Chapter 2
Bank Reconciliation
necessary only for demand deposit accounts
Bank Deposits (3 kinds):
1. Saving deposit
- Depositor is given a passbook which is required when making deposits and withdrawals
- interest-bearing
2. Time deposit
- Evidenced by a formal agreement embodied in certificate of deposit
- may be pre-terminated/withdrawn on demand or after a certain period agreed upon
- interest-bearing
3. Demand deposit
- current/checking account or commercial deposit
- deposits are covered by deposit slips
- withdrawal on demand by drawing checks against the bank
- non-interest bearing
Opening a demand deposit/checking account:
1. opens a demand deposit account
2. authorized person to draw check signs cards by bank to show specimen signatures to be
used on the checks
3. bank files specimen signatures are so that any teller can test the authenticity of checks
4. for corporations, directors pass a resolution authorizing certain officers as signatories of
checks, and files a copy of this resolution to the bank
Fundamental transactions between bank and depositor:
1. Company X (depositor) collected P100,000 from a customer and deposited the same to
First Bank
Book
Cash (Cash in bank)
Accounts receivable
Bank
xxx
xxx
Cash
Company X
xxx
xxx
In practice:
Cash
xxx
Demand deposit
xxx
(posted in Company X’s subsidiary ledger)
2. Company X issued a check for P30,000 in payment of an account payable
Book
Accounts payable
Cash (Cash in bank)
Bank
xxx
xxx
Company X
Cash
xxx
xxx
When balances are extracted, both the depositor’s book and the bank’s book has a cash
balance of P70,000.
The two accounts have equal balances because they are reciprocal accounts. When one
account is debited, the other account is credited, or vice-versa. Thus, the two should have
equal balances as long as no errors are committed, and the same information are
recorded on both.
BUT…
very frequently, there are items on the depositor’s book which do not
appear on the bank records as of the same date, and less frequently, there
are items on the bank records which do not appear on the depositor’s book.
It is in this light that preparing bank reconciliation becomes necessary.
Bank Reconciliation
-
a statement which brings into agreement the cash balance per book and the cash balance per
bank
usually prepared monthly because it is only at the end of the month that the bank provides
the depositor with the bank statement together with debit and credit memoranda and
canceled checks which are issued checks that are actually paid by the bank
A bank statement is a monthly report of the bank to the depositor, which is
an exact copy of the depositor’s ledger in the records of the bank containing
the ff:
a. beginning cash balance per bank
b. deposits made and acknowledged by the bank
c. checks drawn and paid by the bank
d. daily cash balance per bank during the month
Reconciling Items
Book
Bank
a. Credit memos
a. Deposits in transit
b. Debit memos
b. Outstanding checks
c. Errors
c. Errors
Book reconciling items
a. Credit Memos (+)
- items not representing deposits credited by the bank to the account to the depositor
but not yet recorded by the depositor as cash receipts
- increases bank balance, but has no effect yet on book balance
examples:
a. notes receivable collected by the bank
b. proceeds of bank loan
c. matured time deposits transferred to current account
b. Debit Memos (-)
- Items not representing checks paid by bank which are charged or debited by the bank
to the depositor’s account but not yet recorded by the depositor as cash disbursements
- decreases the bank balance, but has no effect yet on the book balance
examples:
a. NSF or no sufficient fund checks - checks deposited but returned by the bank due
to insufficiency f fund
b. technically defective checks
c. bank service charges
d. reduction of loan – amount deducted as payment for matured loan
Errors
-
there’s no definite rule whether to add or deduct
should be analyzed for proper treatment
reconciling items of the party who committed them;
thus, they can be book or bank reconciling items
Bank reconciling items
a. Deposits in transit (+)
- collections already recorded by the depositor, but not yet reflected on the bank
statement
- increases book balance, but has no effect yet on the bank balance
examples:
a. collections already forwarded to the bank but missed the bank statement
b. undeposited collections / cash on hand awaiting delivery to the bank for deposit
b. Outstanding checks (-)
- checks already recorded by the depositor as cash disbursements but not yet reflected
on the bank statement
- decreases book balance, but has no effect yet on the bank balance
examples:
a. checks drawn and given to payee but not yet presented
b. certified checks or checks stamped “accepted” or “certified” by the bank, indicating
sufficiency of fund. This should be deducted from total outstanding checks (if
included therein)
Forms of bank reconciliation
1. Adjusted balance
2. Book to bank
method
method
- book balance and bank
- book balance is
balance are brought to a correct
adjusted to equal the
cash balance that must appear
bank balance
on the balance sheet
- preferred over the other two
3. Bank to book
method
- bank balance is
adjusted to equal the
book balance