BANK RECONCILIATION
1
Learning Objectives
1. Prepare a bank reconciliation
2. Prepare a proof of cash
FOR INSTRUCTIONAL MATERIALS ONLY
Bank Reconciliation Statement
A bank reconciliation statement is a report that is prepared for the
purpose of bring the balances of cash (a) per records and (b) bank
statement into agreement.
FOR INSTRUCTIONAL MATERIALS ONLY
Bank Reconciliations are prepared to:
a. Explain the difference between the cash balance in accounting
records and the cash balance reported on the bank statement;
b. Arrive at the adjusted (correct) cash balance to be shown in the
financial statements; and
c. Provide information for reconciling journal entries.
FOR INSTRUCTIONAL MATERIALS ONLY
Bank reconciliation is prepared on a monthly basis immediately upon
receipt of the monthly bank statement from the bank.
A bank statement is a report issued by a bank that shows the deposit
and withdrawals during the period and a cumulative balance of a
deposit’s bank account.
FOR INSTRUCTIONAL MATERIALS ONLY
FOR INSTRUCTIONAL MATERIALS ONLY
Pro forma bank reconciliation statement
ABC Co.
Bank Reconciliation
For the month ended ________, 20x1
Balance per books, end Pxx Balance per bank statement, end Pxx
Add: Credit Memos (CM) xx Add: Deposits in transit (DIT) xx
Less : Debit memos (DM) (xx) Less: Outstanding checks (OC) (xx)
Add/Less: Book errors xx Add/Less: Bank errors xx
Adjusted Balance Pxx Adjusted balance Pxx
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Definition of terms
• Balance per books end – the cash balance in the accounting records
as of the end of the month.
• Balance per bank statement, end – the ending cash balance in the
bank statement of the month.
FOR INSTRUCTIONAL MATERIALS ONLY
Definition of Terms
• Credit memos – are additions (bank credits) made by the bank to the
depositor’s bank account but not yet recorded by the depositor.
Examples
a. Collections made by the bank on behalf of the depositor
b. Interest income earned by the deposit.
c. Proceeds from loan directly credited or added by the bank to the
depositor’s account.
d. Unrolled over matured time deposits transferred by the bank to the
entity’s account.
FOR INSTRUCTIONAL MATERIALS ONLY
Definition of terms
• Debit memos – are deductions (bank debits) made by the bank to the
depositor’s bank account but not yet recorded by the depositor.
Examples
a. Bank service charges representing bank charges for fees, interest,
penalties, surcharges.
b. No sufficient fund checks (NSF) or Drawn against insufficient funds
checks (DAIF) – These are checks deposited and already recorded by the
bank but subsequently returned to the depositor because the drawer’s
fund is insufficient to pay for the check.
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c. Automatic debits – such as when the depositor and the bank agree
that the bank will make automatic payments of bills on behalf of the
depositor.
d. Payment of loans which the entity (depositor) agreed to be made
directly from its bank account.
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Definition of Terms
• Book errors – errors committed by the depositor e.g., erroneous
recording in the books of accounts).
• Deposits in transit – are deposits made but not yet credited by the
bank to the depositor’s bank account.
• Outstanding checks – are checks drawn and released to the payees
but not yet encashed with the bank..
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Definition of Terms
• Bank errors – errors committed by the bank.
• Credit memos, debit memos and books errors are referred to as book
reconciling items. The depositor should make reconciling entries for
these items.
• Deposit in transit, outstanding checks, and bank error are referred to
as bank reconciling items. The depositors does not make reconciling
entries for these items.
FOR INSTRUCTIONAL MATERIALS ONLY
Illustration
Entity A is preparing its March 31, 20x1 bank reconciliation. The following information was
determined:
a. The cash balance per books is P280,000, while the cash balance per bank statement is
P320,000.
330,000
(+) book b. Credit memo – P20,000
(-) book c. Debit memo – P15,000
(+) bank
d. Deposits in transit – P75,000
(-) bank
e. Outstanding checks – P25,000
(+) book f. The disbursement per books are overstated by P45,000
(-) bank g. The bank debits are understated by P40,000
Requirement: Prepare the bank reconciliation
FOR INSTRUCTIONAL MATERIALS ONLY
Illustration
ABC Co. is preparing its September 30, 20x1 bank reconciliation. Relevant
information is shown below:
Balance per books P213,128
Balance per bank statement 210,000
Collection of note receivable by bank (including P155 interest) 20,000
NSF Check returned by bank 15,000
Bank service charges for December 1,000
Deposits in transit 12,000
Outstanding checks 6,000
FOR INSTRUCTIONAL MATERIALS ONLY
• A P1,395 collection of accounts receivable was erroneously recorded
in the books as P1,593. The actual amount deposited to the bank is
P1,395.
• A P930 loan amortization of AVC Co. was erroneously debited by the
bank to ABC Co.’s account.
Requirements
a. Prepare the bank reconciliation
b. Prepare the month-end adjusting entry.
FOR INSTRUCTIONAL MATERIALS ONLY
Assignment (Problem 1, Problem 2, Problem 3)
Problem 1. True or False (#1-7)
1. The bank statement is a report that is prepared for the purpose of
bringing the balances of cash per records and per bank statement into
agreement. True
2. When preparing bank reconciliation, credit memos are added to the
balance per bank statement to get the adjusted balance. False
3. A bank decreased a depositor’s account. To notify the depositor, the
bank will issue a credit memo False
4. Bank memorandums not recorded by the depositor require reconciling
entries in the depositor’s book of accounts. True
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5. A bank statement has a balance of P200. If the credit memos are P20
while the outstanding checks are P10, the adjusted cash balance is
P190. False
6. The ledger balance of cash is P100. If the credit memos are P20,
deposits in transit are P20, outstanding checks are P10, and NSF checks
are P5, the adjusted cash balance is P110. False
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Problem 2. Multiple Choice (#1-9)
1. These are deposits made but not yet credited by the bank to the
depositor’s bank account.
a. Credit Memos (CM)
b. Debit Memos (DM)
c. Outstanding Checks (OC)
d. Deposit in transit (DIT)
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2. In the preparation of bank reconciliation, it was found out that cash
sales of P9,500 were incorrectly recorded in the books as P5,900. What
entry is reconciling journal entry?
a. (Dr.) Cash; (Cr.) Accounts Receivable
b. (Dr.) Cash; (Cr.) Sales
c. (Dr.) Accounts Receivable; (Cr.) Cash
d. none
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3. What is the reconciling entry in the depositor’s books to record
outstanding checks?
a. (Dr.) Cash; (Cr.) Accounts Receivable
b. (Dr.) Accounts Receivable; (Cr.) Cash
c. (Dr.) Accounts Payable; (Cr.) Cash
d. None
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4. In a bank reconciliation, a note receivable collected by the bank is
a. deducted from the cash balance per bank statement
b. deducted from the cash balance per ledger
c. added to the cash balance per bank statement
d. added to the cash balance per ledger.
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5. Which of the following reconciliation items requires an adjusting
journal entry in the books of ABC Co?
a. Amortization of loan of XYZ, Inc. erroneously credited by the
bank to the ABC Co.’s account
b. NSF check returned by bank and re-deposited by ABC Co.,
during the period and appropriately cleared the bank on the same
period.
c. Cash deposits made but were not yet credited to ABC Co.’s
bank account as of cut-off date.
d. Customer payments directly remitted to the bank.
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6. Which of the following may be used to compute for the adjusted
balance of cash?
a. Balance per books + Credit memo – Debit memo –
Understatement of cash collections
b. Balance per books + Credit memo – Debit memo +
overstatement of cash collections
c. Balance per books + Credit memo – Debit memo +
Overstatement of cash disbursements
d. Balance per books + Credit memo – Debit memo –
Overstatement of cash disbursements
FOR INSTRUCTIONAL MATERIALS ONLY
7. If the balance shown on a company’s bank statement is less than the
correct cash balance, and neither the company nor the bank has made
any errors, there must be
a. Deposits credited by the bank but not yet recorded by the company
b. Outstanding checks
c. Bank charges not yet recorded by the company
d. Deposits in transit
(AICPA)
FOR INSTRUCTIONAL MATERIALS ONLY
8. Certified checks should be excluded from outstanding checks when
preparing bank reconciliation. The rationale for this treatment is that
a. The bank, when certifying checks, draws the check in its account
b. The bank, when certifying checks, automatically debits the
depositor’s amount
c. The bank when certifying checks, automatically credits the
depositor’s account.
d. The bank, when certifying checks, assumes the obligation to pay the
drawee when the check is presented for payment.
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9. When preparing a proof of cash, a credit memo from the previous
month is
a. Extended to the book receipts column as an addition
b. Extended to the bank receipts column as an addition
c. Extended to the book receipts column as a deduction
d. Not extended in any of the book columns.
FOR INSTRUCTIONAL MATERIALS ONLY
Problem 3.
Entity a is preparing its February 28, 20x1 bank reconciliation statement. The
following information was determined
• Cash balance per accounting books, February 28, 20x1, P260,000
• Cash balance per bank statement, February 28, 20x1, P205,000
Additional information:
a. A customer deposited P30,000 to Entity A’s bank account as payment for
an accounts receivable. This is not yet recorded in the books of accounts.
b. A P102,500 check deposited by Entity A during the month is not yet
credited to Entity A’s account.
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c. A check is drawn in the amount of P22,500 is not yet presented to
the bank for payment.
d. The bank returned a check deposit amounting to P5,000 because of
insufficiency in the funds of the drawer. The check was received from a
customer as payment for accounts receivable.
Book - 260,000 Bank - 205,000
(+) 30,000 (+) 102,500
(-) 5,000 (-) 22,500
= 285,000 = 285,000
Requirements A. Cash 30,000
A/R 30,000
a. Prepare the bank reconciliation. D. A/R 5,000
Cash 5,000
b. Prepare the adjusting (reconciling) entries.
FOR INSTRUCTIONAL MATERIALS ONLY
Illustration (IAA)
• BSA Company provided the following information
BSA Company
Date Check No. Withdrawal Deposits Balance
Dec-02 100,000.00 100,000.00
18 104 10,000.00 90,000.00
20 101 5,000.00 85,000.00
22 106 25,000.00 60,000.00
27 50,000.00 110,000.00
29 103 40,000.00 10,000.00 80,000.00
29CM 30,000.00 110,000.00
31Service Charge 2,000.00 108,000.00
FOR INSTRUCTIONAL MATERIALS ONLY
FIRST BANK
Dec-01 100,000.00 Dec-04 5,000.00
21 50,000.00 6 15,000.00
27 10,000.00 8 40,000.00
31 80,000.00 8 10,000.00
10 30,000.00
14 25,000.00
28 50,000.00
FOR INSTRUCTIONAL MATERIALS ONLY
The credit made by the bank on December 29 represents the proceeds
of a note received from a customer which was given to the bank for
collection by the entity on December 26.
Required:
a. Prepare a bank reconciliation using adjusted balance method
b. Prepare adjusting entries Book 65,000 Bank 108,000
Credit memo 30,000 Outstanding check 15,000
Cash 30,000
A/R 30,000 Service charge 2,000 Adjusted balance 93,000
Adjusted balance 93,000
Service charge 30,000
Cash 30,000
FOR INSTRUCTIONAL MATERIALS ONLY
Illustration (AICPA Adapted)
Boracay Company kept all 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 depository on
December 29 does not appear on the bank statement.
Checks outstanding on December 31 totaled P270,000
The bank statement showed that on December 25 the bank collected a
note for Boracay Company and credited the proceeds of P935,000 to
the entity’s account net of P15,000 service charge.
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Boracay Company discovered a check written in December for
P183,000 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.
FOR INSTRUCTIONAL MATERIALS ONLY
1. What amount should be reported as adjusted cash in bank on
December 31?
a. 9,150,000
b. 9,240,000
c. 9,195,000
d. 9,215,000
FOR INSTRUCTIONAL MATERIALS ONLY
2. What amount was reported as unadjusted balance per book on
December 31?
a. 8,480,000
b. 8,525,000
c. 8,435,000
d. 8,510,000
FOR INSTRUCTIONAL MATERIALS ONLY
3. What amount should be recorded as 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
FOR INSTRUCTIONAL MATERIALS ONLY
