CHAPTER 3

BANK RECONCILIATION
BANK
RECONCILIATION
A bank reconciliation statement is a
report that is prepared for the
purpose of bringing the balances of
cash (a) per records and (b) per bank
statement into agreement.
A bank statement is a report issued by a
bank that shows cumulative balance of a
depositor's bank account
PRO FORMA BANK RECONCILIATION STATEMENT

ABC Co.
Bank Reconciliation
For the month ended August 31, 20X1

Balance per books, end. ₱ XX Bal. per bank statement, end. ₱ XX

Add: Credit Memos (CM) XX Add: Deposits in Transit (DIT) XX
Less: Debit Memos (DM) (XX) Less: Outstanding Checks (OC) (XX)
Add/Less: Book Errors XX Add/Less: Bank Errors XX
Adjusted Balance ₱ XX Adjusted Balance ₱ XX
 CREDIT MEMOS

are additions (bank credits) made by the bank to

the depositor's bank account but not yet
recorded by the depositor
 • COLLECTIONS MADE BY THE BANK ON
BEHALF OF THE DEPOSITOR.

• INTEREST INCOME EARNED BY THE

EXAMPLES DEPOSIT.
OF
• PROCEEDS FROM LOAN DIRECTLY
CREDIT CREDITED OR ADDED BY THE BANK TO
MEMO THE DEPOSITOR'S ACCOUNT.

• UNROLLED-OVER MATURED TIME

DEPOSITS TRANSFERRED BY THE BANK
TO THE ENTITY'S ACCOUNT.
 DEBIT MEMOS

are deductions (bank debits) made by the bank

to the depositor's bank account but not yet
recorded by the depositor.
 • BANK SERVICE CHARGES REPRESENTING
BANK CHARGES FOR FEES, INTEREST,
PENALTIES, AND SURCHARGES.

EXAMPLES • NO SUFFICIENT FUNDS CHECKS (NSF) OR

DRAWN AGAINST INSUFFICIENT FUNDS
OF
CHECKS (DAIF) - THESE ARE CHECKS
DEBIT DEPOSITED AND ALREADY RECORDED BY
MEMO THE BANK BUT SUBSEQUENTLY
RETURNED TO THE DEPOSITOR BECAUSE
THE DRAWER'S FUND IS INSUFFICIENT TO
PAY FOR THE CHECK.
 • AUTOMATIC DEBITS, SUCH AS WHEN THE
DEPOSITOR AND THE BANK AGREE THAT
THE BANK WILL MAKE AUTOMATIC
EXAMPLES PAYMENTS OF BILLS ON BEHALF OF THE
OF DEPOSITOR.
DEBIT
• PAYMENT OF LOANS WHICH THE ENTITY
MEMO (DEPOSITOR) AGREED TO BE MADE OUT
DIRECTLY FROM ITS BANK ACCOUNT.
BOOK ERRORS

errors committed by the

depositor (e.g., erroneous
recording in the books of
accounts).
DEPOSITS IN
TRANSIT
are deposits made but not yet credited by the
bank to the depositor's bank account.
Deposits in transit often occur when deposits
are mailed to the bank, placed in a overnight
depository, made through check and the
check has not yet cleared, or made after the
bank's cut-off.
OUTSTANDING CHECKS

are checks drawn and released to

payees but are not yet encashed
with the bank.
 • CERTIFIED CHECKS - THE BANK, WHEN
CERTIFYING CHECKS, AUTOMATICALLY DEBITS
(REDUCES) THE DEPOSITOR'S ACCOUNT AND
ASSUMES DIRECT LIABILITY ON PAYING THE
CERTIFIED CHECKS TO THE PAYEE. CERTIFIED
OUTSTANDING CHECKS ARE ALREADY DEDUCTED FROM THE
ACCOUNT, THUS, THEY ARE NO LONGER
CHECK
OUTSTANDING.
EXCLUDE THE
FOLLOWING:
• 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.
BANK ERRORS

errors committed by the bank.

ILLUSTRATION 1: RECONCILIATION ITEMS
• An entity opens a checking account on
December 27, 20X1. The entries in the
respective accounting records of the entity
(depositor) and the bank are as follows:

Entity (depositor) Bank

Cash in Bank 1,000 Cash on Hand 1,000

Cash on Hand 1,000 Deposit Liability-depositor 1,000
Deposit in transit
2. The entity collects 200 from customers and
deposits it in an overnight depository on
December 31, 20X1.

Entity (depositor) Bank

Cash on hand 200

Accounts receivable 200
No entry yet. Deposit will be received in
Cash in bank 200
January 20X2.
Cash on hand 200
 Credit Memo
3. The bank collects a 500 peso receivable on
behalf of the entity in January 20X2

Entity (depositor) Bank

No entry. the entity is not yet aware of

the collection. It will record the collection Cash on Hand 500
when it receives the January bank Deposit Liability-depositor 500
statement on the first week of February.
Book Error
4. The entity makes payment of 1,000 peso but
erroneously records it as 100 peso in February 20X2.
The check cleared the bank at the correct amount of
1,000 peso.
Entity (depositor) Bank

Accounts Payable 100 Deposit liability-depositor 1,000

Cash in Bank 100 Cash on hand 1,000
.
Adjusting (reconciling) entries are made
only for book reconciling items.
Outstanding checks
5. In March 20X2, the entity wrote checks totaling
400 peso. However, only 100 peso of those checks
were encashed during the month,
Entity (depositor) Bank

Accounts payable 400 Deposit Liability-depositor 100

Cash in bank 400 Cash on hand 100
 Deposit in Transit

DIT, beg. bal. XX

Deposits credited by bank during current
month:
Deposits made during the current month:
Total Debits per books XX

XX Total credits per bank statement

Less: CM last month (XX)
Less: CM in current
Less: Effect of book
(XX) month
error last month (XX)
Less: Effect of bank
ADD/Less: Effect of book
(XX) error last month
error in current month XX XX
XX XX Add/less: Effect of bank error in
current month

XX DIT, end. bal.

 Outstanding checks

Checks encashed by bank during current XX OC, beg. bal.

month: Checks drawn during current month:
Total Debits per bank statement XX
XX Total credits per book
Less: DM in current month (XX) Less: DM last
Less: Effect of bank (XX) month
error last month (XX) Less: Effect of book
ADD/Less: Effect of bank (XX) error last month
error in current month XX XX XX XX Add/less: Effect of bookk error in
current month

OC, end. bal. XX

 PROOF OF CASH

A proof of cash is an expanded bank

reconciliation that includes proof of cash
receipts and cash disbursements. Proof of cash is
useful in discovering discrepancies in the
handling cash over a certain period of time.