Module 9

Bank Reconciliation
Objectives:
1.) describe the nature of a bank reconciliation
statement ABM_FABM12-IId-10
2.) analyze the effects of the identified reconciling
items ABM_FABM12-IId-12
3.) prepare a bank reconciliation statement
ABM_FABM12-IId-13
Thoughts to Ponder On:

1. What is the purpose of a bank

statement?
2. Upon receipt of a bank statement,
what will the company do?
Time lags that prevent one of
the parties (company or the
bank) from recording the
transaction in the same
period as the
other party.
Examples:
A bank statement that ends January 30, 2015 and
then the company were able to collect cash of
P20,000 at 5:00 PM.
Bank usually closes at 3:00 PM because of this,
the cash collected will not be reflected in the
bank as deposit but it is however
recorded in accounting records of the company.
• Errors by either party in recording transactions
 A check was issued to Meralco by the
company amounting to P1000. The company
recorded this as P100. When the
check was presented, the bank paid Meralco
P1,000. In the records of the company it was
P100 while in the records of the bank
it’s P1,000. There is in this case an error that
will cause the difference between the
company’s records and the bank records.
The importance of Bank Reconciliations are as follows:

• Helps in the identification of errors in the accounting records of the company or the
bank.
• Cash is the most vulnerable asset of an entity. Bank reconciliations provide the necessary
control mechanism to help protect the valuable resource through uncovering irregularities
such as unauthorized bank withdrawals. However, in order for the control process to work
effectively, it is necessary to segregate the duties of persons responsible for accounting
and authorizing of bank transactions and those responsible for preparing and monitoring
bank reconciliation statements.
• If the bank balance appearing in the accounting records can be confirmed to be correct
by comparing it with the bank statement balance, it provides added comfort that the bank
transactions have been recorded correctly in the company records.
• Monthly preparation of bank reconciliation assists in the regular monitoring of cash
flows of a business.
There are three methods of preparing bank
reconciliation statement, namely:
a. Adjusted Method wherein the balances per
bank and per book are separately determined.
b. Book to Bank Method wherein the book
balance is adjusted to agree with the bank
balance.
c. Bank to Book Method wherein the bank
balance is adjusted to agree with book balance
The key terms to be aware of when dealing
with a bank reconciliation are:
Deposits in transit are
amounts already received and
recorded by the company, but
are not yet recorded by the
bank
Outstanding checks are checks
that have been written and
recorded in the company's Cash
account but have not yet cleared
the bank account or presented to
the bank by the payee.
Bank errors are mistakes made by the
bank. Bank errors could include the
bank recording an incorrect amount,
entering an
amount that does not belong on a
company's bank statement, or omitting
an amount from a company's bank
statement.
Bank service charges are fees
deducted from the bank
statement for the bank's
processing of the checking
account activity
NSF check is a check that was
not honored by the bank of
the person or company
writing the check because
that account did
not have a sufficient balance.
Check printing charges
occur when a company
arranges for its bank to
handle the reordering of its
checks.
Interest earned will
appear on the bank
statement when a bank
gives a company interest
on its account balances.
Notes Receivable are assets of
a company. When notes come
due, the company might ask
its bank to collect the notes
receivable.
Errors in the company's Cash
account result from the company
entering an incorrect amount,
entering a transaction that does
not belong in the account, or
omitting a transaction that should be
in the account.
The Bank Reconciliation Process

Step 1. Adjusting the Balance per Bank

The first step is to adjust the balance on the bank statement to the
true, adjusted, or corrected balance. The items necessary
for this step are listed in the following schedule:
Step 2. Adjusting the Balance per Books
The second step of the bank reconciliation is to adjust the balance in the company's Cash account so
that it is the true,
adjusted, or corrected balance. Examples of the items involved are shown in the following schedule:
Step 3. Comparing the Adjusted Balances
After adjusting the balance per bank (Step 1) and after
adjusting the balance per books (Step 2), the two
adjusted amounts should be equal. If they are not
equal, you must repeat the process until the balances
are identical. The balances should be the true, correct
amount of cash as of the date of the bank
reconciliation. The adjusted cash balance will appear as
the Cash in Bank in the Statement of Financial Position
(Balance Sheet).
Practice Set
Item 1 The bank statement for August 2014 shows an ending balance of
Php3,490.
Item 2 On August 31 the bank statement shows charges of Php35 for
the service charge for maintaining the checking account.
Item 3 On August 28 the bank statement shows a return item of
Php100 plus a related bank fee of Php10.
Item 4 The bank statement shows a charge of Php80 for check printing
on August 20.
Item 5 The bank statement shows that Php8 was added to the checking
account on August 31 for interest earned by the company during the
month of August.
Item 6 The bank statement shows that a note receivable of Php1,000 was collected
by the bank on August 29 and was deposited into the company's account. On the
same day, the bank withdrew Php40 from the company's account as a fee for
collecting the note receivable.
Item 7 The company's Cash account at the end of August shows a balance of
Php967.
Item 8 During the month of August the company wrote checks totaling more than
Php50,000. As of August 31 Php3,021 of the checks written in August had not yet
cleared the bank and Php200 of checks written in June had not yet cleared the bank.
Item 9 The Php1,450 of cash received by the company on August 31 was recorded
on the company's books as of August 31.
However, the Php1,450 of cash receipts was deposited at the bank on the morning
of September 1.
Item 10 On August 29 the company's Cash account shows cash sales of Php145. The
bank statement shows the amount deposited was actually Php154. The company
reviewed the transactions and found that Php154 was the correct amount