FABM1

TOPIC: BANK RECONCILIATION

Definition of terms:

Cash - comprises cash on hand and demand deposits. (IAS 7, Par. 6). This includes bills and coins on hand
and demand credit instruments (e.g. checks, bank drafts, postal money orders and currency demand deposits
with banks). To be considered as part of cash, it must be immediately available for use in current operations
(e.g. for payment of operating expenses, for payment of current liability or for acquisition of current asset)

Imprest System – a system of internal control for cash where all collections are deposited intact to the bank
and all disbursements are made through the issuance of checks.

Petty Cash Fund – a fund established to pay for small or “petty” expenses of an entity.
Bank Statement – a report of the bank which shows the detailed movements in the bank account of a depositor
with the corresponding balances at the beginning and end of a particular cut-off period or date.

Bank reconciliation statement - a statement which brings into agreement the cash balance per ledger/book
and cash balance per bank. In practice, this is prepared by the company’s accounting personnel on a monthly
basis.

Credit Memos – these are receipts reflected in the bank statement other than deposits made by the client
which were not yet recognized as part of receipts/collections in the company’s record/book. (e.g. collections
which were deposited by customers directly to the depositor’s bank account, proceeds of loan credited to the
account of the depositor, matured time deposits credited to the account of the depositor). This would require
an entry in the book to increase the cash in bank account.

Debit Memos - these are disbursements reflected in the bank statement other than check issuances made by
the client which were not yet recognized as part of disbursements in company’s record/book. (e.g. bank
service charges, no sufficient fund (NSF) checks, technically defective checks, repayments for maturing loans
which were directly deducted by the bank from the depositor’s account). This would require an entry in the
book to decrease the cash in bank account.

Deposits in transit – these are collections recognized by the entity in its book but were not yet acknowledged
by the bank as deposits.

Outstanding Checks – these are checks issued by the entity that are still in the possession of the payee and
not yet reflected as disbursements per bank.

Errors – these are misstatements discovered during the reconciliation process which could either increase or
decrease cash reported by the company or by the bank depending on its nature. This should be a reconciling
item of the party who committed the error.

General procedures in preparing the reconciliation:

1. Determine the balance per book (from the ledger) and balance per bank (from the bank statement).
2. Trace the cash receipts to the bank statement to ascertain whether there are receipts/collections not yet
acknowledged by the bank (deposit in transit) and possible errors.
3. Trace the checks issued to the bank statement to ascertain whether there are check issuances to payees
not yet presented for payment (outstanding checks) and possible errors.
4. Examine the bank statement to determine whether there are bank debits or credits not yet recorded by
the depositor and possible errors.
5. After determining all the reconciling items, a formal bank reconciliation can be prepared.

Forms of bank reconciliation:

Adjusted balance method (preferred method)

Name of the Company
Bank Reconciliation Statement
Date

Unadjusted balance per book Pxx Unadjusted balance per bank Pxx
Add: Credit Memos xx Add: Deposit in Transit xx
Less: Debit Memos xx Less: Outstanding Checks xx
Add/Less: Book Errors xx Add/Less: Bank Errors xx
Adjusted balance per book Pxx Adjusted balance per bank Pxx
 Bank to Book method Book to Bank method
Name of the Company Name of the Company
Bank Reconciliation Statement Bank Reconciliation Statement
Date Date

Unadjusted balance per bank Pxx Unadjusted balance per book Pxx
Add: Deposit in Transit Xx Add: Credit Memos xx
Debit Memos xx Outstanding Checks xx
Less: Outstanding Checks xx Less: Debit Memos xx
Credit Memos xx Deposit in Transit xx
Add/Less: Bank Errors xx Add/Less: Bank Errors xx
Add/Less: Book Errors xx Add/Less: Book Errors xx
Unadjusted balance per book Pxx Unadjusted balance per bank Pxx
Exercise 1 – Preparing a bank reconciliation statement (comprehensive):
Matibay Law Firm was established by Atty. Ernesto Y. Matibay, CPA on January 1, 2018. At that time, he
invested cash of P500,000 which was maintained in Yayamanin Bank. The following information were taken
from the company’s records:
Cash Receipts Summary
Date Client Amount
1/5/2018 Andrew Yllana (Cash) 15,000
1/11/2018 Bayani Namayani (Check) 2,500
1/16/2018 Kian Concepcion (Cash) 10,000
1/26/2018 Alex Gonzales (Cash) 15,000
1/26/2018 Angeline Queento (Cash) 19,500
1/31/2018 Luiz Mansanas (Cash) 18,700
Total 80,700

Check Disbursements Summary

Date Check No. Payee Amount
1/3/2018 10001 Maharlika Furniture Shop 25,000
1/8/2018 10002 Paper Supplies Inc. (supplier) 50,000
1/15/2018 10003 Manila Hotel (meetings) 5,000
1/26/2018 10004 Meralco (utilities) 20,900
1/30/2018 10005 Matikas (employee's salary) 15,000
Total 115,900

All the recorded collections pertain to legal services already rendered. The deposit slips are then prepared on
the date of the collection and it has been the practice of the company to deposit all collections in the first
hour of the next banking day. Atty. Matibay also requested a bank statement for the month of January which
was presented below:
Bank Statement
Account Name: Matibay Law Firm
Account Number: 2968 - 1035 - 30
Branch: Taft Avenue, Malate, Manila
Date Reference Withdrawals Deposits Balance
1/1/2018 500,000
1/8/2018 Cash Deposit 15,000 515,000
1/12/2018 Check Deposit 25,000 540,000
1/17/2018 10003 5,000 535,000
1/17/2018 Cash Deposit 10,000 545,000
1/18/2018 10001 25,000 520,000
1/29/2018 Cash Deposit 34,500 554,500
1/30/2018 CM 12,000 566,500
1/30/2018 10005 15,000 551,500
1/31/2018 10004 20,900 530,600
1/31/2018 DM 2,000 528,600
1/31/2018 E 25,000 503,600
Additional information:
CM - Credit Memo (advance from a client) E - Bank Error
DM - Debit Memo (bank service charge) (reversed in February)
Requirement: Prepare a bank reconciliation statement using the adjusted balance method and the entries to
update the cash balance per book.
Exercise 2 – Preparing a bank reconciliation statement (basic):
Armando Company maintains a checking account in Mapera Bank. The balance per bank and per book at the
beginning of the month showed the same balances based on the previous month’s bank reconciliation
statement. The ledger showed an ending cash balance of P460,000. Upon request, Armando was provided
with a bank statement for the month of February with an ending balance of P770,000. The reconciliation
process showed the following reconciling items:
Collections recognized in the books but were not yet acknowledged by the bank P130,000
Check issued by the company which were not yet disbursed by the bank 400,000
Collection from an account customer by the bank which were not yet recorded in the book 50,000
Service charges made by the bank which were not yet reflected in the book 10,000

Requirement: Prepare a bank reconciliation statement using the adjusted balance method and the entries to
update the cash balance per book.

Armando Company
Bank Reconciliation Statement
February 28, 2018

Unadjusted balance per book Unadjusted balance per bank

Add: CM (collection of account) Add: Deposit in transit
Less: DM (bank service charge) Less: Outstanding checks
Adjusted balance per book Adjusted balance per bank

Journal Entries:
Account title Dr. Cr.

To record collection of receivable by bank

To record bank service charge

Exercise 3 – Effects of identified reconciling items

Identify the effects of the following transactions on the cash balances per book and bank

Book Bank
a) Deposit in transit, P25,000
b) Bank service charge, P1,000
c) Proceeds of a bank loan credited directly to the depositor’s account, P100,000
d) Outstanding checks, P50,000
e) Checks issued for P10,000 but was recoded at P1,000
f) Deposit of another company which was erroneously credited by the bank to the
company’s account
g) Receipt of P52,000 was recoded as P25,000
h) Withdrawal of another company which was erroneously charged by the bank
to the company’s account
i) Check issued for P5,000 but was recorded at P50,000
j) Receipts of P57,000 was recorded as P75,000