Bank Reconciliation

It is a statement which brings into agreement the cash balance per book and cash
balance per bank.

Bank Deposits
 Demand deposit. It is a checking account and noninterest-bearing.
 Savings deposit. It is evidenced by a passbook and/or ATM, interest-bearing.
Notice of withdrawal may be required
 Time deposit. Interest bearing deposit evidenced by a certificate of deposit
however it offers higher interest rates because of its amount requirements and
time constraint.

Company X collected P100,000 from a customer deposited at First Bank.

Company X entry First bank entry

Cash in bank 100,000 Cash 100,000
Accounts Receivable 1,000 Company X 100,000

Company X issued P30,000 in payment of accounts payable.

Company X entry First bank entry

Accounts Payable 30,000 Company X 30,000
Cash in Bank 30,000 Cash 30,000

The reconciliation is usually prepared monthly because the bank provides the depositor
with the bank statement at the end of every month showing the cash balance per bank
at the beginning, deposits made by the depositor, check drawn by the depositor and
daily cash balance per bank during the month.

Reconciling items
1. Book reconciling items
a. Credit memos, items not representing deposits credited by the bank to the
account of the depositor but not yet recorded by the depositor as cash receipts
 notes receivable collected by bank for the depositor
 proceeds of bank loans credited to depositor
 interest income
b. Debit memos, items not representing checks paid by bank which are charged or
debited by bank to depositor but not yet recorded by the depositor
 NSF (not sufficient fund) checks, checks deposited but returned by the
banks
 DAIF(drawn against insufficient fund) checks
 technically defective checks, checks deposited but returned by the bank
because of technical defects such as forged signature or torn checks
 bank service charges,
 reduction of loan
c. Errors
2. Bank reconciling items
a. deposits in transits, collections already recorded by depositor as receipts but
not yet reflected on the bank statement.
 collection already forwarded to the bank for deposit but too late to appear in the
bank statement
 undeposited collection, cash on hand awaiting delivery to the bank
b. outstanding checks, checks already recorded by the depositor as
disbursements but not reflected in the bank statement
 checks drawn and already given to payee but not yet presented for payment
 certified checks, checks that has been guaranteed to be encashed
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.
2. Book to bank method. Under this method, the book balance is adjusted equal to
the bank balance.
3. Book to bank method. Under this method, the bank balance is adjusted equal to
the book balance.

Adjusted balance
method

Book balance
Add: Credit memos
Total
Less: Debit memos
Adjusted book
balance

Bank balance
Add: Deposit in
transit
Total
Less: Outstanding
checks
Adjusted bank
balance

Book to bank method

Book balance
Add: Credit memos
Outstanding
checks
Total
Less: Debit memos
Deposit in
transit
Bank balance

Bank to book method

 Bank balance
Add: Deposit in
transit
Debit memos
Total
Less: Outstanding
checks
Credit memos
Book balance

Example: The cash records of Apathy Company show the following for the month of
December 2019.

Apathy Company
Date Check No. Withdrawal Deposit Balance
Dec 2 100,00 100,000
0
18 104 10,000 90,000
20 101 5,000 85,000
23 106 25,000 60,000
26 50,000 110,000
27 10,000 120,000
27 103 40,000 80,000
27 CM 30,000 110,000
31 Service charge 2,000 108,000

FIRST BANK
Date Date Check No.
Dec 1 Deposit 100,000 Dec 4 101 5,000
20 Deposit 50,000 6 102 15,000
26 Deposit 10,000 9 103 40,000
27 Deposit 80,000 9 104 10,000
10 105 30,000
16 106 25,000
27 107 50,000
Total 240,000 Total 175,000

The credit made by the bank on December 27 represents the proceeds of a note
received from a customer which was given to the bank for collection by the entity on
December 26.

Step 1: Determine the book balance and the bank balance.

In the preceding problem, the bank balance is P108,000. To find the book balance, you
must add total deposits and total withdrawals. Then you need to subtract total deposit
with total withdrawal. P 240,000 less P175,000 is P65,000.
Step 2: Trace the cash receipts to the bank statement to ascertain whether there are
deposits not yet acknowledged by the bank.
In the problem, only three deposits were acknowledged by the bank, but the deposit
made on December 27 has not been acknowledged. Therefore, the deposit of P80,000
in December 27 is a deposit in transit.

Step 3: Trace the checks issued to the bank statement to ascertain whether there are
checks not yet presented for payment.
In the preceding problem, only four checks were presented for payment. Check No.
102, 105 and 107 are not yet paid. Hence, it represents outstanding checks of P95,000.
Step 4: The bank statement should be examined to determine whether there are bank
credits or bank credits not yet recorded by the depositor.
In the problem, there is a credit memo made on December 27 amounting to P30,000.
Debit memo for service charge amounted to P2,000.

Step 5: Watch out for errors.

Adjusted balance method

Book balance P 65,000

Add: Credit memos 30,000
Total 95,000
Less: Debit memos 2,000
Adjusted book balance P 93,000

Bank balance P 108,000

Add: Deposit in transit 80,000
Total 188,000
Less: Outstanding checks 95,000
Adjusted bank balance P 93,000

Book to bank method

Book balance P 65,000

Add: Credit memos 30,000
Outstanding checks 95,000
Total 190,000
Less: Debit memos 2,000
Deposit in transit 80,000
Bank balance P 108,000

Bank to book method

Bank balance P 108,000

Add: Deposit in transit 80,000
Debit memos 2,000
Total 190,000
Less: Outstanding checks 95,000
Credit memos 30,000
Book balance P 65,000
Adjusting entries:
To record the note collected by the bank
Cash in bank 30,000
Accounts Receivable 30,000

To record the bank service charge

Bank service charge 2,000
Cash in bank 2,0000

Errors and their corrections

Collection from customer deposits amount to P10,000 but recorded in book as P1,000.
Cash in bank 9,000
Accounts Receivable 9,000 (10,000 – 1,000)

Check amounting to P20,000 as payment to accounts payable is recorded in the book

as P2,000.
Accounts Payable 18,000
Cash in bank 18,000 (20,000 – 2,000)

Deposit of Mark Anthony Delgado of P1,000 is credited to Mark Antony Delgado.

No entry. Error is made by the bank

References:
 Valix, Conrado M. (2020). Conceptual Framework and Accounting Standards.
Manila,Philippines GIC Enterprises & Co.
 Valix, Conrado M. (2020). Intermediate Accounting 1. Manila,Philippines GIC
Enterprises & Co.
 Valix, Conrado M. (2017). Practical Accounting 1. Manila,Philippines GIC
Enterprises & Co.