Chapter 3

Bank Reconciliation
Bank Reconciliation Statement
⁠~ is a report that is prepared by the entity for the purpose of bringing the cash balances per records
and per bank statement into agreement.
⁠~ is prepared on a monthly basis, immediately upon receipt of the bank statement from the bank.
⁠~ one bank account = one bank reconciliation

Importance:

- It explains the difference between the cash balance reported

in the accounting records and the cash balance reported on
the bank statement;
- It arrive at the correct cash balance to be shown in the
financial statements; and
- It provides information for reconciling journal entries.

Bank statement is a report issued by a bank which shows the deposits and withdrawals made
by the company during the period and the cumulative balance of a depositor’s bank account.

Pro forma bank reconciliation statement

Book Reconciling Items:

Credit Memo (CM)- are the items that the depositor not yet recorded in the book records.
Examples:
・ Collections received by the bank from customers.
・Interest income earned by the deposit.
・Approved loan which automatically credited the amount to the depositor’s account
・Matured time deposit of the account holder
Debit Memo (DM)- are the items already debited or withdraw by the bank on the depositor’s
account but not known by the depositor.
Examples:
・No Sufficient Fund Check (NSF)- insufficient fund
・Defective Check- intended for deposit but dishonored by the bank because of erasures
and discrepancies.
・Bank Service Charges- payment for service fee, interest and penalty etc.
・Automatic Debit Loan Payment – agreement allowed by depositor as a payment of
loan amortization to the bank.
Book Errors- transactions that has an erroneous entry by the depositor.

Bank Reconciling Items

Deposit in Transit (DIT)- cash received and recorded by depositor but not yet reflected in
the bank as a deposit.
Outstanding Checks- checks issued and on the hand of the payee but not yet encashed.
・ Certified Checks- reduces the depositor’s account and assumes direct liability. Already
deducted, no longer outstanding.
・Stale Checks- reverted back to cash. Added back to cash balance per books, excluded
for outstanding checks.
Bank Errors- errors committed by the bank.

Note:

⁠The depositor should make reconciling entries for book reconciling items only.
Methods for preparing bank reconciliation statement:
・ADJUSTED METHOD – balances per bank and per book are separately determined.

・BOOK to BANK METHOD – book balance is adjusted to agree with the bank balance.
 ・ BANK to BOOK METHOD – bank balance is adjusted to agree with the book balance.

Illustration: Actual Procedures

You are the accountant of XYZ Company. You obtained the following information for the purpose of
preparing the bank reconciliation for the month of September 20x2.

Requirements:

Prepare bank reconciliation statement and their reconciling entry.

・in preparing the bank reconciliation statement, we need to determine which amount are
reflected in the ledger but not in the bank statement and vice versa.

・after crossing out, identify the book reconciling items and bank reconciling items:
 Bank Reconciling Items:
⁠~ Outstanding Checks of 80,000 (from ledger ,dated 9/21,check #1111).
⁠~ Deposit in transit of P160,000 (from ledger, dated 9/30 ‘deposit’)
Book Reconciling Items:
⁠~ Debit Memo of P31,905 (from bank statement, dated 9/12 20x2 ‘Payment’)
⁠~ Credit Memo of P90,000 ( dated 9/26/20x2,’ Check Deposit)

AJE:
CHARGES FEE
CASH IN BANK 90,000
31,905
ACCOUNTS RECEIVABLE
CASH IN BANK.
90,000
31,905
To record the collection of
To record the
accounts receivable
payment for the charges

Illustration:
ABC Co. is preparing its September 30, 20x1 bank reconciliation.
The following information was determined:
a. Balance per bank statement, September 30, 20x1-180,000.
b. Deposit in transit, September 30, 20x1 – 32,000,
c. Return of customer’s check for insufficiency of funds (NSF check), September 30,20x1-60,000.
d. Balance per books, September 30, 20x1-143,000.
e. Outstanding checks, September 30, 20x1-P27,000.
 f. A collection of 320,000 was recorded in the books as P230,000. The bank statement shows the
correct amount of P320,000.
g. The bank erroneously credited a 12,000 deposit of Eye Busy Co. to ABC’s account.

Requirement: Prepare the bank reconciliation.

📚 Remember:

・to correct the overstated

credit, debit it.
・to correct the overstated debit,
credit it.
・to correct the understated
credit, credit it.
・to correct understated debit,
debit it.

Proof of Cash
⁠⁠~an expanded bank reconciliation statement that includes proof of cash receipts and cash
disbursement.
⁠~ used to discover discrepancies in handling cash over a certain period of time.
⁠~ prepared only if needed like fraud investigations which involves cash.

Illustration:
The following information relates to ABC Co., Inc.
31-Mar 30-Apr
Book balance 396,600 540,000
Book debits 180,000
Book credits 36,600
Bank balance 280,900 445,380
Bank debits 26,900
Bank credit 191,380
Credit memos 36,000 42,000

Debit memos 10,920 16,020

Deposit in transit 46,780 131,400
Outstanding checks 28,000 19,800

Additional information:
 The outstanding checks in March include certified checks of P5,000. These were certified in
March but were presented for payment in April.
 Collections in March of P14,000 were recorded as P41,000.
 Checks drawn in April amounting to P12,000 cleared the bank for P21,000. Investigation
shows that the company committed the error.
 Deposit in March amounting to P100,000 was erroneously credited by the bank as P10,000.

Required: Prepare a proof of cash.

📚Note: All cash receipts and disbursement from previous month should be deducted in the
receipt or disbursement of proof of cash and for errors, it should either be added or
deducted from the proof of cash.