Accounting for Cash

Bank Reconciliation

Bank Reconciliation
Bank deposits

Three Kinds of bank deposits

Demand deposits
o Current account or checking account or commercial deposit
where deposits are covered by deposit slips
o Funds are withdrawable on demand

Saving deposit
o Passbook

Time deposit
o Certificate of deposit

Bank Reconciliation
The concept of Bank Reconciliation
Transaction

Collection from
a customer
Payment of an
Account
Payable

Entry on Books
of the Company
Cash (or cash in bank)
xxx
Accounts Receivable
xxx
Accounts payable
Cash
xxx

Entry on books
of the Bank
Cash
xxx
Company xxx

xxx
Company X
Cash

xxx
xxx

Bank Reconciliation
The Concept of Bank Reconciliation
Bank Reconciliation = is a statement which brings into
agreement the cash balance per book and cash balance per
bank.
It is usually prepare monthly because the bank provides
the depositor with the bank statement at the end of every
month.
A bank statement is 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.

Bank Reconciliation
Reconciling Items
1. Book reconciling items:
a) Credit memos
b) Debit memos
c) Errors

2. Bank reconciling items:

a) Deposits in transit
b) Outstanding checks
c) Errors

Bank Reconciliation
Reconciling Items 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.
Examples:
o Notes Receivable collected by bank in favor of the
depositor
o Proceeds of bank loan credited to the account of the
depositor
o Measured time deposits transferred by the bank to the
current account of the depositor

Bank Reconciliation
Reconciling Items Debit Memos
Debit memos = refer to 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 depositor as cash disbursements.
Examples:
o NSF Checks
o Technically defective checks
o Bank service charges
o Reduction of Loan

Bank Reconciliation
Reconciling Items Deposits in transit
Deposits in transit = are collections already recorded
by the depositor as cash receipts but not yet reflected
on the bank statement.
Includes:
o Collections already forwarded to the bank for deposit
but too late to appear in the bank statement
o Undeposited collections or those still in the hands of
the depositor. In effect, these are cash on hand
awaiting delivery to the bank for deposit.

Bank Reconciliation
Reconciling Items Outstanding Checks

Outstanding Checks = are checks already

recorded by the depositor as cash disbursements
but not yet reflected on the bank statement.
Includes:
oChecks drawn and already given to payees but
not yet presented for payment
oCertified Checks = Deduction from the total
outstanding checks (if included therein)

Bank Reconciliation
Forms of Bank Reconciliation
Adjusted balance method
Book balance and the bank balance are brought to a correct
cash balance that must appear on the balance sheet

Book to bank method

Book balance is reconciled with the bank balance or the book
balance is adjusted to equal the bank balance

Bank to book method

Bank balance is reconciled with the book balance or the bank
balance is adjusted to equal the book balance

Bank Reconciliation
Forms of Bank Reconciliation Adjusted Balance Method

Proforma Reconciliation
Book Balance
xx
Add: Credit memos
xx
Total
xx
Less: Debit memos
xx
Adjusted Book Balance
xx

Bank Balance
xx
Add: Deposits in Transit
xx
Total
xx
Less: Outstanding Checks
xx
Adjusted Bank Balance
xx

Bank Reconciliation
Forms of Bank Reconciliation Book to Bank Method

Proforma Reconciliation
Book Balance
xx
Add: Credit memos
xx
Outstanding Checks
xx
Total
xx
Less: Debit memos
xx
Deposits in transit
xx
Bank Balance
xx

Bank Reconciliation
Forms of Bank Reconciliation Bank to Book Method

Proforma Reconciliation
Bank Balance
xx
Add: Deposits in transit
Debit Memos
Total
xx
Less: Outstanding Checks
Credit memos
Book Balance

xx
xx
xx
xx
xx

Bank Reconciliation
Adjusting Entries
Only the BOOK RECONCILING ITEMS require adjusting entries
on the book of depositor.
o To record the note collected by bank:
Cash in Bank
xxx
Notes Receivablexxx
o To record the returned check or NSF check:
Accounts receivablexxx
Cash in bank
xxx
o To record the bank service charge:
Bank service charge xxx
Cash in bank
xxx

Bank Reconciliation
Some Errors and their treatment
Understatement of cash receipts on the book of depositor
Cash in Bank
xxx
Accounts Receivable

xxx

Understatement of checks drawn by depositor

Accounts Payable
Cash in Bank

xxx
xxx

Deposit of another entity is credited by the bank to the

account of the depositor
Deduction from the bank balance

Check of another entity charged to the account of the

depositor
Addition to the bank balance

End of Discussion
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