ACCOUNTING 102 – Topic #2 “Bank Reconciliation” *When a check is issue, the payee will present the same to the

a check is issue, the payee will present the same to the bank for payment. The
depositor is actually ordering the bank to pay the payee out of its deposit in the bank. This is
 Bank deposit - are a savings product that customers can use to hold an amount of money at the reason the bank debits the account of the depositor thereby reducing its liability to the
a bank for a specified length of time. In return, the financial institution will pay the customer depositor. Thus, when the depositor’s account is decreased, the same is debited.
the relevant amount of interest, based on how much they choose to deposit and for how long. *At this point when balances are extracted, the cash in bank account on the depositor’s book
 Three (3) Kinds of Deposits: has a balance of P70,000 and the Company X account on the book of the bank has also a
a. Demand Deposit – is the current account or checking account or commercial balance of P70,000.
deposit where deposits are covered by deposit slips and where funds are withdrawable on - Explanation:
demand by drawing checks against the bank. Demand deposits are noninterest *The two accounts have equal or the same balances because they are reciprocal accounts.
bearing. This means that when the account is debited, the other account is credited or vice versa. The
b. Saving Deposit – in a saving deposit, the depositor is given a passbook upon reason for this is that the two accounts cover or reflect the same items or transactions. Thus,
the initial deposit. The passbook is required when making deposits and withdrawals. if no errors are committed in recording, and the same information has been recorded by both
Withdrawals are made anytime but the bank sometimes may require notice of accounts, the two should have equal of the same balances.
withdrawal. A saving deposit is interest bearing. *But very frequently, there items on the depositor’s book which do not appear on the bank
c. Time Deposit – the time deposit is similar to saving deposit in the sense that it records as of the same date.
is interest bearing. A time deposit is evidenced, however, by a formal agreement - For example: Check issued by the depositor are not yet [resented for payment to the bank
embodied in an instrument called certificate of deposit. Time deposit may be or deposits may have been made after the bank records are sent out to the depositor.
preterminated or withdrawn on demand or after a certain period of time agreed upon. *And less frequently, there are items on the bank records which do not appear on the
depositor’s book.
 Bank reconciliation
-For example:
- of the three kinds of bank deposits, bank reconciliation is necessary only for a demand
a. The bank may have charged the depositor’s account with service charges which the
deposit or checking account
depositor may not know about until a report is received from the bank.
- when an account is opened at the bank, the person authorized to draw checks against the
b. Notes endorsed to the bank for collection have been collected by the bank and credited to
account will be required to sign cards furnished by the bank, to show the specimen signature
the depositor’ account but notice of collection is not yet received from the bank by the
to be used on the checks; these specimen signature will be filed by the bank so that any teller
depositor.
who may be unfamiliar with a depositor’s signature can test the authenticity of the of a check
by comparing the depositor’s signature on the card with the signature on the check; if the
In the light of the foregoing, it becomes necessary to prepare a bank reconciliation.
depositor is a corporation, the bank will request that the directors pass a resolution
authorizing certain officers of the corporation as signatories of checks and that a copy of the
this resolution be files with the bank.  Definition of bank reconciliation – is a statement which brings into agreement the
- Illustration: Assume that Company X(depositor) collected P100,000 from a customer in cash balance per book and cash balance per bank. The reconciliation is usually
settlement of an account. The collection deposited at the First Bank. *The JE to record the prepared monthly because the bank provides the depositor with the bank statement at
collection and subsequent deposit is: the end of every month.
Cash (or Cash in Bank) 100,000  Definition of a bank statement - is a monthly report of the bank to the depositor
Accounts Receivable 100,000 showing the:
*On the books of the bank, the JE is: a. The cash balance per bank at the beginning
Cash 100,000 b. Deposits made by the depositor and acknowledged by the bank
Company X 100,000 c. The checks drawn by the depositor and paid by the bank
*The JE on the books of the bank shows the credit is Company X account. This is made, for d. The daily cash balance per bank during the month
our purpose, to facilitate the illustration. *Actually, the bank statement is an exact copy of the depositor’s ledger in the records of
*In practice, however, the account credited by the bank is demand deposit account but the the bank.
same is posted to the subsidiary ledger of Company X. When the bank credits the account of *When the bank statement is received, attached thereto are the depositor’s cancelled
the depositor, Company X, it recognizes its liability to the depositor. checks and any debit or credit memoranda that have affected the depositor’s account.
*Legally, when a deposit is made, there exist a debtor-creditor relationship between the bank *The cancelled checks are the checks issued by the depositor and paid by the bank
and the depositor, the bank being the debtor, and the depositor being the creditor. Hence during the month. These are called cancelled checks because they are literally cancelled
when the account of the depositor is increases the same is credited. by stamping or punching to show that they have been paid.
- Illustration: Let us assume further that Company X subsequently issued a check for P30,000  Reconciling Items – at the end of every month, comparison between the cash records
in payment of an account payable. On the books of Company X, the journal entry is. of the depositor and the bank statement received from the bank will yield the following
Accounts Payable 30,000 reconciling items:
Cash 30,000 a. Book Reconciling items:
*The JE on the books of the bank is: - Credit memos
Company X 30,000 - Debit memos
Cash 30,000 - Errors
b. Bank Reconciling items:
- Deposits in transit
- Outstanding checks
 - Errors
1. Credit memos
- refer to items not representing deposits credited by the bank to the account of the
depositor but not yet recorded by the depositor as cash receipts.
have the effect of increasing the bank balance.
- typical examples are:
 Notes receivable - collected by the bank in favor of the depositor and
credited to the account of the depositor
 Proceeds of the 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
- refer to the items not representing check 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 debit memos have the effect of decreasing
the bank balance.
- typical examples are:
 NSF or No Sufficient Fund Checks – these are checks deposited but
returned by the bank because of insufficiency of fund. The other name
for NSF is DAIF or ‘drawn against insufficient fund.”
 Technically defective checks – these are checks deposited but
returned by the bank because of technical defects such as absence of
signature or countersignature, erasures not countersigned, multilated
checks, conflict between amount in words and amount in figures.
 Bank Service Charges – these include bank charges for interest,
collection, checkbook and penalty.
 Reduction of loan – this pertains to the amount deducted from the
current account of the depositor in payment for the loan which the
depositor owes to the bank and which has already matured.
3. Deposit in transit
- are collections already recorded by the depositor as cash receipts but not yet
reflected on the bank statement.
- DIT include:
 Collections already forwarded to the bank for deposit – but too late
to appear in the bank statement
 Undeposited collections or those still in the hands of the depositor
– In effect, these are cash on hand awaiting delivery to the bank for
deposit.
4. Outstanding Checks
- are checks already recorded by the depositor as cash disbursements but not yet
reflected on the bank statement.
- outstanding checks include:
 Checks drawn and already given to payees – but not yet presented for
payment.
 Certified checks – a certified check is one where the bank has stamped
on its face the word “accepted” or “certified” indicating sufficiency of fund.
When the bank certifies a check, the account of the depositor is
immediately debited or charged to insure the eventual payment of the
check. Certified checks should be deducted from the total outstanding
checks (if included therein) because they are no longer outstanding for
bank reconciliation purposes.
 Forms of Bank Reconciliation – the following formats may be used in reconciling the book
balance and the bank balance.
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.
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.
3. Bank to Book Method – under this method, the bank balance is reconciled with the book
balance or the bank balance is adjusted to equal the book balance.
The first method is preferred over the other two.
PROFORMA RECONCILIATION
A. ADJUSTED BALANCE METHOD
Book Balance XX
Add: Credit Memos XX
Total XX
Less: Debit Memos XX
Adjusted Book Balance XX
Bank Balance XX
Add: Deposits in transits XX
Total XX
Less: Outstanding checks XX
Adjusted Bank Balance XX
*The reconciling items of the book are simply termed as credit memos and debit memos. No
details are shown to simplify the illustration. In actual formal reconciliation, details will have to
be shown.
*Moreover, errors are excluded because no definite rule can be made whether these are to
be added or deducted. Errors will have to be analyzed for proper treatment. However, errors
are reconciling items of the party which committed them.
*It will be observed that under the adjusted balance method, the credit memos are always
added to the book balance and the debit memos are always deducted to from the book
balance.
*Deposit in transit are always added back to the bank balance and the outstanding checks
are always deducted from the bank balance.
*Explanation – the foregoing procedures can be explained as follows:
- the adjusted balance method means that the book balance and the bank balance are
adjusted to equal the correct cash balance.
- credit memos have already increased the bank balance but have no effect on the book
balance because the credit memos are not yet recorded by the depositor; consequently, the
book balance is understated in relation to the correct cash balance; hence, credit memos are
added back to the book balance.
- debit memos already decreased the bank balance but have no effect on the book balance
because the debit memos are not yet recorded by the depositor; consequently, the book
balance is overstated in relation to the correct cash balance; hence, debit memos are
deducted from the book balance.
- deposits in transits already increased the book balance but have no effect on the bank
balance because the deposits are not yet recorded by the bank; consequently, the bank
balance is understated in relation to the correct cash balance; hence, deposits in transits are
added to the bank balance.
- outstanding checks already decreased the book balance but have no effect on the bank
balance because the checks are not yet paid by the bank; consequently, the bank balance is
overstated in relation to the correct cash balance; hence outstanding checks are deducted
from the bank balance.

B. BOOK TO BANK METHOD

Book Balance XX
Add: Credit Memos XX
Outstanding Checks XX XX
Total XX
Less: Debit Memos XX
Deposits in transits XX XX
Bank Balance XX

*When the reconciliation starts with the book balance and ends with the bank balance, the
usual book reconciling items are treated in the same manner they are treated in the “adjusted
balance method”, that is, credit memos are added and debit memos are deducted.
*However, with respect to the bank reconciling items the treatment is simply “reversed”.
*Thus, the deposit in transit is added back to the bank balance, it is now deducted from the
book balance, and since the outstanding check is deducted from the bank balance, it is now
added to the book balance.
*Explanation of the reversal rule - the book to bank method means that the book balance is
adjusted to equal the bank balance.
- deposit in transit already increased the book balance but have no effect on the bank balance
because the deposits are not yet recorded by the bank; consequently, the book balance is
overstated in relation to the book balance; hence, deposits in transit are deducted from the
book balance following the book to bank method.
- on the other hand, outstanding checks already decreased the book balance but have no
effect on the bank balance because the checks are not yet paid by the bank; consequently,
the book balance is understated in relation to the bank balance; hence, outstanding checks
are added to the book balance; following the book to bank method.
C. BANK TO BOOK METHOD
Bank Balance XX
Add: Deposits in transit XX
Debit memos XX XX
Total XX
Less: Outstanding checks XX
Credit memos XX XX
Book Balance XX

*When the reconciliation starts with the bank balance and ends with the book balance, the
usual book reconciling items are treated in the same manner they are treated in the “adjusted
balance method”, that is, deposit in transit is added and outstanding check is deducted.
*However, with respect to the bank reconciling items the treatment is simply “reversed”.
*Thus, since credit memos are added to the book balance, they are now deducted from the
bank balance, and since the debit memos are deducted from the book balance, they are now
added to the bank balance.
*Explanation of the reversal rule - the bank to book method means that the bank balance is
adjusted to equal the book balance.
- debit memos already decreased the bank balance but have no effect on the book balance
because they are not yet recorded by the depositor; consequently, the bank balance is
understated in relation to the book balance; hence, debit memos are added to the bank
balance.
- on the other hand, credit memos already increased the bank balance but have no effect on
the book balance because they are not yet recorded by the depositor; consequently, the bank
balance is overstated in relation to the book balance; hence, credit memos are deducted from
the bank balance.