Class: AEC 54

Date: September of 2022

Topic: Bank Reconciliation

     
Main Ideas / Key Words Notes

Bank Reconciliation  is an important control mechanism of companies to monitor the cash account and
keep bank transactions accounted.
 Most accounting staff perform bank reconciliation, and it is important that you
should master this skill.

Cash on Hand  As a background, when cash is received from a customer, the cash is accounted
under 'cash on hand' account.

 When the collection is sent to the bank for deposit, the said cash is accounted to
Cash in Bank 'cash in bank' account, but the bank will only add the deposit to the company's
account once the deposit is validated.
Issuing of Checks and  During payments, checks are issued and accounted as a deduction from the 'cash in
Encashment bank' account.
 When the person receiving the check will present the check to the bank, then that is
the time when the bank will deduct the amount to the company's account.

 With these scenarios, the timing of accounting for 'cash in bank' and the actual bank
Timing for Accounting of Cash in
account is not the same, resulting in a difference in account balances. That’s why
Bank
we need bank reconciliation.

Direct Deposits and  Also, there are direct deposits (direct online banking) to the bank account that the
Direct Deductions accountant is not aware until the passbook is updated, and there are some direct
deductions to the bank account that were not yet accounted (e.g. service charges,
penalties).

Bank Reconciliation (BR)
  Bank reconciliation will try to reconcile the differences due to the events
mentioned above.
 Normally required in checking accounts
 Separate bank accounts, separate bank reconciliations.
 Not required for savings accounts nonetheless if the records per book is different
from the per bank passbook.

Bank Reconciliation Statement  Report that is prepared for the purpose of bringing the balances of cash per (a)
record and (b) per bank statement into agreement.

Objective of BR/BRS
 To explain the differences between the 'Cash in Bank' account and the Bank
Statement balances.
 Arrive at the adjusted (correct) cash balance to be shown in the financial statements.
 Provide information for reconciling journal entries

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  Monthly basis immediately upon the receipt of the monthly bank statement.
Preparation of BRS
Shows the following:
1. the deposits and withdrawals during the period
Bank Statement 2. the cumulative balance of a depositor’s bank account

Pro forma bank reconciliation

statement

 Credit Memos
 Debit Memos
Book Reconciling Items
 Book Errors

 Deposits in Transit (DIT)

Bank Reconciling Items  Outstanding Checks
 Bank Errors

Credited to the entity’s bank account but not yet reported by the depositor’s cash receipts
(entity’s book).
Credit Memos
Examples:
 Notes Receivable collected by the bank in favor of the depositor
 Proceeds of Bank Loan
 Interest Income (e.g., matured time deposits)

Not represented by checks

Bank debits but not yet recorded by the depositor as cash disbursements.
Debit Memos
Examples:
 No Sufficient Funds or Drawn against insufficient fund checks (Bouncing Checks)
 Technically Defected Checks
 Bank Service Charges
 Automatic Debits
 Payment of Loan

Are collections already recorded by the depositor as cash receipts but not yet reflected on
bank statement.
Deposit in Transit

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 Examples:
 Collections already forwarded to the bank for deposit but too late to appear in the
bank statement.
 Undeposited collections
 Mailed Deposits
 Overnight Depository
 Uncleared Check
 Checks made after bank’s cut-off.

Checks already recorded by the depositor as cash disbursements but not yet recorded on the
Outstanding Checks bank statement.

Example:
 Checks already given to payees but are not yet encashed with the bank.
Excluded:
 Certified Checks—stamped as accepted or certified and automatically debits
(reduces) the depositor’s account. These checks shall be deducted from the total
outstanding.

 Errors also play a role during reconciliations and it is important to know who
committed the error (the accountant or the bank) so that a correction will be made
Errors during bank reconciliation.

Errors committed by the depositor.

1. Book Errors Example: Erroneous recording in the books of accounts.

Errors committed by the bank.

2. Bank Errors

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 Are made only for book reconciling items (credit and debit memos, and book errors)

Example:
Adjusting Entries (Entity’s Book) Credit Memo: The 60,000 deposit to your account but not yet recorded in the accounting
books.
Dr. Cash in Bank 60,000
Cr. Accounts Receivable 60,000
To record the collection of accounts receivable

Debit Memo: The 10,000 deduction from your account but not yet recorded in the
accounting books.
Dr. Communication Expense 10,000
Cr. Cash in Bank 10,000
To record the mobile phone charges for the Month.

Problem 1. In preparing bank reconciliation for the month of December, Company provided
the following data:

Balance per bank statement (Bank) 3,800,000

Application of Bank Reconciliation Deposit in Transit (Bank) 520,000
Amount erroneously credited by bank to case account (Bank) 40,000
Bank Service charge for December (Book) 5,000
Bank-to-Book Method
NSF Check (Book) 50,000
Outstanding Checks 675,000

What is the adjusted cash in bank?

What is the unadjusted cash in bank balance per book?

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 Problem 2. Mindanao Company provided the following data for the month of December.

Balance per book (Book) 1,000,000

Bank Service Charge (DM—Book) 3,000
Outstanding Checks (OC—Bank) 235,000
Deposits in Transit (DIT—Bank) 300,000
Customer Note Collected by the bank (CM—Book) 375,000
Interest on Customer Note (CM—Book) 15,000
Book-to-Bank Method Customer check returned NSF (Book) 62,000
Depositor’s payment of note payable charged to account (DM—book) 250,000

What is the adjusted cash in bank?

What is the unadjusted cash in bank per bank statement?

Sab Company provided the following data for the month of January 2020:

1. Balance per book, January 31 (Book) 3,130,000

2. Balance per bank, January 31 (Bank) 3,500,000
3. Collection on January 31 but undeposited (DIT—Bank) 550,000
4. NSF check received form a customer returned by the bank 50,000
on February 5 with the January Bank Statement (DM—Book)
5. Checks outstanding on January 31 (OC—Banks) 650,000
Errors 6. Bank Debit Memo for safety box rental (DM—Book) 5,000
(BOOK) 7. A creditor check for 30,000 was incorrectly recorded 300,000
in the depositor’s book as (Error—Book)
8. A customer check for 200,000 was recorded by the 20,000
depositor as (Error—Book)
9. The depositor neglected to make an entry in its books 125,000
for a check drawn in payment of an account payable

Bank Errors

 Proof of Cash is an extended bank reconciliation that covers two or more periods.
 This method is mostly used to track the monthly or periodic cash collections and
cash disbursements, especially when the accounting system of the company is
weak.

Proof of Cash

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