1.3.3.

Bank Reconciliation
Cash is one of the most susceptible to misappropriation and losses. Companies establish internal control
measures to safeguard all cash receipts and disbursements. Therefore companies would deposit all cash
receipts in the bank and disbursements are made by issuance of checks. The petty cash fund is maintained
in order to pay for minor expenses and keep small change in custody. For internal control purposes,
current day’s receipts are deposited intact and in no way be used for any disbursements.

The record of all cash receipts and disbursements must be accounted for. The company must periodically
prove the balance in the general ledger by comparing actual cash on hand (undeposited cash, petty cash
fund, change fund) against bank records. A bank reconciliation compares company’s record and the
bank’s record of the company’s cash.

Bank Deposits

Most companies maintain a general checking account or otherwise known as a demand deposit. It is a
noninterest bearing deposit account that allows deposits but withdrawals are mainly through checks.
Savings deposits on the other hand are interest bearing to which a passbook is given to depositor to show
record of deposits and withdrawal in the account. Some companies may sometimes avail of a
combination deposit of savings and checking where its checking account is linked to the passbook savings
account. In this way, maintaining balance in checking account is kept at a minimum while the bulk is in the
savings accounts where interest is earned. All check issuances are posted a withdrawal in the passbook
account.

Reconciliation of Balances

At the end of each calendar month the bank supplies each customer with a bank statement (a copy of the
bank's account with the customer) together with the customer's checks that the bank paid during the
month. If neither the bank nor the customer made any errors, if all deposits made and all checks drawn by
the customer reached the bank within the same month, and if no unusual transactions occurred that
affected either the company's or the bank's record of cash, the balance of cash reported by the bank to the
customer equals that shown in the customer's own records. This condition seldom occurs due to one or
more of the reconciling items presented below (adopted from Kieso, et.al. 2019):

Reconciling Items

• Deposits in Transit. End-of-month deposits of cash recorded on the depositor's books in one
month are received and recorded by the bank in the following month.
• Outstanding Checks. Checks written by the depositor are recorded when written but may not
be recorded by (may not “clear”) the bank until the next month.
• Bank Charges. Charges recorded by the bank against the depositor's balance for such items as
bank services, printing checks, not-sufficient-funds (NSF) checks, and safe-deposit box rentals.
The depositor may not be aware of these charges until the receipt of the bank statement.
 • Bank Credits. Collections or deposits by the bank for the benefit of the depositor that may be
unknown to the depositor until receipt of the bank statement. Examples are note collection
for the depositor and interest earned on interest-bearing checking accounts.
• Bank or Depositor Errors. Errors on either the part of the bank or the part of the depositor
cause the bank balance to disagree with the depositor's book balance.

Hence, a company expects differences between its record of cash and the bank's record. Therefore, it
must reconcile the two to determine the nature of the differences between the two amounts. A bank
reconciliation is a schedule explaining any differences between the bank's and the company's records of
cash. If the difference results only from transactions not yet recorded by the bank, the company's record
of cash is considered correct. But, if some part of the difference arises from other items, either the bank or
the company must adjust its records.

The Bank and Book Transactions

The cash records of the company and of the bank should match. Any entry in the books of the company
should have a corresponding entry in the books of the bank. For cash receipts for example, the company
debits Cash in Bank while the bank credits Company’s account.

Example:

Assume that BA Company maintains a deposit in DC Bank. When BA Company collects cash from a
customer (assuming from sales) for P50,000, the said amount is deposited to DC Bank. The journal entries
in both books are:

BA Company:

Cash in Bank (DC Bank) 50,000

Sales 50,000

Upon deposit to the bank, DC Bank records:

Cash 50,000

BA Company 50,000

Assume further that BA Company issued a check for P15,000 in payment for an accounts payable, the
entries to be made are:

BA Company:

Accounts Payable 15,000

Cash in Bank (DC Bank) 15,000

DC Bank

BA Company 15,000
 Cash 15,000

If no other transactions occurred, then the cash ledger balance in BA Company would be P35,000, while
DC Bank will report a P35,000 balance in BA Company’s account.

In most instances, the two records are not in balance because of time difference. The company may have
on hand cash collections that are still undeposited to the bank. Upon receipt of cash, an entry has been
made debiting the Cash in Bank account; therefore the cash ledger would be greater than the balance in
the bank’s records.

Also the company may have issued check in payment of an obligation, passing an entry crediting Cash in
Bank. The check may not have yet been presented to the bank, thus no corresponding entry debiting the
company’s account has yet been made.

On the side of the bank, they are may be items that the bank record in the depositor’s account which have
not yet taken up in the company’s books. Examples:

1. The bank charged the company with service charges, debiting the account.
2. The bank may have collected notes receivable of the company and credited to the company’s
account.

The Statement of Bank Reconciliation

The bank reconciliation brings into agreement the cash balance per book and cash balance per bank. The
company’s cash ledger balance is reconciled with the bank statement issued by the bank. The bank
statement is a monthly report issued by the bank to its depositors. It contains:

1. The cash balance per bank at the beginning of the month.

Specific Explanation of Reconciling Items (Valix)

Credit Memos – refer to items not representing deposits credited by the bank to the account of the
deposit but not yet recorded by the deposit as cash receipts. The credit memos have the effect of
increasing the bank balance. Examples:

1. Note receivable collected by bank in favor of the depositor and credited to the account of the
depositor.
2. Proceeds of bank loan credited to the account of the depositor.
3. Matured time deposits transferred by the bank to the current account of the depositor.

Debit Memos – refer to 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 deposit as cash disbursements. The
debit memos have the effect of decreasing the bank balance. Examples:
 1. NSF or no sufficient fund checks (or drawn against insufficient fund, DAIF) – these are checks
deposited but returned by the bank because of insufficiency of fund.
2. Technically defective checks – checks deposited but returned by the bank because of
technical defects such as absence of signature or countersignature, erasures not
countersigned, mutilated checks, conflict between amount in words and mount in figures.
3. Bank service charges – these include bank charges for interest, collection, checkbook and
penalty.
4. Reduction of loan – this pertains to amount deducted from the current account of the
depositor in payment for loan which the depositor owes to the bank and which has already
matured.

Deposit in Transit – are collections already recorded by the company as cash receipts but not yet reflected
on the bank statement. These include:

1. Collections already forwarded to the bank for deposit but too late to appear in the bank
statement.
2. Undeposited collections or those still in the hands of the company. In effect, these are cash on
hand awaiting delivery to the bank for deposit.

Outstanding Checks – are checks already recorded by the depositor as cash disbursements but not yet
reflected on the bank statement. These include:

1. Checks drawn and already given to payees but not yet presented for payment.
2. Certified checks – a certified check is one where the bank has stamped on its face the word
“accepted” or “certified” indicating sufficiency of fund. The account of the depositor is
immediately debited or charged to insure the eventual payment of the check.

Forms of Bank Reconciliation

1.
1.
1. Adjusted balance method – the book balance and the bank balance
are brought to a correct cash balance that must appear in the
statement of financial position.
2. Book to bank method – the book balance is reconciled with the bank
balance or the book balance is adjusted to equal the bank balance.
3. Bank to book method – the bank balance is reconciled with the book
balance or the bank balance is adjusted to equal the book balance.

Proforma Reconciliation

Adjusted Balance Method

Book balance xxx

Total xxx

Less: debit memos xxx

Adjusted book balance xxx

Bank balance xxx

Add: deposits in transit xxx

Total xxx

Less: outstanding checks xxx

Adjusted bank balance xxx

Note: any errors are reconciling items of the party which committed them.

Book to Bank Method

Book balance xxx

Add: credit memo xxx

Outstanding checks xxx xxx

Total xxx

Less: debit memos xxx

Deposit in transit xxx xxx

Bank balance xxx

Bank to Book Method

Bank balance xxx

Add: Deposit in transit xxx

Debit memo xxx xxx

Total xxx

Less: Outstanding checks xxx

Credit memos xxx xxx

Book balance xxx

Nugget Mining Company's books show a cash balance at the Denver National Bank on November 30,
2019, of $20,502. The bank statement covering the month of November shows an ending balance of
$22,190. An examination of Nugget's accounting records and November bank statement identified the
following reconciling items.

1. A deposit of $3,680 that Nugget mailed November 30 does not appear on the bank
statement.
2. Checks written in November but not charged to the November bank statement are:

Check #7327 $ 150

#7348 4,820

#7349 31

3. Nugget has not yet recorded the $600 of interest collected by the bank November 20 on
Sequoia Co. bonds held by the bank for Nugget.
4. Bank service charges of $18 are not yet recorded on Nugget's books.
5. The bank returned one of Nugget's customer's checks for $220 with the bank statement,
marked “NSF.” The bank treated this bad check as a disbursement.
6. Nugget discovered that it incorrectly recorded check #7322, written in November for $131 in
payment of an account payable, as $311.
7. A check for Nugent Oil Co. in the amount of $175 that the bank incorrectly charged to
Nugget accompanied the statement.

Nugget reconciled the bank and book balances to the correct cash balance of $21,044.
The journal entries required to adjust and correct Nugget's books in early December 2019 are taken from
the items in the “Balance per books” section and are as follows.

To record interest on Sequoia Co. bonds, collected by bank

Cash 600

Interest Revenue 600

To correct error in recording amount of check #7322

Cash 180

Accounts Payable 180

To record bank service charges for November

Office Expense (bank charges) 18

Cash 18

To record customer's check returned NSF

Accounts Receivable 220

After posting the entries, Nugget's cash account will have a balance of $21,044. Nugget should return the
Nugent Oil Co. check to Denver National Bank, informing the bank of the error.

Comprehensive Illustration (Valix)

The general ledger of the company will show cash in bank account for January of P50,000.

The bank statement for January received from First Bank:

Additional information:
 • The CM of P15,000 on January 26 represents proceeds of not collected by the bank in favor
of the company.
• The RT of P5,000 represents check of customer deposited previously but returned by the
bank because of “no sufficient fund” or NSF.

General procedures:

1. Determine the balance per book and the balance per bank: P50,000 for the books and
P84,000 for the bank.
2. Trace the cash receipts to the bank statement to ascertain whether there are deposits not yet
acknowledged by the bank.
o Cash receipt of P40,000 on Jan 31 does not appear in the bank statement. This
represents deposit in transit.
3. Trace the checks issued to the bank statement to ascertain whether there are checks not yet
presented for payment.
o Checks no. 725 for P37,000 and 726 for P28,000 do not appear in the bank
statement. These are outstanding checks.
4. The bank statement should be examined to determine whether there are bank credits or bank
debits not yet recorded by the depositor. There is CM for P15,000 and DM for returned
check of P5,000 and service charge of P1,000.
5. Watch out of errors.

Bank Reconciliations:
Adjusting entries:
To record the note collected by bank:

Cash in bank 15,000

Notes receivable 15,000

To record the NSF customer check:

Accounts receivable 5,000

Cash in bank 5,000

To record the bank service charge:

Bank service charge 1,000

Cash in bank 1,000

Some errors and their correction:

1. Understatement of cash receipts on the book of the depositor. Example, the collection from customer
which is deposited amounts to P10,000 but recorded in the book only as P1,000. There is an
understatement of cash receipt of P9,000. The error is added to the book balance and adjusted as follows:

Cash in bank 9,000

Accounts receivable 9,000

2. Understatement of checks drawn by depositor. For example, a check in payment of accounts payable
amounting to P20,000 is recorded in the books as P2,000. There is an understatement of cash
disbursement and a consequent overstatement of book balance in the amount of P18,000. The error is
deducted from the book balance and adjusted as follows:

Accounts payable 18,000

Cash in bank 18,000

3. Deposit of another entity is credited by the bank to the account of the depositor. This is a deduction
from the bank balance because it erroneously increased the account balance of the depositor in the
bank. No adjustment is necessary on the book of the depositor.

4. Check of another entity charged to the account of the depositor. This is an addition to the bank balance
because it erroneously decreased the account balance of the depositor in the bank. No adjustment is
necessary on the book of the depositor.