference
between:
– the cash book balance, i.e. the
business' record of their bank
account, and
– the bank statement balance, i.e. the
bank's record of the company’s bank
account.
 What is a Bank Statement?
 Report released (on a fixed date every
month) by banks that lists deposits,
withdrawals, checks paid, interest
earned and service charges or
penalties incurred on an account.
 It shows the cumulative effect of these
transactions, the account’s balance up
to the date the report was prepared.
 Nature of the Cash Book

• The balance in the cash book is an asset to the

company, therefore:

CASH BOOK
• A debit • A credit
represents an represents a
increase decrease
 Nature of the Bank Statement

• The balance as per the bank statement is a

liability to the bank, therefore:

BANK STATEMENT
Dr. Cr. Balance
(represents (represents
decrease) increase)
Reasons to Prepare a Bank Reconciliation
Statement
• The cash book records all transactions with the bank.
The bank statement records all the bank's
transactions with the business.

• The contents of the cash book should be exactly the

same as the record provided by the bank in the form
of a bank statement, and therefore the business'
records should correspond with the bank statement.

But this is not what happens at the end of the period!

 Why do their
balances differ
at the end of the
period?
 Reasons for Differences
 There are some transactions recorded
by the depositor but not yet recorded
by the bank
 Unpresented checks
 Deposit in transit
 Similarly, there are transactions
appearing in the bank statement not
recorded by the company
 Dishonored checks (NSF, DAIF)
 Service charges
 Omissions and errors made by the
bank or the firm itself.
 Why is it
necessary to
reconcile their
balances?
 Reasons to Prepare a Bank Reconciliation
Statement
• It reflects actual bank balance position
– At the end of the period, we need to
determine how much is the correct cash in
bank balance to be reported in the
Statement of Financial Position.
• Detect mistake in cash book
• Prevent frauds in recording banking
transactions
• Explain any delay in collection of checks
• It identifies valid transaction recorded by
one party but not by other
 Book Reconciling Items
1. Debit Memos
a. NSF/DAIF checks
b. Bank service charge
2. Credit Memos
a. Note collected by bank
b. Loan proceeds
3. Errors
a. Errors in recording payables
b. Errors in recording receivables
 Bank Reconciling Items
1. Deposit in transit
2. Outstanding checks
a. Certified checks
3. Errors
a. Errors in recording withdrawals
b. Errors in recording deposits
 Forms of Bank Reconciliation
1. Adjusted balance method
– The book balance and the bank
balance are brought to a correct
cash balance that must appear on
the balance sheet.
 Forms of Bank Reconciliation
2. Book to bank method
– The book balance is reconciled
with the bank balance or the book
balance is adjusted to equal the
bank balance.
 Forms of Bank Reconciliation
3. Bank to book method
– The bank balance is reconciled
with the book balance or the bank
balance is adjusted to equal the
book balance.
 Steps in Making a Bank
Reconciliation
1. Determine the balance per book and the
balance per bank.
2. Compare deposits listed on the
accounting records of the company with
the deposits listed on the bank
statement. Any deposit not yet
recorded by the bank are deposits in
transit. This is added to the balance per
bank.
3. Determine if there are checks issued by
the company but not yet paid by the
bank. These are outstanding checks to
deducted from the balance per bank.
 Steps in Making a Bank
Reconciliation
4. Add to the balance per book any
credit memoranda issued by the
bank which is not yet recorded
by the depositor.
5. Deduct from the balance per
book any debit memorandum
issued by the bank which is not
yet recorded by the depositor.
 Steps in Making a Bank
Reconciliation
6. Make appropriate adjustments to correct
any errors in either the bank statement
or the depositor’s accounting records.
N.B. Errors are reconciling item of the
party who committed them!
7. Determine whether the adjusted balance
in the depositor’s records is equal to the
adjusted balance of the bank statement.
8. Prepare journal entries to record any
item in the bank reconciliation listed as
adjustments to the balance per book.
 OPEN FORUM
QUESTIONS????
REACTIONS!!!!!

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 25