MODULE 6 Part 2

Internal Control
of Cash
What is a Bank Reconciliation Statement
The bank reconciliation statement is an internal document that verifies the accuracy of records
maintained by the depositor and the financial institution or banks. The account to reconcile is the
CASH IN BANK account. It brings into agreement the cash balance per book and cash balance per
bank.
Cash in Bank-includes demand or checking account deposits and savings account deposits that are
unrestricted as to withdrawal.
Bank Statement-a monthly report of the bank to the depositor showing all the transactions involving
the depositor’s account, the credits, the debits reflecting the cash balance at the end of the month.
 BRS helps to detect errors in recording transactions and determining the exact bank balance as on a
specified date.

 Due to timing differences, clerical errors can occur in the company’s books and bank records and
such discrepancies will only be detected upon doing bank reconciliation statement based on the
bank statement issued by the bank every month.
 Bank Reconciliation
 To reconcile both records, identification of reconciling items must be done by comparing the
postings regarding cash in the books of the bank as reported in the Bank Statement and in the
depositor’s books.

 COMMON RECONCILING ITEMS

1. Deposits in transit .Collections of the company which are deposited already in the bank but not yet reflected in the bank
statement because it did not catch up with the cut-off period during the month and will be reported only in the bank
statement of the following month.
2. Outstanding Checks . These are checks written but not yet reported in the bank statement maybe because the holder of
the check did not present it yet to the bank or still within the clearing period. This will appear in the next month bank
statement.
3. Bank Credit memo. A written advice from the bank that the amount of depositor’s cash in bank increased maybe due
to :
Interest earned, collection made by the bank for the account of the company.
4. Bank debit memo. A written advice from the bank informing of the decrease in depositor’s balance in bank maybe due
to the following:
Bank service charge, cost of checks ordered by the company, etc.
5. Clerical errors. Committed either in the bank records or in the depositor’s record.
Examples of Reconciling Items
Credit Memos-items not representing deposits but Debit Memos-items not representing checks paid by
credited by the bank to the account of depositor but not bank which are charged or debited by the bank to the account
yet recorded by the depositor as cash receipts. It increase of depositor but not yet recorded by the depositor as cash
the bank balance. disbursements. It decrease the bank balance.
1. Notes Receivable collected by bank in favor of the 1. NSF or “No Sufficient Fund” checks – these are checks
depositor and credited the same to the depositor’s deposited but returned by bank because of insufficiency of
account. fund. Another term for NSF is DAIF or “drawn against
insufficient fund”.
2. Proceeds of bank loan credited to the account of
depositor 2. Technically defective checks – refers to checks deposited
but returned by bank because of technical defects such as
3. Matured time deposits transferred by the bank to the absence of signature or countersignature, erasures not
current account of depositor. countersigned, mutilated checks, conflict between amount in
words and in figures.
3. Bank service charges-charges for interest, collection, cost
of checkbook, penalty.
4. Reduction of Loan-amount deducted from the account of
depositor in payment for loan which the depositor owes from
the bank that has already matured.
 ILLUSTRATION 1:
At the end of the month Dec 31, 2020, the bank statement showed the following postings:

ABC BANK
Paseo de Roxas, Makati

Current Account No. 123456: Song Enterprises December 2020

WITHDRAWALS DEPOSITS BALANCE
Beginning Balance P50,000
Deposits 210,000 260,000
Check cleared 255,000 5,000
Bank Charges-DM 200 4,800

The Cash in Bank account in the General Ledger of the company shows the following entries:

Account: CASH IN BANK-ABC Bank Account Code: 101

Date Particulars PR Debit Credit Balance

2020
12/1 Beginning balance P50,000
12/15 Collections CRJ 250,000
12/30 Check payment CkR 290,000 P10,000
Comparing Records
 Upon receipt of the bank statement, the reconciliation should start by comparing the
postings in the two records. Based on our illustration the following discrepancies could be
identified:
1. The amount of deposits recorded by book is more by P40,000 than what was recorded in
the bank. The difference could be deposit in transit, assuming no clerical error was
committed.
2. The amount of check recorded in the books is more by P35,000 compared to the checks
that was cleared by the bank. The difference could be Outstanding checks already issued to
payees but have not been cleared/ presented to the bank for clearing.
3. The bank debit memo for P200 was not reflected in the ledger.

**Stale checks- checks presented to bank beyond six months (180 days).
Based on the these findings, the bank reconciliation statement could be prepared as
follows:
Song Enterprises
Bank Reconciliation Statement
December 31, 2020

Per Bank Per Book

Unadjusted Balances P4,800 P10,000
Deposit in transit 40,000
Outstanding Checks (35,000)
Bank Charges (200)
Adjusted Balances 9,800 9,800

Adjustments:

1. Bank Charges P200.00

Cash in Bank-ABC Bank P200.00
 ILLUSTRATION 2:
The cash records of BSA Inc. show the following balances for the month of January 2019:

2019 CASH RECEIPTS CASH DISBURSEMENTS

January 5 P60,000 January 6 Chk No. 721 P5,000

13 20,000 7 Chk No. 722 10,000

25 30,000 10 Chk No. 723 18,000
31 40,000 14 Chk No. 724 2,000
28 Chk No. 725 37,000
31 Chk No. 726 28,000
P150,000 P100,000

Account: CASH IN BANK-MY Bank Account Code: 101

Debit Credit
Jan 31 CRJ 150,000 Jan 31 CR P100,000

Balance P50,000
Bank Recon…
Account No. 54321 MY Bank
BSA, Inc. Manila, Phils.
Batangas City

Date Check No. Withdrawals Deposits Balance

Jan 6 P60,000 P60,000
8 721 P5,000 55,000
11 722 10,000 45,000
12 723 18,000 27,000
14 20,000 47,000
17 724 2,000 45,000
26 30,000 75,000
26 CM 15,000 90,000
30 RT 5000 85,000
30 SC 1,000 84,000
Ref: CM-credit memo RT-returned checks
DM-debit memo SC-service charge

ADDITIONAL DATA:
1. The CM of P15,000 on January 26 represents proceeds of Notes collected by bank in favor of the company.
2. The RT of P5,000 represents check of customer paid to the company and deposited to the bank previously but
subsequently returned by bank because of “no sufficient fund” or NSF
GENERAL PROCEDURES IN PREPARING RECONCILIATION

1. Determine balance per book and balance per bank.

As shown in the illustration the book balance is P50,000 and the bank balance is P84,000.
2. Trace cash receipts to the bank statement to ascertain whether there are deposits not yet acknowledged by bank.
Based on our illustration, the cash receipts of P40,000 does not appear in the bank statement and therefore represents “deposit in
transit”.
3. Trace the checks issued versus the bank statement to determine checks not yet presented to the bank for payment.
In our sample problem, Check#725 for P37,000 and #726 for P28,000 do not appear in the bank statement. These are considered
outstanding checks.
4. Examine the bank statement to determine bank credits and bank debits not yet recorded by the depositors.
The CM of 15,000 and the DM of 5,000 for returned checks and service charge of P1,000 are all reconciling items of the book.
5. Lastly, watch out for errors. They are reconciling items of the party who committed them,

To reconcile, there are several methods to be be used:

1. Adjusted balance method.
2. Book to bank balance method
3. Bank to book balance method…
ADJUSTED BALANCE METHOD

BSA, INC.
Bank Reconciliation Statement
January 31, 2019
Balance per Book P50,000
Add: Note collected by bank 15,000
Total 65,000
Less: NSF check 5,000
Bank service charge 1,000 6,000

Adjusted balance per book P59,000

Balance per Bank 84,000

Add: Deposit in Transit 40,000
Total 124,000
Less: Outstanding checks:
# 725 37,000
#726 28,000 65,000

Adjusted balance per Bank P59,000

Adjusting Entries
1. Cash in Bank-My Bank P15,000
Notes Receivable P15,000
To record note collected by bank in favor of BSA.

2. Accounts Receivable 5,000

Cash in Bank-My Bank 5,000
To record returned check by bank due to NSF.

3. Bank Charges 1,000

Cash in Bank-My Bank 1,000
To record bank service charge incurred.

REMINDERS:

Only reconciling items of the book should be adjusted in order to bring the cash in bank balance per
General Ledger in agreement with the bank balance.
PRACTICE PROBLEM

Ellee Phils., Inc. has the following transaction in its ledger affecting CASH IN BANK-BPI for
the month of December, 2020 as follows:
Date Deposits Checks Issued Balance
Dec 1 Balance P100,000
Chk#771 P20,000 80,000
4 Chk#772 5,000 75,000
6 P30,000 105,000
Chk#773 35,000 70,000
10 Chk#774 15,000 55,000
12 40,000 95,000
14 Chk#775 30,000 65,000
18 Chk#776 25,000 40,000
24 50,000 90,000
Chk#777 40,000 50,000
31 60,000 110,000
The following Bank Statement was received from BPI:

Acct.No. 678910
Ellee Philippines, Inc. BPI, Makati
DATE CHECKS PAID CHECK AMOUNT DEPOSITS BALANCE

DEC. 1 Balance P130,000

Chk#768 P10,000
#771 20,000

4 #772 5,000
6 #773 35,000 30,000
12 #774 15,000 40,000
12 #776 52,000
24 #1042 8,000 50,000
28 NSF check 10,000
CM 45,000
28 Service Charge 5,000
DM check book 1,500 133,500

Additional data
1. Ellee Phils. bank reconciliation of November 30 showed two (2) REQUIRED:
outstanding checks: #768 for 10,000 and #770 for P20,000. 1. Prepare Bank Reconciliation Statement for December
2. Check #1042 was drawn by Ellie Company but the bank charged 2020
it in error to the account of Ellee Phils.
3. Check #776 was correctly drawn for 52,000 in payment of
2. Prepare journal entries to bring the cash balance in
accounts with supplier but it was entered in the books by the
agreement with the bank balance.
bookkeeper as P25,000.
4. The CM on Dec 28 was proceeds of P50,000, less collection fee
of P5,000.
5. The NSF check was received from a customer on account. .
Next Module 7 THANK YOU!
 Ellee Phils. Inc.
Bank Reconciliation Statement
December 31, 2020

Balance per Book P110,000

Add: Note collected 45,000
Total 155,000 Adjusting Entries DR CR
Less: NSF check P10,000
Bank Charges 6,500 1. Cash in Bank-BPI 45,000
Error in recording Ch#776 : Bank Charges 5,000
Recorded at P25,000 Notes Receivable P50,000
Should be 52,000 27,000 43,500
2. Accounts Receivable 10,000
Adjusted balance per Books 111,500 Cash in Bank-BPI 10,000
3. Bank Charges (checkbook) 1,500
Balance per Bank 133,500 Cash in Bank-BPI 1,500
Add: Deposit in Transit 60,000
Bank error-Ellie Company’s check 8,000
4. Accounts Payable 27,000
Total 201,500 Cash in Bank-BPI 27,000
Less: Outstanding Check:
#770 20,000
#775 30,000
#777 40,000 90,000
Adjusted balance per Bank 111,500