Financial Accounting and Reporting 1 Handout#2
St. Vincent College of Cabuyao
Bank Reconciliation
3 Types of Bank Deposit
1. Demand deposit – current/checking account (non –interest bearing)
2. Saving deposit – depositor is given a passbook upon initial deposit (interest bearing)
3. Time deposit – evidenced by a formal agreement embodied in an instrument called
certificate of deposit (interest bearing); withdrawal either on demand or after a period of
time agreed upon
Bank Reconciliation – a statement which brings into agreement the cash balance per book and
cash balance per bank
Bank Statement – a monthly report of the bank to the depositor showing the cash balance per
bank at the beginning, the deposits acknowledged, the checks paid, other charges and credits and
the daily cash balance per bank during the month (DM, CM, cancelled checks are attached)
Cancelled Checks – checks paid by the month during the month
Reconciling items
A. Book Reconciling Items
a. CM
b. DM
c. Errors
B. Bank Reconciling Items
a. Deposit in transit
b. Outstanding checks
c. Errors
Credit Memo – items not representing deposits credited by the bank to the account of the
depositor but not yet recorded by the depositor as cash receipts. (Increase bank balance)
Ex: Notes receivable collected by bank, proceeds of bank loans, matured time deposit transferred
by the bank to the current account
Debit Memo – 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 depositors as cash disbursements
(Decrease bank balance)
Ex: NSF (no sufficient fund) / DAIF (drawn against insufficient fund), technically defective
checks, bank service charges (interest, collection, checkbook, penalty), reduction of loan
Deposit in transit – collections already recorded by the depositor as cash receipts but not yet
reflected on the bank statement
Ex: Undeposited collections (cash on hand awaiting delivery)
Outstanding checks – checks already recorded by the depositor as cash disbursements but not
yet reflected on the bank statement
Ex: checks drawn and delivered but not yet encashed,
Note: Certified checks should be deducted from total outstanding checks
Forms of Bank Reconciliation
1. Adjusted balance method – both book and bank balance are brought to a correct cash
balance reflected on the BS (preferred)
2. Book to bank method – book balance is adjusted to equal the bank balance
FNVR, CPA
Instructor
Financial Accounting and Reporting 1 Handout#2
St. Vincent College of Cabuyao
Bank Reconciliation
3. Bank to book method – bank balance is adjusted to equal the book balance
Proforma Reconciliation:
Bank Balance xx Book Balance xx
Add: CM xx Add: DIT xx
Less: DM (xx) Less: OC (xx)
Adjusted Book Bal. xx Adjusted Bank Bal. xx
Book to bank method Bank to book method
Book balance xx Bank balance xx
Add: CM xx Add: DIT xx
OC xx xx DM xx xx
Less: DM xx Less: OC xx
DIT xx (xx) CM xx (xx)
Bank balance xx Book balance xx
Some Errors and their Correction
1. Understatement of cash receipts on the book of depositor
Cash in bank xx
Accounts receivable xx
2. Understatement of checks drawn by depositor
Accounts payable xx
Cash in bank xx
3. Deposit of another entity is credited by the bank to the account of the depositor
4. Check of another entity charged to the account of the depositor
FNVR, CPA
Instructor
Financial Accounting and Reporting 1 Handout#2
St. Vincent College of Cabuyao
Bank Reconciliation
Illustration: Company X
Cash Receipts Cash Disbursements
Jan. 5 60,000 Jan. 6 Check#721 5,000
13 20,000 7 Check#722 10,000
25 30,000 10 Check#723 18,000
31 40,000 14 Check#724 2,000
28 Check#725 37,000
31 Check#726 28,000
Cash in bank per ledger
CIB – BB Phils
Jan. 31 CR 150,000 Jan. 31 CD 100,000
Bal. 01/31 50,000
Bank Statement received by Company X
In account with: No. 775
Company X BB Phils.
Calamba Laguna Manila, Philippines
Date Check No. Withdrawals Deposits Balances
Jan. 6 60,000 60,000
8 721 5,000 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 15,000 CM 90,000
30 5,000 RT 85,000
30 1,000 SC 84,000
RT – Returned Checks SC – Service Charge CM – Credit Memo DM – Debit Memo
FNVR, CPA
Instructor
Financial Accounting and Reporting 1 Handout#2
St. Vincent College of Cabuyao
Bank Reconciliation
The following data are gathered in connection with CM and DM appearing on the bank
statement:
1. The CM of 15,000 on January 26 represents proceeds of note collected by the bank in
favour of the company.
2. The RT of 5,000represents check of customer deposited previously but returned by the
bank because of NSF
Solution:
Adjusted balance method:
Balance per book 50,000
Add: note collected by bank 15,000
Total 65,000
Less: NSF customer check 5,000
Service Charge 1,000 6,000
Adjusted book balance 59,000
Balance per bank 84,000
Add: DIT 40,000
Total 124,000
Less: OC
Check#725 37,000
Check#726 28,000 65,000
Adjusted bank balance 59,000
Adjusting Entries:
Cash in bank 15,000
Notes receivable 15,000
To record the note collected by bank
Accounts receivable 5,000
Cash in bank 5,000
To record the NSF customer check
Bank service charge 1,000
Cash in bank 1,000
To record the bank service charge
FNVR, CPA
Instructor
