BANK RECONCILIATION

A bank reconciliation is the process of matching the balances in an entity's accounting records for a
cash account to the corresponding information on a bank statement. The goal of this process is to ascertain
the differences between the two, and to book changes to the accounting records as appropriate.
A bank reconciliation should be completed at regular intervals for all bank accounts, to ensure that a
company's cash records are correct. Otherwise, it may find that cash balances are much lower than
expected, resulting in bounced checks or overdraft fees. A bank reconciliation will also detect some types
of fraud after the fact; this information can be used to design better controls over the receipt and payment
of cash

BANK RECONCILING ITEMS

1. DEPOSIT IN TRANSIT (DIT) - Cash and/or checks that have been received and recorded by an
entity, but which have not yet been recorded in the records of the bank where the entity deposits the funds.
If this occurs at month-end, the deposit will not appear in the bank statement, and so becomes a reconciling
item in the bank reconciliation. A deposit in transit occurs when a deposit arrives at the bank too late for it
to be recorded that day, or if the entity mails the deposit to the bank (in which case a mail float of several
days can cause a delay), or the entity has not yet sent the deposit to the bank at all. (ADD)
2. OUTSTANDING CHECKS (OC) - A check payment that has been recorded by the issuing entity,
but which has not yet cleared its bank account as a deduction from cash. If it has not yet cleared the bank
by the end of the month, it does not appear on the month-end bank statement, and so is a reconciling item
in the month-end bank reconciliation. (DEDUCT)
3. ERRORS (ADD or DEDUCT)

BOOK RECONCILING ITEMS

1. CREDIT MEMO (CM) – refers to items not representing deposits credited by the bank to the account of
the depositor but not yet recorded by the depositor as a cash receipts. (ADD)
- Proceeds of bank loans
- Matured time deposits transfer by the bank to the depositor’s account
- Notes collected by bank in favor of the depositor and credited to the account of the depositor.
2. DEBIT MEMO (DM) – refers to items not representing checks paid by the bank which are charged or debited
by the bank to the account of the depositor but not yet recorded by the depositor as a cash disbursements. (DEDUCT)
- The company's monthly loan payment
- The fee for printing the company's checks
- The fee for handling a check that the company deposited and the check was returned because of
insufficient funds
- A transfer of funds to another account at the bank
3. ERRORS

Reconciliation Format (Adjusted Balance Method)

Unadjusted Book balance xx
Add: CM xx
Less: DM (xx)
Add or Less ERRORS xx / (xx)
Adjusted Book Balance xx

Unadjusted Bank balance xx

Add: DIT xx
Less: OC (xx)
Add or Less ERRORS xx / (xx)
Adjusted Bank Balance xx
Bank to Book Method
Bank balance xx
Add: DIT xx
Add: DM xx
Total xx
Less: OC xx
Less: CM xx
Book Balance xx

Book to Bank Method

Book balance xx
Add: OC xx
Add: CM xx
Total xx
Less: DIT xx
Less: DM xx
Bank Balance xx

Problem 1.
In preparing its August 31, 2018 bank reconciliation, AA Co. provided the ff. information:
Balance per bank statement 1,805,000
Deposit in transit 325,000
Return of NSF check 60,000
Outstanding checks 275,000
Bank service charge for August 10,000
Check erroneously credited by the bank 100,000
Interest on customer notes 20,000
Collection of note 400,000
On August 31, 2018, how much is the adjusted cash in bank? ____________________________
Problem 2.
In an audit of MM Co. on Dec. 31, 2018, the ff. data are gathered:
Balance per book 1,000,000
Bank charges 3,000
Outstanding checks 235,000
Deposit in transit 300,000
Customer note collected by the bank 375,000
Interest on customer note 15,000
Customer check returned NSF 62,000
Depositor’s note charged to account 250,000
What is the unadjusted book balance? __________________________
Problem 3.
On March 31, 2018, AA Co. received its bank statement. However, the closing bank balance was unreadable.
Attempts to contact the bank after hours did not secure the desired information. The ff. data are available in preparing
bank reconciliation:
February 28 book balance (unadjusted) 1,460,000
Note collected by the bank 100,000
Interest earned on note 10,000
NSF check of customer 130,000
Bank service charge on NSF check 2,000
Other bank service charges 3,000
 Outstanding checks 202,000
Deposit in transit 85,000
Check issued by BB Co. charged to AA’s account 20,000
What is cash balance per bank statement (unadjusted)? __________________________
Problem 4.
The cash account in the ledger of MM Co. shows a balance of 1,652,000 at Dec. 31, 2018. The bank statement
however shows a balance of 2,090,000 at the same date. The only reconciling items consists of bank charge of 2,000,
a large number of outstanding checks totalling 590,000 and a deposit in transit. What is the deposit in transit in the
Dec. 31 bank reconciliation? ______________________
v.177

Problem 5.
In preparing the bank reconciliation on Dec. 1, 2018, MM Co. provided the ff. data:
Balance per bank statement 3,800,000
Deposit in transit 520,000
Amount erroneously credited by bank to MM’s account 40,000
Bank service charge 5,000
Outstanding checks 675,000
Credit memos 200,000
Debit memos 300,000
Amount recorded in book 97,000 instead of 79,000 97,000
Amount of unadjusted book balance _________________________________.