Bank Reconciliation

The purpose of the bank reconciliation

 Due to the timing difference, omissions and
errors made by the bank or the firm itself.
 The balance of the bank statement and the bank
account in the cash book rarely agree.
 Bank reconciliation statements can be used
 To explain the reasons for the differences and to
identify errors and omissions in both documents,
so that corrections can be made as soon as
possible.
Bank Deposits
 Three kinds of deposits:
1. Demand deposit – current or checking
account where deposits are covered by
deposit slips and funds are withdrawable on
demand; non-interest bearing
2. Savings deposit – interest bearing
3. Time Deposit – high interest bearing,
evidenced by a certificate of deposit.
 Reasons for differences between the cash
book balance and the bank statement
balance
1. Uncredited items
They are deposits paid into the bank. These
items occurred too close to the cut-off date of
the bank statement and so do not appear on
the statement. They will appear on the next
statement.
Banking made shown in the cash book
But not on the bank statement
2. Unpresented checks
They are checks issued by the firm that have not
yet been presented to its bank for payment.
3. Standing orders
They are standing instructions from the firm to
the bank to make regular payments.
4. Bank charges
They are charges made by the bank to the
company for banking services used.
6. Dishonored checks
They are checks deposited but subsequently
returned by the bank due to the failure of the
drawer to pay.
7. Credit transfers / direct credits
They are money received from customers
directly through the banking system.
8. Interest allowed by the bank
They are interest received for deposits or fixed
deposits.
Reconciling Items
 Book reconciling items

a. Credit Memos
b. Debit Memos
c. Errors
Reconciling Items
 Bank reconciling items
a. Deposit in transit
b. Outstanding checks
c. Errors
 To reconcile the bank statement with
corrected cash book
Three steps:
1. Check the bank statement and the cash book
to identify the items which have been
omitted.
2. Update the cash book with any omissions and
errors made by the firm itself.
e.g. Credit transfers (debit cash book)
Bank interest (debit cash book)
Standing orders / direct debits (credit cash book)
Bank charges (credit cash book)
Dishonoured cheques (credit cash book)
3. Prepare the bank reconciliation statement
Forms of Bank Reconciliation
 Adjusted balance method
 Book to bank method
 Bank to book method
Adjusted balance method
Book Balance xx
Add: Credit Memos xx
Less: Debit Memos xx
Adjusted Book balance xx

Bank Balance xx
Add: Deposit in transit xx
Less: Outstanding checks xx
Adjusted bank balance xx
Book to Bank Method
Book Balance xx
Add: Credit Memos xx
Outstanding checks xx
Total xx
Less: Debit Memos xx
Deposit in transit xx
Bank balance xx
Bank to Book Method
Bank Balance xx
Add: Debit Memos xx
Deposit in transit xx
Total xx
Less: Credit Memos xx
Outstanding checks xx
Book balance xx
 General Procedures in Preparing the
Reconciliation
1. Determine the balance per book and balance
per bank.
2. Trace the book debits vs bank credits (DIT)
3. Trace book credits vs bank debits (O/S)
4. Check for DM and CMs
5. Watch out for errors.
Nature of the cash book and bank
statement
Cash Book (bank column only)

Debit represents an increase Credit represents an decrease

Bank Statement
Dr Cr Balance

(represents (represents (represents

decrease) increase) the amount
owned to
the clients)
Nature of the cash book and bank
statement
Cash Book (bank column only)

Debit represents an increase Credit represents an decrease

1. Book Bal

Bank Statement
Dr Cr Balance

(represents (represents (represents

decrease) increase) the amount
owned to
the clients)
DM CM 1. Bank bal
Proof of Cash
(Two-date bank Reconciliation)
Procedures:
 The same with one-date reconciliation
 Becomes complicated when certain facts or
data are omitted
 Among the omitted information may be one
or any combination of the following:
1. Book Balance – beginning and end
2. Bank Balance – beginning and end
3. Deposit in transit - beginning and end
4. Outstanding checks – beginning and
end
Computation of Book Balance
Balance per book, beg xxx
Add: Book debits xxx
Less: Book credits (xxx)
Balance per book, end xxx
Computation of Bank Balance
Balance per bank, beg xxx
Add: Bank credits xxx
Less: Bank debits (xxx)
Balance per bank, end xxx
Computation of Deposit in Transit
Deposit in transit, beg xxx
Add: Cash receipts deposited xxx
Less: Deposits acknowledged (xxx)
by the bank
Deposit in transit, end xxx
Computation of Outstanding Checks

Outstanding Checks, beg xxx

Add: Checks drawn by depositor xxx
Less: Check paid by the bank (xxx)
Outstanding Checks, end xxx
Proof of Cash
 Is an expanded reconciliation in that it
includes proof of receipts and
disbursements.
 Three (3) forms:
1. Adjusted Balance Method
2. Book to Bank Method
3. Bank to Book Method
Adjusted balance method