Module 08 (Q2-Week 1-2): Basic Reconciliation Statement

I. LEARNING COMPETENCIES
1. Describe the nature of a bank reconciliation statement.
2. Analyze the effects of the identified reconciling items.
3. Prepare a bank reconciliation statement.

II. LESSON PRESENTATION

Motivation
Upon receipt of a bank statement, what do you think the company will do? Give some options.

Nature of Bank Reconciliation Statement

It is normal for a company's bank balance as per accounting records to differ from the
balance as per bank statement. The difference between these figures is the reasons why
companies prepare a bank reconciliation statement. Bank Reconciliation Statement is a report
which compares the bank balance as per company's accounting records with the balance stated
in the bank statement.
The two common causes of the discrepancy in figures are:
Time lags - that prevent one of the parties (company or the bank) from recording the
transaction in the same period as the other party.
Example: A bank statement that ends January 30, 2015 and then the company were able to
collect cash of P20,000 at 5:00 PM. Bank usually closes at 3:00 PM because of this, the cash
collected will not be reflected in the bank as deposit but it is however recorded in accounting
records of the company.
Errors - by either party in recording transactions
Example: A check was issued to Meralco by the company amounting to P1000. The company
recorded this as P100. When the check was presented, the bank paid Meralco P1,000. In the
records of the company it was P100 while in the records of the bank it’s P1,000. There is in this
case an error that will cause the difference between the company’s records and the bank
records.
The importance of Bank Reconciliations are as follows:
a. Preparation of bank reconciliation helps in the identification of errors in the accounting
records of the company or the bank.
b. Cash is the most vulnerable asset of an entity. Bank reconciliations provide the necessary
control mechanism to help protect the valuable resource through uncovering irregularities such
as unauthorized bank withdrawals. However, in order for the control process to work
effectively, it is necessary to segregate the duties of persons responsible for accounting and
authorizing of bank transactions and those responsible for preparing and monitoring bank
reconciliation statements.

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c. If the bank balance appearing in the accounting records can be confirmed to be correct by
comparing it with the bank statement balance, it provides added comfort that the bank
transactions have been recorded correctly in the company records.
d. Monthly preparation of bank reconciliation assists in the regular monitoring of cash flows of
a business.
Three Methods of Preparing Bank Reconciliation Statement
a. Adjusted Method - wherein the balances per bank and per book are separately determined.
b. Book to Bank Method - wherein the book balance is adjusted to agree with the bank balance.
c. Bank to Book Method - wherein the bank balance is adjusted to agree with book balance.
In this course, however, the adjusted method will be used. The two remaining methods
will be discussed in higher accounting subjects in case you pursue an accounting degree. In
practice anyway, the adjusted method is the commonly used method.

Common Reconciling Items

The most common format of a bank reconciliation statement is shown below:

Image 8.1. Common Format of a Bank Reconciliation Statement (Source: DepEd FABM 2 Teaching Guide)

The key terms to be aware of when dealing with a bank reconciliation are:
Deposits in Transit - are amounts already received and recorded by the company, but are not
yet recorded by the bank.
For example, a retail store deposits its cash receipts of August 31 into the bank's night
depository at 10:00 p.m. on August 31. The bank will process this deposit on the morning of
September 1. As of August 31 (the bank statement date) this is a deposit in transit.
Because deposits in transit are already included in the company's Cash account, there is
no need to adjust the company's records. However, deposits in transit are not yet on the bank
statement. Therefore, they need to be listed on the bank reconciliation as an increase to the
balance per bank in order to report the true amount of cash.
A deposit in transit is on the company's books, but it isn't on the bank statement.

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Outstanding Checks - are checks that have been written and recorded in the company's Cash
account but have not yet cleared the bank account or presented to the bank by the payee.
Checks written during the last few days of the month plus a few older checks are likely
to be among the outstanding checks.
Because all checks that have been written are immediately recorded in the company's
Cash account, there is no need to adjust the company's records for the outstanding checks.
However, the outstanding checks have not yet reached the bank and the bank statement.
Therefore, outstanding checks are listed on the bank reconciliation as a decrease in the balance
per bank.
Illustration of an Outstanding Check: On January 29, 2015, Juan issued a check to Maria
amounting to P2,000. The checks was then recorded by Juan in his books as a deduction to his
cash. It so happen that the bank was closed on that day and Maria was able to visit the bank
and have it encashed on February 1, 2015 only. In the bank statement received by Juan from his
bank ending January 30,2015, the P2,000 check was not deducted however it was already
deducted in the books of Juan on January 29, 2015. The P2,000 check is called an outstanding
check.
Bank Errors - are mistakes made by the bank. Bank errors could include the bank recording an
incorrect amount, entering an amount that does not belong to a company's bank statement, or
omitting an amount from a company's bank statement.
The company should notify the bank of its errors. Depending on the error, the
correction could increase or decrease the balance shown on the bank statement.
Since the company did not make the error, the company's records are not changed.
Bank Service Charges - are fees deducted from the bank statement for the bank's processing of
the checking account activity.
Examples:
- accepting deposits,
- posting checks,
- mailing the bank statement,
Other types of bank service charges include the fee charged when a company overdraws
its checking account and the bank fee for processing a stop payment order on a company's
check.
The bank might deduct these charges or fees on the bank statement without notifying
the company. When that occurs, the company usually learns of the amounts only after
receiving its bank statement.
Because the bank service charges have already been deducted on the bank statement,
there is no adjustment to the balance per bank. However, the service charges will have to be
entered as an adjustment to the company's books. The company's Cash account will need to be
decreased by the amount of the service charges.
To Note: The bank usually issue a credit memo to inform the client of any additions made to the account of the
client. A debit memo is issued by the bank to inform the client that the account was deducted.
NSF Check - is a check that was not honored by the bank of the person or company writing the
check because that account did not have a sufficient balance. As a result, the check is returned
without being honored or paid.

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 NSF is the acronym for not sufficient funds. When the NSF check comes back to the
bank in which it was deposited, the bank will decrease the checking account of the company
that had deposited the check. The amount charged will be the amount of the check plus a bank
fee.
Because the NSF check and the related bank fee have already been deducted on the
bank statement, there is no need to adjust the balance per the bank. However, if the company
has not yet decreased its Cash account balance for the returned check and the bank fee, the
company must decrease the balance per books in order to reconcile.
Check Printing Charges - occur when a company arranges for its bank to handle the reordering
of its checks. The cost of the printed checks will automatically be deducted from the company's
checking account.
Because the check printing charges have already been deducted on the bank statement,
there is no adjustment to the balance per bank. However, the check printing charges need to be
an adjustment on the company's books. They will be a deduction to the company's Cash
account.
Interest Earned - will appear on the bank statement when a bank gives a company interest on
its account balances. The amount is added to the checking account balance and is automatically
on the bank statement. Hence there is no need to adjust the balance per the bank statement.
However, the amount of interest earned will increase the balance in the company's Cash
account on its books.
Notes Receivable - are assets of a company. When notes come due, the company might ask its
bank to collect the notes receivable. For this service the bank will charge a fee. 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. Since these amounts are already
on the bank statement, the company must be certain that the amounts appear on the
company's books in its Cash account.
Errors - in the company's Cash account result from the company entering an incorrect amount,
entering a transaction that does not belong in the account, or omitting a transaction that
should be in the account. Since the company made these errors, the correction of the error will
be either an increase or a decrease to the balance in the Cash account on the company's books.

The Bank Reconciliation Process

Step 1. Adjusting the Balance per Bank
The first step is to adjust the balance on the bank statement to the true, adjusted, or
corrected balance. The items necessary for this step are listed in the following schedule:

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 Image 8.2. Step 1. Adjusting the Balance per Bank (Source: DepEd FABM 2 Teaching Guide)
Step 2. Adjusting the Balance per Books
The second step of the bank reconciliation is to adjust the balance in the company's
Cash account so that it is the true, adjusted, or corrected balance. Examples of the items
involved are shown in the following schedule:

Image 8.3. Step 2. Adjusting the Balance per Books (Source: DepEd FABM 2 Teaching Guide)
Step 3. Comparing the Adjusted Balances
After adjusting the balance per bank (Step 1) and after adjusting the balance per books
(Step 2), the two adjusted amounts should be equal. If they are not equal, you must repeat the
process until the balances are identical. The balances should be the true, correct amount of
cash as of the date of the bank reconciliation. The adjusted cash balance will appear as the Cash
in Bank in the Statement of Financial Position (Balance Sheet).

III. SUMMARY OF LESSON

 Bank Reconciliation Statement is a report which compares the bank balance as per
company's accounting records with the balance stated in the bank statement.
 The two common causes of the discrepancy in figures are time lags and errors.
 The three methods of preparing a bank reconciliation statement are adjusted method, book
to bank method and bank to book method.
 The bank reconciliation process (adjusted method) is Step 1. Adjusting the Balance per
Bank, Step 2. Adjusting the Balance per Books and Step 3. Comparing the Adjusted
Balances.

IV. PRACTICE
A. Book or a Bank Reconciling
Direction: Identify whether the following independent transaction is a book or a bank reconciling. In
addition, determine the amount of the error and state whether the amount will be added or deducted
in the preparation of the bank reconciliation (use adjusted method). Answer on a separate sheet. (2 pts.
each)
1. Eagle Repairs received P1,500 from Jane. The bookkeeper recorded the amount as P500.
2. Nation Bank collected from the customer of Eagle the sum of P5,000 representing payment of the said
customer to Eagle. No entry was made in the books of Eagle.
3. The bank teller deducted CK 123 for P3,500 from the account of Eagle. The said check was issued by
Eagles Company a different depositor of the bank.

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4. The bookkeeper of Eagle recorded Check No. 345 in the Cash Disbursement Journal as P5,205. The
correct amount of the check was P5,250.
5. The deposits of Eagle earned interest of P100 for the month. Eagle does not have knowledge of
interest earned until it receives the bank statement.

B. Preparation of Bank Reconciliation Statement

Direction: Given the information below, prepare a bank reconciliation statement. Use adjusted
method. Answer on a separate sheet.. (20 pts.)
Item 1
The bank statement for August 2014 shows an ending balance of Php3,490.
Item 2
On August 31 the bank statement shows charges of Php35 for the service charge for
maintaining the checking account.
Item 3
On August 28 the bank statement shows a return item of Php100 plus a related bank fee of
Php10. The return item is a customer's check that was returned because of insufficient funds.
Item 4
The bank statement shows a charge of Php80 for check printing on August 20.
Item 5
The bank statement shows that Php8 was added to the checking account on August 31 for
interest earned by the company during the month of August.
Item 6
The bank statement shows that a note receivable of Php1,000 was collected by the bank on
August 29 and was deposited into the company's account. On the same day, the bank withdrew
Php40 from the company's account as a fee for collecting the note receivable.
Item 7
The company's Cash account at the end of August shows a balance of Php967.
Item 8
During the month of August the company wrote checks totaling more than Php50,000. As of
August 31 Php3,021 of the checks written in August had not yet cleared the bank and Php200 of
checks written in June had not yet cleared the bank.
Item 9
The Php1,450 of cash received by the company on August 31 was recorded on the company's
books as of August 31. However, the Php1,450 of cash receipts was deposited at the bank on
the morning of September 1.
Item 10
On August 29 the company's Cash account shows cash sales of Php145. The bank statement
shows the amount deposited was actually Php154. The company reviewed the transactions and
found that Php154 was the correct amount.

V. ENRICHMENT
Direction: Answer the following question in 3-5 sentences. Answer on a separate sheet. (10 pts.
each; Correctness of Ideas - 7, Organization of Ideas - 3)
What will happen if a business does not perform a bank reconciliation process?

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VI. EVALUATION
Preparation of Bank Reconciliation Statement
Direction: Given the information below, prepare a bank reconciliation statement. Use adjusted method.
Answer on a separate sheet. (30 pts.)
The bank statement for Juan Company shows a balance per bank of P15,907.45 on April
30,2015.
On this date the balance of cash per books is P11,589.45.
Deposits in transit: April 30 deposit (received by the bank on May 1) P2,201.40
Outstanding checks: No. 453-P3,000.00
No. 457-P1,401.30
No. 460-P1,502.70
Errors: Juan wrote check no. 443 for P1,226.00 and the bank correctly paid that amount.
However, he recorded the check as P1,262.00.
Bank memoranda:
Debit - NSF check from Pedro P425.60 .
Debit - Charge for printing company checks P30.00
Credit - Collection of note receivable for P1,000 plus interest earned of P50, less bank
collection fee of P15.00.
Hint: Bank Debit Memo are deductions made by the bank to the account of the depositor
Bank Credit Memo are additions made by the bank to the account of the depositor

VII. RESOURCES
DepEd FABM 2 Teaching Guide