CHAPTER 2 (BANK RECONCILIATION) Company X 30,000

▲Kinds of Bank Deposits Cash 30,000

• Demand deposit – the current account or checking account or commercial
deposit where deposits are covered by deposit slips and where funds are - When a check is issued, the payee will present the same to the bank for
withdrawable on demand by drawing checks against the bank. payment.
- A demand deposit is noninterest bearing
- The depositor is actually ordering the bank to pay the payee out of its
deposit in the bank.
• Saving deposit - This is the reason the bank debits the account of the depositor thereby
- In a saving deposit, the depositor is given a passbook upon the initial reducing its liability to the depositor.
deposit. The passbook is required when making deposits and withdrawals. - Thus, when the depositor's account is decreased, the same is debited.
- Withdrawals are made anytime but the bank sometimes may require notice - At this point, when balances are extracted, the cash in bank account on the
of withdrawal. depositor's book has a balance of P70,000 and the Company X account on the
- A saving deposit is interest bearing. book of the bank has also a balance of P70,000.

• Time deposit ■ Explanation

- The time deposit is similar to saving deposit in the sense that it is interest - The two accounts have equal or the same balances because they are
bearing. reciprocal accounts.
- A time deposit is evidenced, however, by a formal agreement embodied in an - This means that when one account is debited, the other account is credited or
instrument called certificate of deposit. vice versa.

- Time deposit may be preterminated or withdrawn on demand or after a - The reason for this is that the two accounts cover or reflect the same items or
certain period of time agreed upon. transactions.
- Thus, if no errors are committed in recording, and the same information has
been recorded by both accounts, the two should have equal or the same
▲ Bank Reconciliation
balances.
- A bank reconciliation is necessary only for a demand deposit or checking
- But very frequently, there are items on the depositor’s book which do not
account.
appear on the bank records as of the same date.
- When an account is opened at the bank, the person authorized to draw
- For example, checks issued by the depositor are not yet presented for
checks against the account will be required to sign cards furnished by the
payment to the bank or deposits may have been made after the bank records
bank, to show the specimen signatures to be used on the checks.
are sent out to the depositor.
- These specimen signatures will be filed by the bank so that any teller who - And less frequently, there are items on the bank records which do not appear
may be unfamiliar with a depositor's signature can test the authenticity of a on the depositor's book.
check by comparing the depositor's signature on the card with the signature on
the check.
- If the depositor is a corporation, the bank will request that the directors pass For example:
a resolution authorizing certain officers of the corporation as signatories of a. The bank may have charged the depositor's account with service charges
checks and that a copy of this resolution be filed with the bank. which the depositor may not know about until a report is received from the
bank.
• Fundamental Transactions Affecting the Depositor and the Bank. b. Notes endorsed to the bank for collection have been collected by the bank
and credited to the depositor's account but notice of collection is not yet
Assume that Company X (the depositor) collected P100,000 from a customer
received from the bank by the depositor.
in settlement of an account. The collection is deposited at the First Bank.
In the light of the foregoing, it becomes necessary to prepare a bank
reconciliation.
Book
Cash (or cash in bank) 100,000
• Bank reconciliation – a statement which brings into agreement the cash
Accounts receivable 100,000 balance per book and cash balance per bank.
- The reconciliation is usually prepared monthly because the bank provides
Bank the depositor with the bank statement at the end of every month.
Cash 100,000
Company X 100,000 ■ Bank statement – a monthly report of the bank to the depositor showing:
a. The cash balance per bank at the beginning
- The journal entry on the books of the bank shows the credit is Company X b. The deposits made by the depositor and acknowledged by the bank
account. This is made, for our purpose, to facilitate, the illustration. c. The checks drawn by the depositor and paid by the bank
- In practice, however, the account credited by the bank is demand deposit d. The daily cash balance per bank during the month
account but the same is posted to the subsidiary ledger of Company X.
- When the bank credits the account of the depositor, Company X, it
- The bank statement is an exact copy of the depositor's ledger in the records
recognizes its liability to the depositor.
of the bank.
- Legally, when a deposit is made, there exists a debtor-creditor relationship
- When the bank statement is received, attached thereto are the depositor's
between the bank and the depositor, the bank being the debtor, and the
cancelled checks and any debit or credit memoranda that have affected the
depositor being the creditor.
depositor's account
- Hence, when the account of the depositor is increased the same is credited.
- The cancelled checks are the checks issued by the depositor and paid by the
bank during the month.
Let us assume further that Company X subsequently issued a check for - These are called cancelled checks because they are literally cancelled by
P30,000 in payment of an account payable. stamping or punching to show that they have been paid.

Book
Accounts payable 30,000
Cash 30,000
Bank
▲ Reconciling Items • Adjusted Balance Method – under this method, the book balance and the
• Book reconciling items: bank balance are brought to a correct cash balance that must appear on the
balance sheet.
■ Credit memos
• Book to bank method – under this method, the book balance is reconciled
■ Debit memos with the bank balance or the book balance adjusted to equal the bank balance.
■ Errors • Bank to book method – under this method, the bank balance is reconciled
with the book balance or the bank balance is adjusted to equal the book
• Bank reconciling items balance.
■ Deposits in transit
■ Outstanding checks - The first method is preferred over the other two.
■ Errors
▲ Proforma reconciliation
• Credit memos – items not representing deposits credited by the bank to the • Adjusted balance method
account of the depositor but not yet recorded by the depositor as cash receipts. Book balance xxx
- The credit memos have the effect of increasing the bank balance. Add: Credit memos xxx
Total xxx
■ Examples of Credit Memos Less: Debit memos xxx
a. Notes receivable collected by bank in favor of the depositor and credited to Adjusted book balance xxx
the account of the depositor.
Bank balance xxx
b. Proceeds of bank loan credited to the account of the depositor Add: Deposits in transit xxx
c. Matured time deposits transferred by the bank to the current account of the Total xxx
depositor.
Less: Outstanding checks xxx
Adjusted bank balance xxx
• Debit memos – items not representing checks paid by bank which are
charged or debited by the bank to the account of the depositor but not yet
recorded by the depositor as cash disbursements. - The reconciling items of the book are simply termed as credit memos and
- The debit memos have the effect of decreasing the bank balance. debit memos.
- No details are shown to simplify the illustration.
■ Examples of Debit Memos - In actual formal reconciliation, details will have to be shown.

a. No Sufficient Fund Checks (NSF) – checks deposited but returned by the - Moreover, errors are excluded because no definite rule can be made whether
bank because of insufficiency of fund. these are to be added or deducted.

- The other name for NSF is DAIF or drawn against insufficient fund - Errors will have to be analyzed for proper treatment.
b. Technically Defective Checks – checks deposited but returned by the bank - However, errors are reconciling items of the party which committed them.
because of technical detects such as absence of signature or countersignature, - It will be observed that under the adjusted balance method, the credit memos
erasures not countersigned, mutilated checks, conflict between amount in are always added to the book balance and the debit memos are always
words and amount in figures. deducted from the book balance.
c. Bank Service Charges – include bank charges for interest, collection, - Deposits in transit are always added to the bank balance and the outstanding
checkbook and penalty. checks are always deducted from the bank balance.
d. Reduction of Loan – pertains to amount deducted from the current account
of the depositor in payment for loan which the depositor owes to the bank and ■ Explanation
which has already matured.
- The adjusted balance method means that the book balance and the bank
balance are adjusted to equal the correct cash balance
• Deposits in Transit – collections already recorded by the depositor as cash - Credit memos already increased the bank balance but have no effect on the
receipts but not yet reflected on the bank statement book balance because the credit memos are not yet recorded by the depositor.
- Consequently, the book balance is understated in relation to the correct cash
■ Inclusion in Deposits in Transit balance.
a. Collections already forwarded to the bank for deposit but too late to appear - Hence, credit memos are added to the book balance.
in the bank statement. - Debit memos already decreased the bank balance but have no effect on the
b. Undeposited collections or those still in the hands of the depositor. In book balance because the debit memos are not yet recorded by the depositor.
effect, these are cash on hand awaiting delivery to the bank for deposit. - Consequently, the book balance is overstated in relation to the correct cash
balance.
• Outstanding checks – checks already recorded by the depositor as cash - Hence, debit memos are deducted from the book balance.
disbursements but not yet reflected on the bank statement. - Deposits in transit already increased the book balance but have no effect on
the bank balance because the deposits are not yet recorded by the bank.
■ Inclusion in Outstanding Checks - Consequently, the bank balance is understated in relation to the correct cash
a. Checks drawn and already given to payees but not yet presented for balance.
payment. - Hence, deposits in transit are added to the bank balance
b. Certified checks – a check where the bank has stamped on its face the - Outstanding checks already decreased the book balance but have no effect
word "accepted" or "certified" indicating sufficiency of fund on the bank balance because the checks are not yet paid by the bank.
- When the bank certifies a check, the account of the depositor is immediately - Consequently, the bank balance is overstated in relation to the correct cash
debited or charged to insure the eventual payment of the check. balance.
- Certified checks should be deducted from the total outstanding checks (if - Hence, outstanding checks are deducted from the bank balance.
included therein) because they are no longer outstanding for bank
reconciliation purposes.

• Book to Bank Method

▲ Forms of Bank Reconciliation
Book balance xxx The cash records of Company X show the following for the month of January
Add: Credit memos xxx Cash Receipts Cash Disbursements
Outstanding checks xxx xxx Jan. 5 60,000 Jan. 6 Check No. 721 5,000
Total xxx 13 20,000 7 Check No. 722 10,000
Less: Debit memos xxx 25 30,000 10 Check No. 723 18,000
Deposits in transit xxx xxx 31 40,000 14 Check No. 724 2,000
Bank balance xxx 150,000 28 Check No. 725 37,000
31 Check No. 726 28,000
- When the reconciliation starts with the book balance and ends with the bank 100,000
balance, the usual book reconciling items are treated in the same manner they The general ledger of the company shows the cash in bank account for
are treated in the "adjusted balance method", that is, credit memos are added January as follows:
and debit memos are deducted.
- However, with respect to the bank reconciling items the treatment is simply Cash in bank – First Bank
"reversed." Jan. 31 CR 150,000 Jan. 31 CD 100,000
- Thus, since the deposit in transit is added to the bank balance, it is now
deducted from the book balance, and since the outstanding check is deducted The balance of the cash in bank on the depositor’s book is P50,000
from the bank balance, it is now added to the book balance.

■ Bank statement
■ Explanation of Reversal Rule
The following is the bank statement for January received from the First Bank:
- The book to bank method means that the book balance is adjusted to equal
the bank balance.
- Deposits in transit already increased the book balance but have no effect on
the bank balance because the deposits are not yet recorded by the bank.
- Consequently, the book balance is overstated in relation to the bank balance.
Hence, deposits in transit are deducted from the book balance following the
book to bank method.
- On the other hand, outstanding checks already decreased the book balance
but have no effect on the bank balance because the checks are not yet paid by
the bank. Consequently, the book balance is understated in relation to the bank
balance.
- Hence, outstanding checks are added to the book balance, following the
book to bank method.
The following data are gathered in connection with the CM and DM
appearing on the bank statement:
• Bank to book method
a. The CM of P15,000 on January 26 represents proceeds of note collected by
Bank balance xxx the bank in favour of the company
Add: Deposits in transit xxx b. The RT of P5,000 represents check of customer deposited previously but
Debit memos xxx xxx returned by the bank because of “no sufficient fund” or NSF
Total xxx
Less: Outstanding checks xxx ▲ General Procedures in Preparing the Reconciliation.
Credit memos xxx xxx a. Determine the balance per book and the balance per bank.
Book balance xxx - As mentioned earlier, the cash in bank account on the book of the depositor
has a debit balance of P50,000.
- The bank balance is shown on the bank statement as the final item, P84,000.
- When the reconciliation starts with the bank balance and ends with the book
balance, the usual bank reconciling items are treated in the same manner they b. Trace the cash receipts to the bank statement to ascertain whether
are treated in the "adjusted balance method", that is, deposit in transit is added there are deposits not yet acknowledged by the bank.
and outstanding check is deducted. - In the illustrative problem, the cash receipt of P40,000 on January 31 does
- However, with respect to the book reconciling items, the treatment is simply not appear in the bank statement.
"reversed". - This represents deposit in transit.
- Thus, since the credit, memos are added to the book balance they are now c. Trace the checks issued to the bank statement to ascertain whether
deducted from the bank balance, and since the debit memos are deducted from there are checks not yet presented for payment.
the book balance, they are now added to the bank balance. - In the illustrative problem, Check Nos. 725 for P37,000 and 726 for P28,000
do not appear in the bank statement.
■ Explanation of Reversal Rule - These are outstanding checks.
- The bank to book method means that the bank balance is adjusted to equal d. The bank statement should be examined to determine whether there
the book balance. are bank credits or bank debits not yet recorded by the depositor.
- Debit memos already decreased the bank balance but have no effect on the - In the illustrative problem there is CM of P15,000 and DM for returned
book balance because they are not yet recorded by the depositor. check of P5,000 and service charge of P1,000.
- Consequently, the bank balance is understated in relation to the book e. Watch out for errors.
balance. Hence, debit memos are added to the bank balance. - Again, errors are reconciling items of the party which committed them. - In
- On the other hand, credit memos already increased the bank not yet recorded the illustrative problem, there are no errors committed.
by the depositor book balance
- Hence, credit memos are deducted from the bank balance but have no effect
At this point, a formal reconciliation may be prepared because all the
on the book balance because they are not yet recorded by the depositor
reconciling items have already been determined.
- Consequently, the bank balance is overstated in relation to the book balance.
Hence, credit memos are deducted from the bank balance
• Adjusted Balance Method
• Illustration
Balance per book 50,000
Add: Note collected by bank 15,000 - For example, the collection from customer which is deposited amounts to
Total 65,000 P10,000 but recorded in the book only as P1,000.
Less: NSF customer check 5,000 - There is an understatement of cash receipt of P9,000. The error is added to
the book balance and adjusted as follows:
Service charge 1,000 6,000
Cash in bank 9,000
Adjusted book balance 59,000
Accounts receivable 9,000
Balance per bank 84,000
Add: Deposit in transit 40,000
b. Understatement of checks drawn by depositor.
Total 124,000
For example, a check in payment of account payable amounting to P20,000 is
Less: Outstanding checks: recorded in the book as P2,000.
Check No. 725 37,000
There is an understatement of cash disbursement and a consequent
Check No. 726 28,000 65,000 overstatement of book balance in the amount of P18,000. The error is
Adjusted bank balance 59,000 deducted from the book balance and adjusted, as follows:
Accounts payable 18,000
▲ Preparation of Adjusting Entries Cash in bank 18,000
- Only the book reconciling items require adjusting entries on the book of
depositor. This is but understandable. c. Deposit of another entity is credited by the bank to the account of the
- The adjustments are necessary to bring the cash in bank balance to its correct depositor.
balance for statement presentation purposes. - This is a deduction from the bank balance because it erroneously increased
• To record the note collected by bank: the account balance of the depositor in the bank. No adjustment is necessary
on the book of the depositor.
Cash in bank 15,000
Notes receivable 15,000
d. Check of another entity charged to the account of the depositor.
• To record the NSF customer check:
- This is an addition to the bank balance because it erroneously decreased the
Accounts receivable 5,000
account balance of the depositor in the bank. No adjustment is necessary on
Cash in bank 5,000 the book of the depositor.
• To record the bank service charge:
Bank service charge 1,000
Cash in bank 1,000

In the preparation of adjustments, an item added to the book balance is

debited to cash and an item deducted from book balance is credited to cash

• Book to Bank Method

COMPANY X
Bank Reconciliation
January 31
Balance per book 50,000
Add: Note collected 15,000
Outstanding checks No. 725 37,000
No. 726 28,000 65,000 80,000
Total 130,000
Less: NSF check 5,000
Service charge 1,000
Deposit in transit 40,000 46,000
Balance per bank 84,000

• Bank to Book Method

COMPANY X
Bank Reconciliation
January 31
Balance per bank 84,000
Add: Deposit in transit 40,000
NSF check 5,000
Service charge 1,000 46,000
Total
Less: Outstanding checks
No. 725 37,000
No. 726 28,000 65,000
Note collected by bank 15,000 80,000
Balance per book 50,000
▲ Some Errors and their Correction
a. Understatement of Cash Receipts on the Book of Depositor.