CHAPTER 2

BANK RECONCILIATION

Bank Deposits

There are three kinds of bank deposits:

Demand deposit

The demand deposit is the current account or checking account or commercial deposit where deposits
are covered by deposit slips and where funds are withdrawals on demand by drawing checks against the
bank.

A demand deposit is non-interest bearing.

Saving deposit

In a saving deposit, the depositor is given a passbook upon the initial deposit. The passbook is required
when making deposits and withdrawals.

A saving deposit is interest bearing.

Time deposit

The time deposit is similar to saving deposit in the sense that it is interest bearing.

A time deposit is evidenced, however, by a formal agreement embodied in an instrument called

certificate of deposit.

Time deposit may be preterminated or withdrawn on demand or after a certain period of time agreed
upon.

Bank Reconciliation

A bank reconciliation is a statement which brings into agreement the cash balance per book and cash
balance from bank.

Reconciling Items

1. Book reconciling items:

a. Credit memos
b. Debit memos
c. Errors
2. Bank reconciling items:
a. Deposit in transit
b. Outstanding checks
 c. Errors

Credit memos

Credit memos refer to items not representing deposits credited by the bank to the account of the
depositor but not yet recorded by the depositor as cash receipts.

Debit memos

Debit memos refer 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 cash disbursement.
The debit memos have the effect of decreasing the bank balance.

Deposit in transit

Deposit in transit are collections already recorded by the depositor

Outstanding checks

Outstanding checks are checks already recorded by the depositor as cash disbursement but not yet
reflected in the bank statement.

Forms of bank reconciliation

a. Adjusted balance method – Under this method, the book balance and the bank balance are
brought to a correct cash balance that must appear on the balance sheet.
b. Book to bank method – Under this method, the book balance is reconciled with the bank balance
or the book balance is adjusted to equal the bank balance.
c. 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 balance.
The first method is preferred over the other two.

Proforma reconciliation

Adjusted balance method

Book Balance xx
Add: Credit memo xx

Total xx
Less: Debit memos xx

Adjusted book balance xx

Bank balance xx
Add: Deposit in transit xx

Total xx
Less: Outstanding checks xx
Adjusted bank balance xx

Errors will have to be analyzed for proper treatment.

Errors are reconciling items of the party which committed them.

The adjusted balance method means that the book balance and the bank balance are adjusted to equal
the correct cash balance.

Book to bank method

Book balance xx
Add: Credit memos xx
Outstanding Checks xx xx
Total xx
Less: Debit memos xx
Deposit in transit xx xx
Bank Balance xx

The book to bank method means that the book balance is adjusted to equal the bank balance.

Bank to book method

Bank balance xx
Add: Deposit in transit xx
Debit memos xx xx
Total xx
Less: Outstanding Checks xx
Credit memos xx xx
Book Balance xx

The bank to book method means that the bank balance is adjusted to equal the book balance.

Illustration
The cash records of Company X show the following for the month of January.
CASH RECEIPTS CASH DISBURSEMENTS
Jan. 5 60,000 Jan. 6 Check No. 721 5,000
13 20,000 7 Check No. 722 10,000
25 30,000 10 Check No. 723 18,000
31 40,000 14 Check No. 724 2,000
150,000 28 Check No. 725 37,000
31 Check No. 726 28,000
100,000

The general ledger of the company shows the cash in bank account for January as follows:

Cash in Bank – First Bank

Jan. 31 CR 150,000 Jan.31 CD 100,000
The balance of the cash in bank on the depositor’s book is P50,000.
Bank statement
The following is the bank statement for January received from the First Bank:

In account with: No. 775

Company X FIRST BANK
Quezon, City Manila, Philippines
Date Check No. Withdrawals Deposits Balance
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 14,000 47,000
17 724 2,000 45,000
26 30,000 75,000
26 15,000CM 90,000
30 5,000RT 85,000
30 1,000SC 84,000
Code: CM – Credit memo SC – Service charge
DM – Debit memo RT – Returned check

The following data are gathered in connection with CM and DM appearing on the bank statement:
a. The CM of P15,000 on January 26 represents proceeds of note collected by the bank in favor of
the company.
b. The RT of P5,000 represents check of customer deposited previously but returned by the bank
because of “no sufficient fund” or NSF.

Adjusted balance method

Balance per book 50,000

Add: Noted 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: Deposit in transit 40,000
Total
Less: Outstanding checks:
Check No. 725 37,000
Check No. 726 28,000 65,000
Adjusted bank balance 59,000

Preparation of adjusting entries

Only the book reconciling items require adjusting entries on the book of depositor. This is
understandable.

The adjustments are necessary to bring the cash in bank balance to its correct balance for statement
presentations purposes.

a. To record the note collected by bank:

Cash in bank 15,000
Notes receivable 15,000

b. To record NSF customer check:

Accounts receivable 5,000
Cash in bank 5,000

c. 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 the book balance is credit to cash.

Some errors and their correction

a. Understatement of cash receipts on the book of depositor.

For example, the collection from customer which is deposited amounts to P10,000 but recorded in the
book only as Pl,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

b. Understatement of checks drawn by depositor.

For example, a cbeck in payment of account payable amounting to P20,000 is recorded in the book as
P2,000.

There is an understatement of cash diabursement 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

c. 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.

d. 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.
 Problems
BANK RECONCILIATION

Problem 1
In preparing the bank reconciliation for the month of August, Apex Company provided the following
information:
Balance per bank statement 1,805,000
Deposit in transit 325,000
Return of customer check for insufficient fund 60,000
Outstanding checks 275,000
Bank service charge for August 10,000

What is the adjusted cash in bank?

a. 1,855,000
b. 1,795,000
c. 1,785,000
d. 1,755,000

Solution: A
Balance per bank 1,805,000
Deposit in transit 325,000
Total 2,130,000
Outstanding checks (275,000)
Adjusted bank balance 1,855,000

The customer check which is returned for insufficient fund and the bank service charge are ignored
because these are book reconciling items.

Problem 2

Core Company provided the following data for the purpose of reconciling the cash balance per book with
the balance per bank statement on December 31:
Balance per book 850,000
Balance per bank statement 2,000,000
Outstanding checks, including certified check of P100,000. 500,000
Deposit in transit 200,000
December NSF checks (of which P50,000 had
been redposited and cleared on December 27) 150,000
Erroneous credit to Core's account, representing
proceeds of loan granted to another company 300,000
Proceeds of note collected by bank for Core,
net of service charge of P20,000. 750,000

What amount should be reported as cash in bank at year-end?

a. 1,500,000
b. 1,400,000
c. 1,800,000
d. 1,450,000
Solution: A
Balance per bank 2,000,000
Deposit in transit 200,000
Outstanding checks (500,000-100,000) (400,000)
Erroneous bank credit (300,000)
Adjusted bank balance 1,500,000

The certified check of P100,000 is no longer outstanding for reconciliation purposes. Thus, the amount is
deducted from the total outstanding checks.

Balance per book 850,000

NSF checks (150,000- 50,000) (100,000)
Proceeds of note collected 750,000
Adjusted book balance 1,500,000

Note that NSF checks of P50,000 are already redeposited and cleared on December 27.

Problem 3
Boracay Company keptall cash in a checking account. An examination of the bank statement for the
month of December revealed a bank statement balance of P8,470,000.

A deposit of P950,000 placed in the bank's night depositor December 29 does not appear on the bank
statement.

Checks outstanding on December 31 amount to P270,000

The bank statement showed that on December 25 the bank collected a note for Boracay Company and
credited the proceeds ofP935,000 the entity's account which included P35,000 interest.

Boracay Company discovered that a check written in December for

P183,000 in payment of an account had been recorded as P138,000.

Included with the December 31 bank statement was an NSF check for
P250,000 that Boracay Company had received from a customer on
December 20.

The bank statement showed a P15,000 service charge for December.

1. What is the adjusted cash in bank on December 31?

a. 9,150,000
b. 9,240,000
c. 9,195,000
d. 9,215,000
2. What is the unadjusted balance per book on December 31?
a. 8,480,000
b. 8,525,000
c. 8,435,000
d. 8,510,000
3. What is the net adjustment to cash in bank on December 31?
a. Net debit 935,000
b. Net credit 310,000
c. Net debit 625,000
d. Net credit 625,000

Question 1 Answer A
Balance per bank 8,470,000
Deposit in transit 950,000
Checks outstanding (270,000)
Adjusted bank balance 9,150,000

Question 2 Answer B
Balance per book (SQUEEZE) 8,525,000
Note collected by bank for the depositor 935,000
Book error in recording check (183,000-138,000) (45,000)
NSF check (250,000)
Service charge (15,000)
Adjusted book balance 9,150,000

Ouestion 3 Answer C
Cash in bank 935,000
Service charge 15,000
Note receivable 950,000
Accounts payable 45,000
Accounts receivable 250,000
Service charge 15,000
Cash in bank 310,000

The two entries can be compounded and the net effect is a debit to cash in bank of P625,000.

Problem 4
Divine Company prepared the following bank reconciliation on
December 31:

Balance per bank statement 2,800,000

Add: Deposit in transit 195,000
Checkbook printing charge 5,000
Error made by Divine in recording 35,000
check issued in December
NSF check 110,000
345,000
Total 3,145,000

Less: Outstanding check 100,000

 Note collected by bank including 215,000
315,000
P15,000 interest
Balance per book 2,830,000

The entity had cash on hand P500,000 and petty cash fund P50,000 on December 31.

1.What amount should be reported as cash in bank at year-end?

Balance per book

a. 2,930,000
b. 3,095,000
c. 2,895,000
d. 3,130,000

2.What total amount of cash should be reported at year-end?

a. 3,395,000
b. 3,350,000
c. 3,445,000
d. 3,380,000

Question 1 Answer c

Balance per bank 2,800,000

Deposit in transit 195,000
Outstanding check (100,000)
Adjusted cash in bank 2,895,000

Balance per book 2,830,000

Note collected by bank 215,000
NSF check (110,000)
Book error (35,000)
Checkbook printing charge (5,000)
Adjusted cash in bank 2,895,000

Question 2 Answer c

Adjusted cash in bank 2,895,000

Cash on hand 500,000
Petty cash fund 50,000
Total cash 3,445,000

Problem 5
Susan Company showed the following information on August 31:
Balance of cash in bank account 1,300,000
Balance of bank statement 1 ,200,000
Outstanding checks, August 31:
Number 555 10,000
761 55,000
762 40,000
763 25,000
764 65,000
765 70,000
Receipts of August 31, deposited September 275,000
Service charge for August 5,000
NSF check received from a customer 85,000

The cashier-bookkeeper had misappropriated P30,000 and an

additional P10,000 by charging sales discounts and crediting accounts
receivable.

The stub for check number 765 and the invoice relating thereto showed
that it was for P50,000. It was recorded incorrectly in the cash
disbursements journal as P70,000.

This check was drawn in payment of an account payable.

Payment has been stopped on check number 555 which was drawn in
payment of an account payable. The payee cannot be located.

1.What is the adjusted cash in bank on August 31?

a: 1,240,000
b. 1,230,000
c. 1,210,000
d. 1,200,000

Solution Answer a
Balance per book 1,300,000
Add: Overstatement of check number 765 20,000
Check number 555 stopped for payment10,000 30,000
Total 1330,000
Less: Service charge 5,000
NSF check 85,000 90,000
Adjusted book balance 1,240,000

Balance per bank 1,200,000

Add: Undeposited collections 275,000
Total 1,475,000
Less: Outstanding checks:
Number 761 55,000
762 40,000
763 25,000
764 65,000
 765 50,000 235,000
Adjusted bank balance 1,240,000