BANK RECONCILIATION & PROOF OF CASH
BANK RECONCILIATION
The bank and the depositor maintain independent records of the depositor’s checking account.
People tend to assume that the respective balances will always agree. In fact, the two balances
are seldom the same at any given time, and both balances differ from the “correct” or “true”
balance. Therefore, it is necessary to make the balance per books and the balance per bank
agree with the correct or true amount—a process called reconciling the bank account. The
need for agreement has two causes:
1. Time lags that prevent one of the parties from recording the transaction in the same period
as the other party.
2. Errors by either party in recording transactions.
A bank reconciliation compares the bank’s balance with the company’s balance and explains
any differences to make them agree.
A bank statement shows the depositor’s bank transactions and balances.
METHODS OF BANK RECONCILITION
1. Book-to-Bank. Adjusting ending book balance to come up with bank ending balance.
2. Bank-to-Book. Adjusting ending bank balance to come up with book ending balance
3. Adjusted Balance. Adjusting both ending book and bank balance to come up with an
adjusted balance.
RECONCILING ITEMS
Per Bank Balance
1. Deposit in Transit/Undeposited Collections (+)
2. Outstanding Checks/Checks issued by the firm but not yet presented for payment (-)
3. Bank Errors (+) (-)
Per Book Balance
1. Debit Memorandum (-)
a. Bank Charges (e.g. service fees, charges for printing checks, required taxes)
b. Bounced check or No sufficient Fund (NSF) check/ Drawn against Insufficient
Funds (DAIF)
c. Customers Dishonored/Technically Defective Check
d. Drawn against Uncollected Deposits (DAUD)
e. Direct payments made by the bank on behalf of the customers
2. Credit Memorandum (+)
a. Interest earned
b. Collection of Receivables/Amount directly deposited in the bank account
3. Book Errors (+) (-)
PROOF OF CASH
A proof of cash is essentially a roll forward of each line item in a bank reconciliation from one
accounting period to the next, incorporating separate columns for cash receipts and cash
disbursements. The columns (and formula) used for a proof of cash are:
Beginning balance + Cash receipts for the period – Cash disbursements for the period =
Ending balance
When used for each line item in a bank reconciliation, the proof of cash highlights areas in which
there are discrepancies, and which may therefore require further investigation, and probably some
adjusting entries.
Aside from common issues resolved in a regular bank reconciliation, a proof of cash can also
uncover instances of fraud. If there is a difference between the totals, it can indicate the presence
of unauthorized borrowings and repayments within the time period covered by a single bank
statement. Thus, if a controller were to illegally withdraw Php10,000 from the company accounts
near the beginning of the month for his personal use, and replaced the funds before the end of
the month, the issue would not appear in a normal bank reconciliation as a reconciling item.
However, a proof of cash would be more likely to flag the extra cash withdrawal and cash return
within the period.
PROOF OF CASH
Sample Format
Particulars Beg. Balance Receipts Disbursements End. Balance
Per Book xxx xxx xxx xxx
Note collected
Previous Month xxx (xxx)
Current Month xxx xxx
NSF Checks
Previous Month (xxx) (xxx)
Current Month xxx (xxx)
Service Fees
Previous Month (xxx) (xxx)
Current Month xxx (xxx)
Adjusted Balance xxx xxx xxx xxx
Per Bank xxx xxx xxx xxx
Deposits in Transit
Previous Month xxx (xxx)
Current Month xxx xxx
Outstanding Checks
Previous Month (xxx) (xxx)
Current Month xxx (xxx)
Adjusted Balance xxx xxx xxx xxx
- - END - -
Sources:
1. Financial Accounting Vol.I, First Part, 2016 Edition Valix, Conrado T., Peralta, Jose F. and
Valix, Christian Aris M.
2. Financial Accounting, 9th Ed. Weygandt, Kimmel, Kieso
3. https://www.accountingtools.com/articles/what-is-a-proof-of-cash.html
