Bank Reconciliation Statement

Bank Statement is a report that shows and informs the account holders of all the bank
transactions that occur generally every month. It is prepared and sent by the bank together with
the debit and credit memos and the cancelled checks to those accounts that do not have
passbooks.

Usually, the balance of the company's book record and bank statement is unequal; hence, the
difference between these figures is the reason why companies prepare a bank reconciliation
statement.

What is a Bank Reconciliation Statement?

It is a report that compares the balance of the company's accounting records with the bank
statement's balance. The preparation of a bank reconciliation statement is done in order to see
the difference between the two records.

The company's record is based on the ending balance of their accounting records, otherwise
known as cash book balance. The bank's record, as reflected on the bank statement, is known as
bank balance.

Two common causes of
the discrepancy in
figures
1. Time lags
prevents the company or the bank
from recording the transaction in
the same period as the other
party.
2. Errors
can be either done by the
company or the bank.

Two types of errors
2. Book error
1. Bank error
mistakes made by the company
mistakes made by the bank and
and can also depend on the error
can depend on the error (whether
whether there will be an increase
an increase or a decrease in the
or a decrease in the balance of
balance of the bank statement).
the company's record.

These errors can either cause an overstatement or understatement in the balance of either
records (bank balance or book balance). However, take note that we do not make any corrections
if the error is made by the bank.

Overstatement refers to the amount that is recorded higher that it should be. It occurs if the
cash in the book balance is higher than the cash in the bank balance. If an account or a figure on
an account is overstated, the amount that is reported on the financial statement is more than it
should be. For example, the company issued a check amounting to ₱520, this exact amount was
already deducted on the bank statement. However, the company committed an error in
recording the amount on the book record. Instead of recording ₱520, the amount recorded was
₱250. This caused a lower amount deducted on the company's book balance. Therefore, the
effect of this error to the cash in the book balance is overstated.

Understatement refers to the amount recorded as lower than it should be in the book record. If
an account or a figure on an account is understated, the amount that is reported on the financial
statement is less than it should be. For example, the company issued a check amounting to
₱250, this exact amount was already deducted on the bank statement. However, the company
committed an error in recording the amount on the book record. Instead of recording ₱250, the
amount recorded was ₱520. This caused a higher amount deducted on the company's book
balance. Therefore, the effect of this error to the cash in the book balance is understated.

Transposition
Transplacement
a mistake in the recording of an amount in which the
an error in which some or all of the digits are moved
positions of the digits are somewhat exchanged.
to the left or right. Example: instead of ₱150, the
Example: instead of ₱150, the amount recorded was
amount recorded was ₱1,500.
₱510.

Nature of a Bank Reconciliation Statement

1. It is a process because it involves a series of steps.
2. A periodic report because it is prepared monthly.
3. It contains an explanation of the differences in the balance of the Cash Book and Bank
Statement.
4. It is an integral part of cash management and control and only deals with the cash
transactions of the company.
5. Prepared by the account holder but not legally compulsory to prepare this statement.

Importance of Bank Reconciliation

1. It helps in the identification of errors.
2. It provides the necessary control mechanism to help protect the valuable resource through
uncovering regularities.
3. It provides comfort if the bank transactions have been recorded correctly in the company's
records.
4. It assists in the regular monitoring of cash flows of a business.
5. It helps in tracking and adjusting the accounting books for fees and penalties.

The Bank Reconciliation Statement helps in the identification of reconciling items in the
accounting records of the company or the bank. In addition, it can detect if any of the
customer's check bounced or if any checks issued were altered, stolen or cashed out without
the account holder's knowledge.

A Bank Reconciliation Statement main purpose is to detect fraud and errors in the cash of the
bank or book's records. It becomes necessary to reconcile it on a daily basis to prevent fraud.

Common Reconciling Items

A. Bank
1. Deposit in Transit - are cash or checks received and recorded by the company and
deposited to the bank but not yet recorded to the bank's records. It is recorded on the
company's books but not on the bank statement. They need to be listed on the bank
reconciliation as an increase to the balance per bank report.
2. Outstanding Checks - are checks issued as a payment but not yet presented by the
payee/customer of the company to the bank. The company has already recorded it or has
already decreased the payment in the cash book, but has not yet reflected on the bank's record.
This should be deducted from the book balance and are listed on the bank reconciliation as a
decrease in the balance per bank.

B. Book
Debit Memos (deductions charged by the bank)
1. Bank Service Charges - fees deducted from the bank statement for the bank's processing of
the checking account activity.
2. NSF Check - checks that was not honored by the bank because that account does not have
sufficient funds. When the NSF check bounced, the bank will decrease the checking account of
the company that had deposited the check. The company must decrease the balance per books
in order to reconcile.
 3. Check Printing Charges - occurs when a company arranges for its checks. The cost of the
printed checks will automatically be deducted from the company's checking account.
Credit Memos (amount added by the bank)
1. Interest Earned - There is no need to adjust the balance per bank statement; however, the
amount of interest earned will increase the balance in the company's cash account on its books.
2. Notes Received - These are assets of the company when notes come due. The bank will
increase the company's checking account for the amount it collected and will decrease its
account by the collection fee.

Adjustments made in the book balance require adjusting entries; nevertheless, an adjusting
entry for the bank balance is not necessary.

Methods of Preparing Bank Reconciliation

1. Adjusted Balance Method - balance per bank and per book are separately determined.
Formula:
Book Balance ₱xx
Add: Credit Memos
Interest earned xx
Notes Received xx
Errors xx
Total xx
Less: Debit Memos
Bank Service Charges (xx)
NSF Check (xx)
Check Printing Charges (xx)
Adjusted Book Balance ₱xx

Bank Balance ₱xx

Add: Deposit in Transit xx
Total xx
Less: Outstanding Checks (xx)
Adjusted Bank Balance ₱xx

2. Book to Bank Method - adjusted to agree with the bank balance.

Formula:
Book Balance ₱xx
Add: Credit Memos xx
Outstanding Checks xx
Total xx
Less: Debit Memos (xx)
Deposit in Transit (xx)
Bank Balance ₱xx

3. Bank to Book Method - adjusted to agree with the book balance.

Formula:
Bank Balance ₱xx
Add: Debit Memos xx
Deposit in Transit xx
Total xx
Less: Credit Memos (xx)
Outstanding Checks (xx)
Book Balance ₱xx

The Bank Reconciliation Process

Step 1. Get the cash ending balance per bank statement and the ending balance of the cash in
bank account in the general ledger of the company's books. Identify the difference between
cash book and bank statement.
Step 2. Compare the deposits credited by the bank in the bank statement against the deposits
made by the company in the cash receipts book. Tick or put a check mark on the cash entries
which are on the bank statement.
Step 3. Adjust cash book with items which are on the bank statement but not in the cash book.
Step 4. Check for errors made by the bank by the book recording transactions. These errors are
either added or subtracted from the bank or book balance depending on their effect on the
balances. Prepare bank reconciliation, indicating remaining differences between cash book and
bank statement.

A Bank Service Charge is a book reconciling item that An NSF Check is a book reconciling item that must be
must be deducted from the book balance. deducted from the book balance.

A Check Printing Charge is a book reconciling item Interest earned is a book reconciling item that must
that must be deducted from the book balance. be added to the book balance.

Notes received is a book reconciling item that must Outstanding checks are bank reconciling items that
be added to the book balance. must be deducted to the book balance.

A Deposit in Transit is a bank reconciling item that

must be deducted to the book balance.