Bank Reconciliation

is a report which compares the bank balance as

per company's accounting records with the
balance stated in the bank statement.
The two common causes of the discrepancy in figures are:

1. Time lags/Time differences that prevent

one of the parties (company or the bank) from
recording the transaction in the same period as
the other party.
Example: A bank statement that ends January
30, 2015 and then the company were able to
collect cash of P20,000 at 5:00 PM. Bank usually
closes at 3:00 PM because of this, the cash
collected will not be reflected in the bank as
deposit but it is however recorded in accounting
records of the company.
2. Errors by either party in recording
transactions
Example: A check was issued to Meralco by
the company amounting to P1000. The
company recorded this as P100. When the
check was presented, the bank paid
Meralco P1,000. In the records of the
company it was P100 while in the records of
the bank it’s P1,000. There is in this case an
error that will cause the difference between
the company’s records and the bank records
The importance of Bank Reconciliations are as follows:
• Preparation of bank reconciliation helps in the identification of
errors in the accounting records of the company or the bank.
• Cash is the most vulnerable asset of an entity. Bank reconciliations
provide the necessary control mechanism to help protect the valuable
resource through uncovering irregularities such as unauthorized bank
withdrawals. However, in order for the control process to work effectively, it
is necessary to segregate the duties of persons responsible for accounting
and authorizing of bank transactions and those responsible for preparing
and monitoring bank reconciliation statements.
• If the bank balance appearing in the accounting records can be
confirmed to be correct by comparing it with the bank statement
balance, it provides added comfort that the bank transactions have been
recorded correctly in the company records.
• Monthly preparation of bank reconciliation assists in the regular
monitoring of cash flows of a business.
There three methods of preparing bank reconciliation
statement, namely:
a. Adjusted Method wherein the balances per
bank and per book are separately determined.
b. Book to Bank Method wherein the book
balance is adjusted to agree with the bank
balance.
c. Bank to Book Method wherein the bank
balance is adjusted to agree with book
balance.
Reconciling Items on the bank side: (Timing Differences)

1. Deposits in transit are amounts already received and

recorded by the company, but are not yet recorded by the
bank.
For example, a retail store deposits its cash receipts of August 31
into the bank's night depository at 10:00 p.m. on August 31. The
bank will process this deposit on the morning of September 1.
As of August 31 (the bank statement date) this is a deposit in
transit. Because deposits in transit are already included in the
company's Cash account, there is no need to adjust the
company's records. However, deposits in transit are not yet on
the bank statement.
Therefore, they need to be listed on the bank reconciliation as
an increase to the balance per bank in order to report the true
amount of cash.
Reconciling Items on the bank side: (Timing Differences)

2. Outstanding checks are checks that have been written and

recorded in the company's Cash account but have not yet cleared the bank
account or presented to the bank by the payee.
Checks written during the last few days of the month plus a few older checks are
likely to be among the outstanding checks.
Because all checks that have been written are immediately recorded in the
company's Cash account, there is no need to adjust the company's records for
the outstanding checks. However, the outstanding checks have not yet reached
the bank and the bank statement. Therefore, outstanding checks are listed on
the bank reconciliation as a decrease in the balance per bank.
Illustration of an Outstanding Check: On January 29, 2015, Juan issued a check to
Maria amounting to P2,000. The checks was then recorded by Juan in his books
as a deduction to his cash. It so happen that the bank was closed on that day
and Maria was able to visit the bank and have it encashed on February 1, 2015
only. In the bank statement received by Juan from his bank ending
January30,2015, the P2,000 check was not deducted however it was already
deducted in the books of Juan on January 29, 2015. The P2,000 check is called an
Summary of Bank Reconciliation per bank from Timing Differences

Unadjusted balance P10,000

Add:
Deposit in transit 5,000

Less:
Outstanding checks 2,000

Adjusted Balance P13,000

 Reconciling Items on the book side: (Timing Differences)

 Collection received by the bank

In some cases, customer deposits their payment directly to the
supplier’s bank. However, the customer may not have informed the
supplier. In this case the deposit is already recorded in the bank account
but not in the accounting books. Since cash was appropriately received,
it was correctly added to the bank account. Therefore, the correct
adjustment is to add the amount of the collection to the unadjusted book
balance.

Journal Entry
Cash P1000
Accounts Receivable P1000
 Reconciling Items on the book side: (Timing Differences)

Debit and credit memo

Debit memos are already deducted in the bank records on
the date of payment. However, there will be no basis of
recording the debit memo in the accounting records until the
statement of accounts received. Therefore, the correct
adjustment is to deduct the amount of the debit to the
unadjusted book balance.

Journal Entry:
Accounts Payable P1,000
Cash P1,000
 Reconciling Items on the book side: (Timing Differences)

Debit and credit memo

Credit memo is the direct opposite of debit memo. E.g. are
interest income and other collections made by the bank on
your behalf. This means that the bank have already recorded
the additions to your account. However, there is no basis to
record the credit memo in the accounting books prior to
receiving the bank statement. The correct adjustment is to add
the amount of credit memo to the unadjusted book balance.
Journal entry:
Cash P1,000
Accounts Receivable P1,000
 Reconciling Items on the book side: (Timing Differences)

Non-sufficient fund (NSF) check

NSF checks refer to checks received and deposited by the
account holder that are dishonoured by the issuing bank
because the issuer does not have enough funds on his checking
account to cover the check.

Journal Entry:
Accounts Receivable P1,000
Cash P1,000
Summary of Bank Reconciliation per accounting book from
Timing Differences
Unadjusted balance P10,000
Add:
Credit Memo 5,000
Interest Income 1,000
Collection Received 1,000

Less:
Debit Memo 1,000
Bank fees 1,000
NSF check received 1,000

Adjusted Balance P14,000

 Errors
It is common for either the bank or the company’s
accountant to make an erroneous entry made in their
books. These errors should be carefully analysed and
adjustment should be made on the side that committed
the error.
For example, the amount of the check received was
P9,540. It was recorded as debit to cash in the accounting
books for P9,450. In this case, the adjustment should be to
add P90 to the unadjusted accounting records. If the
bank committed an error in recording, the adjustment for
the correction should be made on the side of the bank.
Summary of Bank Reconciliation per bank from Timing Differences and Errors

Unadjusted balance P10,000

Add:
Deposit in transit 5,000
Bank errors

Less:
Outstanding checks 3,000
Banks errors
Adjusted Balance P12,000
Summary of Bank Reconciliation per accounting book from
Timing Differences and Errors
Unadjusted balance P10,000
Add:
Credit Memo 5,000
Interest Income 1,000
Collection Received 1,000
Errors
Less:
Debit Memo 1,000
Bank fees 1,000
NSF check received 1,000
Errors
Adjusted Balance P14,000
 Sample Problem: Elvis Company
The balance of general ledger cash account as of December 31, 2011 is P7,120. On the
other hand, the bank statement showed a December 31, 2011 balance of P6,850. You were tasked to
prepare the bank reconciliation statement for the company’s bank account.
Your analysis of the bank statement and the general ledger account revealed the following:
Deposit in transit P1,345
Credit memo for direct collection of a note receivable 755
Credit memo for interest income 65
Auto debit of cell phone bill 290
Customers NSF check 455
Outstanding check 575
Debit memo for bank charges 25
A check received from a customer was recorded in the accounting books for P3,280. The bank
statement revealed that the customer check cleared at the correct amount of P3,820.
The bank deducted P360 from the account of Elvis for a check issued by Elvira Inc.
Required: Prepare the bank reconciliation statement as of December 31, 2011 for Elvi’s Bank
account.
 Answer:
Bank Book
Unadjusted balance P6,580 P7,120
Add:
Deposit in transit 1,345
Credit memo for direct collection of a note receivable 755
Credit memo for interest income 65
Errors 360 540
Less:
Auto debit of cell phone bill 290
Customer NSF Check 455
Debit memo for bank charges 25
Outstanding check 575
Adjusted Balance P7,710 P7,710