INTERMEDIATE ACCOUNTING 1A – MODULE #3

CHAPTER 2 – BANK RECONCILIATION

Learning Objective:

• The student is expected to know the different items being considered in a bank reconciliation.
• The student is expected to learn how to prepare a bank reconciliation.
• The student is expected to learn how to prepare a proof of cash.

"God gave us eyes at the front of our heads so we can look forward to the future." – Kamina, Gurren Lagann

Bank Deposits

There are three kinds of bank deposits, namely:

1. Demand Deposit
• This is the current account or checking account or commercial deposit where deposits are
covered by deposit slips and where funds are withdrawable on demand by drawing checks
against the bank.
• A demand deposit is noninterest bearing.

2. Saving Deposit
• The depositor is given a passbook upon the initial deposit. The passbook is required when
making deposits and withdrawals.
• Withdrawals are made anytime but the bank sometimes may require notice of withdrawal.
• A saving deposit is interest bearing.

3. Time Deposit
• This is similar to saving deposit in the sense that it is interest bearing.
• A time deposit is evidenced, however by, a formal agreement embodied in an instrument called
certificate of deposit.
• Time deposit may be predetermined or withdrawn on demand or after a certain period of time
agreed upon.

Bank Reconciliation Statement

A bank reconciliation statement is a report that is prepared for the purpose of bringing the balances
of cash per records and per bank statement into agreement.
The reconciliation usually prepared monthly because the bank provides the depositor with the bank
statement at the end of every month.

Bank reconciliation are prepared to:

a) Explain the difference between the cash balance reported on the bank statement and the cash
balance in the accounting books.
b) Arrive at the adjusted (correct) cash balance to be shown in the financial statements.
c) Provide information for reconciling journal entries.

A bank statement is a monthly report of the bank to the depositor showing:

1. The cash balance per bank at the beginning;
2. The deposits made by the depositor and acknowledged by the bank;
3. The checks drawn by the depositor and paid by the bank; and
4. The daily cash balance per bank during the month.
RECONCILING ITEMS

Book Reconciling Items:

1. Credit memos – These are book reconciling items not representing deposits credited by the bank to
the account of the depositor but not yet recorded by the depositor as cash receipts.
The following are examples of credit memos.
✓ Interest earned – This is a type of credit memo that will appear on the bank statement when a
bank gives a company interest on its account balances.
✓ Notes receivable – This is a type of reconciliation where the bank will increase the company's
checking account for the amount it collected (principal and interest) and will decrease the
account by the collection fee it charges.
✓ Proceeds of bank loan credited to the account of the depositor.
✓ Matured time deposits transferred by the bank to the current account of the depositor.

2. Debit Memos - These are book reconciling items not representing checks paid by the bank which are
charged or debited by the bank to the account of the depositor but not yet recorded by the depositor
as cash disbursements.

The following are examples of debit memos:

✓ No Sufficient Funds (NSF) – These are checks that were not honored by the bank of the person
or company writing the check because that account did not have a sufficient balance.
✓ Technically Defective Checks - These are check that deposited but returned by the bank
because of technical defects such as absence of signature/ countersignature, erasures, mutilated
checks, conflict between amount in words and figures.
✓ Bank service charges – This type of debit memo comprises fees deducted from the bank
statement for the bank's processing of the checking account activity.
These include bank charges for interest, collection, checkbook and penalty.
✓ Reduction of Loan – This pertains to amount deducted from the current portion of depositor in
payment for loan which the depositor owes the bank and which has already matured.

3. Errors - These are book reconciling items which represent the errors made by the accountant or
another person in charge during the bookkeeping process

Bank Reconciling Items:

1. Deposits in Transit – These are collections already recorded by the depositor as cash receipts but
not yet reflected on the bank statements.

The following are examples of deposits in transit:

✓ Collections already forwarded to the bank for deposit but too late to appear in the bank
statement. E.g. deposits are mailed to the bank, placed in an overnight depository
✓ Undeposited collections or those still in the hands of the depositor. These are cash on hands
awaiting delivery to the bank for deposit.

2. Outstanding Checks - These checks are already recorded by the depositor as cash disbursements
but not yet reflected on the bank statement.

The following are examples of outstanding check:

✓ Check drawn and drawn but not yet presented by payee for payment.
✓ Certified checks - the bank, when certifying the checks automatically debits (reduces) the
depositor's account and assumes direct liability on paying the certified checks to the payee.
Certified checks should be deducted if included because they are no longer outstanding.
 ✓ Stale checks - checks that remain outstanding for a relatively long period of time, are reverted
back to cash, meaning, they are added back to the cash balance per books, and are excluded from
outstanding checks.

3. Errors - These are bank reconciling items which represent the errors made by the bank such as
erroneously debiting the company’s account for the transaction that does not exist.

FORMS OF BANK RECONCILIATION:

1. Adjusted balance method - Under this method, the book balance and the bank balance are brought to a
correct cash balance that must appear on the balance sheet.

Balance per book, end Xxx Balance per bank, end Xxx
Add: Credit Memos Xxx Add: Deposits in Transit Xxx
Total Xxx Total Xxx
Less: Debit Memos Xxx Less: Outstanding Checks Xxx
Adjusted book balance Xxx Adjusted bank balance Xxx

2. Book to bank method - Under this method, the book balance is reconciled with the bank balance or the book
balance is adjusted to equal the bank balance.

Book balance Xxx

Add: Credit Memos Xxx
Outstanding Checks Xxx Xxx
Total Xxx
Less: Debit Memos Xxx
Deposit in Transit Xxx (Xxx)
Bank Balance Xxx

3. Bank to book method - Under this method, the bank balance is reconciled with the book balance or the bank
balance is adjusted equally with the bank balance.

Bank Balance Xxx

Add: Deposit in Transit Xxx
Debit Memos Xxx Xxx
Total Xxx
Less: Outstanding Checks Xxx
Credit Memos Xxx (Xxx)
Book balance Xxx
ILLUSTRATION
You received your July 2018 bank statement. The July 31, 2018 cash balance in your accounting books is
P300,000 while the cash balance shown on the bank statement is P430,000. You determined the following
reconciling item:
a. Credit memo - P190,000
b. Debit memo - P30,000
c. Deposits in transit - P50,000
d. Outstanding checks - P20,000

Prepare the bank reconciliation.

1. Bank Reconciliation using ADJUSTED BALANCE METHOD:

Balance per book, end P300,000 Balance per bank, end P430,000
Credit memos (CM) 190,000 Deposits in transit (DIT) 50,000
Debit memos (DM) (30,000) Oustanding checks (OC) (20,000)
Book errors 0 Bank errors 0
Adjusted balance P460,000 Adjusted Balance P460,000

2. Bank Reconciliation using BOOK TO BANK METHOD:

Book balance P300,000

Add: Credit Memos 190,000
Outstanding Checks 20,000 210,000
Total 510,000
Less: Debit Memos 30,000
Deposit in Transit 50,000 (80,000)
Bank Balance 430,000

3. Bank Reconciliation using BANK TO BOOK METHOD:

Bank Balance P430,000

Add: Deposit in Transit 50,000

Debit Memos 30,000 80,000
Total 510,000
Less: Outstanding Checks 20,000
Credit Memos 190,000 (210,000)
Book balance 300,000
COMPUTATION OF DEPOSITS IN TRANSIT & OUTSTANDING CHECKS

- There are certain instances where deposits in transits and outstanding checks are not
immediately available in the problem. You may only solve the problem through
reconstruction of data. The following T-account formula may be used to compute for DIT and
OC:
-
*Deposit in Transit, Ending = DIT, beg. Balance + Deposits made during current month – Deposits credit by bank during current month

DEPOSIT IN TRANSIT

DIT, beg. Balance xx

Add: Debits per books xx xx Total Credits per Bank Statement

Less: CM last month (xx) (xx) Less: CM current month
Less: Effect of book error last month (xx) (xx) Less: Effect of bank error last month

Add/Less: Effect of book error in current month xx xx Add/Less: Effect of bank error in current month

Deposit made during current month xx xx Deposits credited by bank during current month

XX DIT, end. balance

*OC, Ending = OC Beg. Balance + Checks Drawn During Current Month – Checks encashed by Bank During Current Month

OUTSTANDING CHECKS

xx OC, beg. balance

Add: Debits per bank statement xx xx Total Credits per Book

Less: DM current month (xx) (xx) Less: DM last month
Less: Effect of bank error last month (xx) (xx) Less: Effect of book error last month

Add/Less: Effect of bank error in current month xx xx Add/Less: Effect of book error in current month

Deposit made during current month xx xx Checks drawn during current month

OC, end. bal. XX