BANK RECONCILIATION

Importance:
 To test the correctness of the entries in the books, to locate other forms of recording errors, and to determine the
existence of frauds
 The bank reconciliation provides comfort that a company’s accounting records and balance sheet reflect the proper
amount of cash

Definitions:
Bank reconciliation
- Statement which brings into agreement the cash balance per book and cash balance per bank
Bank statement
- Monthly report of the bank to the depositor showing the cash per bank at the beginning, the deposits acknowledged,
the checks paid, other charges and credits and daily cash balance per bank during the month
Adjusted balance per bank
- The balance on the bank statement after deducting outstanding checks, adding deposits in transit, and recording any
bank errors
Adjusted balance per book
- The balance in the general ledger for the checking account after (1) deducting any bank fees or other deductions that
are on the bank statement but are not yet recorded in the general ledger and (2) adding any receipts on the bank
statement that are not yet recorded in the general ledger account
Journal entries
- Entries to the company’s accounting records. Journal entries are required or bank reconciliation adjustments to the
balance per books
Demand deposits, checking accounts
Time deposits, savings accounts and certificates of deposits

Reconciling items
1. Items credited in the bank statement but not yet debited in the depositor’s books
CREDIT MEMO (CM)
An addition to a bank account made by the bank for an adjustment to a deposit, correction of a bank error,
interest on bank balance, etc.
Examples:
 Collections made by the bank for the account of the depositor
 Loans granted by the bank
 Interest income

2. Items debited in the bank statement but not yet credited in the depositor’s books
DEBIT MEMO (DM)
A deduction from a bank account made by the bank for a bank service charge, deposited check that was returned,
check printing fee, etc.
Examples;
 Service charge
 Repayment of loans
 Checks returned by the bank
 NSF check

3. Items debited in the depositor’s books but not yet credited in the bank statement
DEPOSIT IN TRANSIT (DIT)
Receipts that occurred but they are not yet reported on the bank statement
Examples:
 Unrecorded deposits
 Undeposited collections

4. Items credited in the depositor’s books but not yet debited in the bank statement
OUTSTANDING CHECK (OC)
Checks that were written (and have been recorded on the company’s books), but have not cleared that bank account
Forms of bank reconciliation

Adjusted balance method:

Book balance xx Bank balance xx
Add: Credit memo xx Add: Deposit in transit xx
Total xx Total xx
Less: Debit memo xx Less: Outstanding checks xx
Adjusted book balance xx Adjusted bank balance xx

Book to bank method: Bank to book method:

Book balance xx Bank balance xx
Add: Credit memo xx Add: Deposit in transit xx
Outstanding check xx xx Debit memo xx xx
Total xx Total xx
Less: Debit memo xx Less: Outstanding checks xx
Deposit in transit xx xx Credit memo xx xx
Bank balance xx Total xx

General Procedures in Preparing the Reconciliation

a. Determine the balance per book and the balance per bank
b. Trace the cash receipts to the bank statement to ascertain whether there are deposits not yet acknowledged by the bank
c. Trace the checks issued to the bank statement to ascertain whether there are checks not yet presented for payment
d. The bank statement should be examined to determine whether there are bank credits or bank debits not yer recorede by the
depositor
e. Watch out for errors. Again, errors are reconciling items of the party which committed them.

Rules: ERROR
1. Who made the error?
2. Impact of error?
3. Correct the error.
ASSIGNMENT

Answer the following problems (Problem 1 and 2) below. (1 whole sheet of paper)

Problem 1

Image World Company provided the following information:

Image World Company

Date Check No. Withdrawal Deposits Balance
Dec 2 100,000 100,000
18 104 10,000 90,000
20 101 5,000 85,000
22 106 25,000 60,000
27 50,000 110,000
29 10,000 120,000
29 103 40,000 80,000
29 CM 30,000 110,000
31 Service charge DM 2,000 108,000

FIRST BANK
Dec 1 Deposit 100,000 Dec 4 Check No. 101 5,000
21 Deposit 50,000 6 Check No. 102 15,000
27 Deposit 10,000 8 Check No. 103 40,000
31 Deposit 80,000 8 Check No. 104 10,000
10 Check No. 105 30,000
14 Check No. 106 25,000
28 Check No. 107 50,000

The credit made by the bank on December 29 represents the proceeds of a notes received from a customer which was given to
the bank for collection by the entity on December 26.

Prepare a bank reconciliation using adjusted balance method and also prepare adjusting entries.

Problem 2

Adopt Company provided the following data for the month of December of the current year:

Balance per book 5,000,000

Balance per bank 4,450,000
Deposit in transit 3,000,000
Outstanding check 850,000
Bank service charge for the month of December 50,000
Customer’s check returned by bank marked NSF 500,000
Customer’s note collected by bank P2,000,000;
Interest, P200,000; collection fee, P50,000 2,150,000

a. Prepare a bank reconciliation on December 31.

b. Prepare adjustments to correct the cash balance per book.