WHAT IS A BANK RECONCILATION STATEMENT?

There are instances wherein the records kept by the depositor will not reconcile with the records
kept by the bank or shall we say, the book balance will not reconcile with the bank balance.

When the bank balance will not tally with the book balance upon receipt of the bank statement,
the discrepancy should be looked into by the depositor. The process of bringing these two
independently and separately kept records into agreement is called Bank Reconciliation
Statement and it is always the depositor who does the reconciliation.

The discrepancy that will occur very often where the book and the bank balances will not
reconcile is when the book records the deposit this month while the same deposit was entered
by the bank on the next month. The book records the withdrawal this month while the same
withdrawal is recorded by the bank next month. These are called timing differences.

A discrepancy committed due to bank error is corrected by the bank itself and the depositor is in
no position to correct such error. Like for example, the bank clerk enters the deposit or
withdrawal by mistakes. Instead of account name of Davao Grocery Corporation, it was
erroneously posted to Davao Global Corporation. However, this seldom happens.

Again, it is worthy to mention that the bank reconciliation statement is prepared from the
viewpoint of the depositor and not from the bank.

RECONCILING ITEMS

The usual causes of differences between the book and the bank records are as follows:

1. Deposit in Transit - this is the deposit made by the depositor which did not appear in the
deposit column of the bank statement. This usually happens when the deposit is made on the
last day of the month and bank records the deposit on the first day of the following month.

For example, the depositor makes deposit of P2,000 in the late afternoon of August 31 (the
monthly cut-off date).. The deposit was entered by the bank on September 1. Hence, the total of
the Cash Receipts journal of the depositor will not tally with the deposit column of the bank
statement for August. The book record shows a bigger total amount as compared to bank
record by P2,000. The amount of P2,000 is referred to as deposit in transit. Thus, the amount of
P2,000 becomes a reconciling item for the month of August. In reconciling the book and the
bank balances, the amount of P2,000 is added to the un-reconciled bank balance of August.

2. Outstanding Checks - it is the check issued by the depositor to a supplier and same was not
presented by said supplier to the bank for payment within the month of issue. While the
depositor has already recorded this in the Cash Disbursements Journal during the month, the
bank did not.
For example, the depositor issued a check in the amount of P5,000 to a certain supplier. The
check is dated November 24 but the supplier did not present the check to the bank for
encashment during the month of November. He had it encashed during the month of December.
So, while the depositor has already recorded the P5,000 in the Cash Disbursements Journal as
withdrawal of November, the bank did not. This is called "outstanding check" for the month of
November.

To reconcile the book and bank balances, the outstanding check is deducted from the
un-reconciled bank balance because the bank balance shows a bigger amount by not deducting
the check of P5,000 during the month of November.

When the supplier failed to present the check to the bank for encashment or for deposit six (6)
months after from the date of issue, the check will become a "stale check" and the bank will no
longer honor the check even if the depositor has sufficient amount to cover the check. The
supplier will have it replaced by the depositor for another check.

3. NSF Checks or DAUD - when a person issued a check to another person without a
corresponding or sufficient amount of deposit to honor the check, the check becomes a
bouncing check. The bank will return the check. The check will be marked with RT (Returned
Check) or NSF (No Sufficient Fund) or DAUD (Drawn Against Un-cleared Deposit).

This becomes a reconciling item because while the depositor has recorded it already as a
deposit, the bank did not or if had been recorded by the bank, it was removed therefrom. Thus,
the book and bank balances will show a discrepancy.

For example, Mr. A issued a check in payment of his account to Mr. B in the amount of P10,000.
The latter immediately deposited it to the bank under his account name. It was later found out
that Mr. A's deposit was not enough to honor the check, so it was returned by the bank.

To reconcile the book and bank balances, the amount should be deducted from the
un-reconciled book balance because the book shows a bigger amount by not deducting the
check of P10,000 during the month.

The depositor should always be informed about the "cash in bank" balance at all times to avoid
the return of the check in order not to be penalized by the bank. NSF check will lead to a
"bouncing check" which constitutes a criminal offense punishable under Batasang Pambansa
Bilang 22 otherwise known as "Bouncing Check Law". The payee of the check or the supplier
can file a case against the depositor.

4. Service Charge - bank charges for services rendered by the bank to the depositor in
maintaining his current account is deducted outright by the bank from the depositor. The
depositor will record these charges upon receipt of the bank statement. The withdrawal column
of the bank statement is bigger than that of the total amount disbursed by the depositor. In
reconciling the book and the bank balances, the service charge is deducted from un-reconciled
book balance. Thus, this becomes a reconciling item. This is usually accompanied with a debit
memo of the bank. The same holds true when the cost of the checkbook is charged by the bank
to the depositor's deposits.

BANK RECONCILIATION AS ILLUSTRATED

There are three (3) methods of preparing a Bank Reconciliation. They are as follows:

● Bank to Book Reconciliation

● Book to Bank Reconciliation
● Adjusted Method

The most common method applied is the Adjusted Method. This will show the correct amount of
Cash in Bank account in the Statement of Financial Position.

PROCEDURES IN PREPARING BANK RECONCILIATION STATEMENT

Step 1: Compare the bank balance per bank statement against the book balance per Cash in
Bank Ledger.

Step 2: Make a pencil total in the bank statement under Deposit column and compare the total
against the debit entry in the Cash in Bank account.

Step 3: Compare the amounts in the Withdrawal column of the bank statement against the Cash
Disbursements Journal.

In step 1, the bank balance per bank statement is P19,735 while the balance per books as per
Cash in Bank account per Ledger is P20,000. Therefore, they do not reconcile.

In step 2, the purpose of doing the comparison is to find out whether all deposits made were
reflected in the Bank Statement. Better, use the Cash Receipts Journal in looking into details.

The total of the deposit column in the bank statement is P22,000 while that of Cash Receipts
Journal is P25,000. Looking into the details of the Cash Receipts Journal on page 354, it was
the collection from Mrs. Magdalena Luna of P3,000 dated February 28 under O.R. No. 0005 did
not appear in the bank deposit column. The amount of difference of P3,000 is what we call
"deposit in transit". To reconcile, add P3,000 to the bank balance.

In step 3, it is much easier to trace making use of the check number. Try to examine whether all
check numbers appearing in the Cash Disbursements Journal also appear in the Withdrawal
column. Simultaneously, try to take note entries made by the bank that do not appear in the
book record. Usually, the cost of check books and bank service charges. Be careful in
comparing the amounts.
When we compare the withdrawal column of the Bank Statement against the Cash
Disbursements Journal of the depositor, we noted the following:

a) Checks that appear in the withdrawal column:

Check No. 245751 P3,000

Check No. 245753 P2,000
Check No. 245754 P5,000

b) Checks that did not appear in the withdrawal column:

Check No. 245752 P1,000

Check No. 245755 P4,000

The checks that did not appear in the withdrawal column are called "outstanding checks". To
reconcile, outstanding checks are deducted from the bank balance.

c) Further, there are two more items that appeared in the withdrawal column of the Bank
Statement but are not found in the Cash Disbursements Journal of the depositor. These are as
follows:

Cost of the Checkbook P1,265

Service Charge P1,000

These bank charges are outright deduction from depositor's deposit. To reconcile, bank charges
are deducted from book balance.