BANK RECONCILIATION

MICHAEL G. AUDITOR
WHAT IS BANK RECONCILIATION?

 activity that reconciles an entity’s bank account with its financial records
 a useful financial internal control tool used to prevent fraud
 output of bank reconciliation process is a bank reconciliation statement
 outlines the deposits, withdrawals, and other activities affecting a bank account
for a specific period
WHY RECONCILE?

 the account balance as reported by the bank is compared to the general ledger of a
business
 businesses maintain a cash book and the bank too keeps an account for every customer

 The bank sends the account statement to its customers every month or at regular
intervals.
 Sometimes these balances do not match.
 The business needs to identify the reasons for the discrepancy and reconcile the
differences.
 This is done to confirm every item is accounted for and the ending balances match.
OTHER PURPOSE OF BR?

 Detecting errors such as double payments, missed payments, calculation errors

 A check payment of P10,000 was recorded at P100,000 by the company.
 Tracking and adding bank fees and penalties in the books
 Bank service charge for the month of February 2022 and checkbook fees are reflected in the bank statement
but not yet taken up in the company’s book
 Spot fraudulent transactions and theft
 ABC made P100,000 deposit per deposit control book of the treasury department but was not found in the
bank statement received. The investigation unveiled that such deposit didn’t really happened and that two
employees had collided to commit the fraud
 Keeping track of accounts payable and receivables of the business
 The bank statement can reveal the checks encashed by suppliers and amount of cash/check credited to its
accounts from customers, creditors, lenders, etc.
 You receive a bank statement, typically at the end of each month, from
the bank.
 The statement itemizes the cash and other deposits made into the
checking account of the business.
 The statement also includes bank charges such as for account servicing
fees.
Before the reconciliation process, business should ensure that they have recorded all
transactions up to the end of your bank statement.

Businesses that use online banking service can download the bank statements for the
regular reconciliation process rather than having to manually enter the information.
STEP 1 COMPARE THE AMOUNTS

 Compare the amount of each deposit recorded in the debit side of the bank column of
the cashbook with credit side of the bank statement. BOOK DEPOSITS vs BANK
CREDITS
 Compare the amount of each credit side of the bank column with the debit side of the
bank statement. BOOK DISBURSEMENTS vs BANK DEBITS
 DBO BANK ABC, ENTERPRISE

Book Debits Bank Credits/ Deposits

Amount Amount
Feb-01 10,000.00 Feb-04 10,000.00
Feb-02 20,000.00 Feb-05 20,000.00
Feb-05 30,000.00 Feb-11 15,000.00
Feb-10 12,000.00 Feb-13 12,000.00
Feb-13 3,000.00 Feb-16 3,000.00
Feb-15 28,000.00 Feb-18 28,000.00
Feb-18 3,600.00 Feb-21 3,600.00
Feb-20 18,500.00 Feb-23 18,500.00
Feb-23 6,000.00 Feb-26 6,000.00
Feb-27 18,100.00 Feb-28 CM1 100,000.00
Feb-28 2,000.00 Feb-28 CM2 5,000.00

Total 151,200.00 Total 221,100.00

 Deposits in transit are amounts that are received and recorded by the
business but are not yet recorded by the bank.
 TREATMENT: They must be added to the bank statement.
 Outstanding checks are those that have been written and recorded in cash
account of the business but have not yet cleared the bank account. This often
happens when the checks are written in the last few days of the month.
CERTIFIED CHECKS are not considered outstanding.
 TREATMENT: They need to be deducted from the bank balance.
 Bank errors are mistakes made by the bank while creating the bank
statement.
 Common errors include entering an incorrect amount or omitting an amount from the
bank statement.
 Compare the cash account’s general ledger to the bank statement to spot the errors.
STEP 2. ADJUST THE BANK STATEMENTS

Adjust the balance on the bank statements by

 adding deposits in transit
 deducting outstanding checks
 add/deduct bank errors.
Book deposits 151,200.00
Less Dep. Ackn. By Bank
Total Bank Credits 221,100.00
Less items not deposited 120,000.00
Deposits Acknowledged 101,100.00
Deposit in transit 50,100.00

Balance Per Bank Statement 116,750.00

Add: Deposit in Transit 50,100.00
Add: Effect of bank errors
Book disbursements 137,000.00
Less Checks. Ackn. By Bank
Total Bank debits 104,350.00
Less items not checks 6,850.00
Deposits Acknowledged 97,500.00
Outstanding checks 39,500.00

Balance Per Bank Statement 116,750.00

Add: Deposit in Transit 50,100.00
Add: Effect of bank errors
Less: Outstanding Checks 39,500.00
Less: Effect of bank errors
STEP 3. ADJUST THE CASH ACCOUNT

 Adjust the cash balances in the business account by adding interest or deducting
monthly charges and overdraft fees.
 Bank charges are service charges and fees deducted for the bank’s processing of the business’
checking account activity. This can include monthly charges or charges from overdrawing your
account. They must be deducted from your cash account. If you’ve earned any interest on your
bank account balance, they must be added to the cash account.
 An NSF (not sufficient funds) check is a check that has not been honored by the bank due to
insufficient funds in the entity’s bank accounts. This means that the check amount has not been
deposited in your bank account and hence needs to be deducted from your cash account records.
 Errors in the cash account result in an incorrect amount being entered or an amount being omitted
from the records. The correction of the error will increase or decrease the cash account in the books.
 DBO BANK ABC, ENTERPRISE

Book Debits Bank Credits/ Deposits

Amount Amount
Feb-01 10,000.00 Feb-04 10,000.00
Feb-02 20,000.00 Feb-05 20,000.00
Feb-05 30,000.00 Feb-11 CM3 15,000.00
Feb-10 12,000.00 Feb-13 12,000.00
Feb-13 3,000.00 Feb-16 3,000.00
Feb-15 28,000.00 Feb-18 28,000.00
Feb-18 3,600.00 Feb-21 3,600.00
Feb-20 18,500.00 Feb-23 18,500.00
Feb-23 6,000.00 Feb-26 6,000.00
Feb-27 18,100.00 Feb-28 CM1 100,000.00
Feb-28 2,000.00 Feb-28 CM2 5,000.00
Book Credits Bank Debits/ Disbursements
Total 151,200.00 Total 221,100.00
Chk No. Amount Chk No. Amount
Feb-01 001 5,000.00 Feb-06 001 5,000.00
Feb-02 002 2,000.00 Feb-08 003 8,000.00
Feb-05 003 8,000.00 Feb-09 002 2,000.00
Feb-08 004 12,000.00 Feb-17 005 28,000.00
Feb-12 005 28,000.00 Feb-18 007 17,000.00
Feb-13 006 15,000.00 Feb-21 008 33,000.00
Feb-17 007 17,000.00 Feb-26 009 4,500.00
Feb-21 008 33,000.00 Feb-28 DM1 850.00
Feb-24 009 4,500.00 Feb-28 DM2 6,000.00
Feb-25 010 3,600.00
Feb-26 011 8,900.00
Total 137,000.00 Total 104,350.00
 Balance Per Book/ Ledger 14,200.00
Add: Credit Memo Items 120,000.00
Add: Effect of book errors
Less: Debit Memo Items 6,850.00
Less: Effect of book errors
Adjusted balance per Book 127,350.00
STEP 4. COMPARE THE BALANCES

 After adjusting the balances as per the bank and as per the books, the
adjusted amounts should be the same.
 If they are still not equal, you will have to repeat the process of
reconciliation again.
 Once the balances are equal, businesses need to prepare journal entries
for the adjustments to the balance per books.
ADJUSTMENTS

 FOR CMs
 Check on the nature of the CMs.
 It could probably be a bank loan automatically credited to account, collections made by the bank, or
interest accrued on company’s deposits.)
 FOR DMs
 Check on the nature of the DMs.
 It could probably be a bank service fees/ charges, or NSF checks
 ABC Enterprise
Statement of Bank Reconciliation
February 28, 2022

Balance Per Book/ Ledger
Add: Credit Memo Items
Add: Effect of book errors
Less: Debit Memo Items
Less: Effect of book errors
Adjusted balance per Book
14,200.00 Balance Per Bank Statement 116,750.00
120,000.00 Add: Deposit in Transit 50,100.00
Add: Effect of bank errors
6,850.00 Less: Outstanding Checks 39,500.00
Less: Effect of bank errors
127,350.00 Adjusted balance per DBO 127,350.00

CIB 15,000.00
A/R 15,000.00

CIB 100,000.00
LP 100,000.00

CIB 5,000.00
A/R 5,000.00

BSC 850.00
CIB 850.00

Checking fee 6,000.00

CIB 6,000.00
HOW OFTEN SHOULD YOU RECONCILE YOUR BANK
ACCOUNT?

 Reconcile your bank account each time you receive a statement from
your bank.
 This is often done at the end of every month, weekly and even at the end
of each day by businesses that have a large number of transactions.
INTEGRATE ACCOUNTING INFORMATION SYSTEM

 Bank reconciliation done through accounting software is easier and error-

free.
 The bank transactions are imported automatically allowing you to match
and categorize a large number of transactions at the click of a button.
 This makes the bank reconciliation process efficient and controllable.
READ AND LEARN MORE
 What is DAUD
 DAIF
 NSF
 Certified checks
 Window dressing
 Kiting
 Imprest Cash System
 Internal Control System for Cash
 Stale check
 Post-dated check
 Overdraft
 IOUs