Bank Reconciliation

Bank Reconciliation

• Report prepared for the purpose of bringing the cash balances of

the following into agreement:
• Per records
• Per bank statement
• Prepared to explain the difference between the cash balance in
the accounting records and cash balance reported on the bank
statement.
• Prepared to arrive at the correct cash balance to be presented in
the financial statements
Bank Statement

• Bank report showing the deposits and withdrawals during the

period, as well as the cumulative balance of the depositor’s bank
account.
 Ella Company
Bank Reconciliation
For the month ended March 31, 2020

Balance per books Pxx Balance per bank Pxx

Add: Credit memos xx Add: Deposit in transit xx
Less: Debit memos xx Less: Outstanding checks xx
Add/Less: Book errors xx Add/Less: Bank errors xx
Adjusted book balance Pxx Adjusted bank balance Pxx
• Balance per books – ending balance of cash per books/ledger prior
to adjustment
• Balance per bank – ending balance of cash in bank prior to
adjustment
Credit Memo (CM)

• Additions (bank credits) made by bank to depositor’s bank account

but not yet recorded by depositor.
• Note: CM increased already the bank statement, but not yet in the books.
• Examples:
• Collections made by the bank on behalf of the depositor
• Interest income earned by the deposit
• Proceeds from loan directly added by bank to depositor’s account
• Unrolled-over matured time deposits transferred by bank to entity’s
account
• Addition to book balance
Debit Memos (DM)

• Deductions made by bank to depositor’s bank account but not yet

recorded by depositor.
• Note: DM has already decreased the bank statement, but no effect yet in the
books.
• Examples:
• Bank service charges
• NSF/DAIF Checks
• Automatic debits (e.g. payment of bills)
• Loan payment made directly from bank account.
• Deduction in book balance.
Deposits in transit

• Deposits made by the entity but not yet reflected in the bank
statement.
• Book balance has already increased at that time; however, bank balance
hasn’t increased yet.
• Deposits placed in overnight depository, deposits made through
check (which has not yet cleared), deposits made after bank’s cut-
off
• Addition to bank balance
Outstanding checks

• Drawn and released to payees but not yet encashed by the bank
• This already has the effect of the book balance decreased, but no effect
yet by the bank
• Exclude the following from outstanding checks:
• Certified checks – checks already paid by the bank
• Stale checks – reverted back to cash because they remain outstanding for a
relatively long period of time.
Illustration

• Ella Company received its April 2020 bank statement. The April 30, 2020 cash balance per ledger is
P150,000 while the cash balance shown on the bank statement is P125,000. Here are the following
information:
• A customer deposited P25,000 to your bank account. No record of this transaction is shown in the
books.
• The bank makes automatic payments for Ella Company’s electric bills. The bill for this month
amounted to P69,000
• Collection of notes receivable amounting to P25,000, plus interest on notes receivable of P1,500.
• Deposits on April 30, 2020 amounting to P50,000 did not appear in the bank statement.
• Checks drawn and recorded, but not yet encashed by the bank are the following:
• Check #001 – P15,000
• Check #002 – P20,000
• Check #003 – P10,500
• Check #004 – P22,000
• Check #125 presented to bank for encashment was returned to Ella Company. The reason: amount of
P20,000 written in words as “Twenty pesos”. The proper amount is P20,000.
• Bank service charge amounted to P5,000
1. Identify which of the following are the book and bank reconciling
items
2. Sort the items according to where they are intended to be in a
bank reconciliation statement
3. Compute correct cash balance.
Illustration

• A customer deposited P25,000 to your bank account. No record of this

transaction is shown in the books. (Credit memo - BOOK)
• The bank makes automatic payments for Ella Company’s electric bills. The bill
for this month amounted to P69,000 (Debit memo – BOOK)
• Collection of notes receivable amounting to P25,000, plus interest on note
receivable of P1,500. (Credit memo – BOOK)
• Deposits on April 30, 2020 amounting to P50,000 did not appear in the bank
statement. (Deposit in transit – BANK)
• Checks drawn and recorded, but not yet encashed by the bank are the
following: (Outstanding checks – BANK)
• Check #001 – P15,000
• Check #002 – P20,000
• Check #003 – P10,500
• Check #004 – P22,000
• Check #125 presented to bank for encashment was returned to Ella
Company. The reason: amount of P20,000 written in words as
“Twenty pesos”. The proper amount is P20,000. (Debit memo –
BOOK)
• Bank service charge amounted to P5,000 (Debit memo – BOOK)
 Ella Company
Bank Reconciliation
For the month ended March 31, 2020

Balance per books P150,000 Balance per bank P125,000

Add: Credit memos 51,500 Add: Deposit in transit 50,000
Less: Debit memos 94,000 Less: Outstanding checks 67,500
Adjusted book balance P107,500 Adjusted bank balance P107,500
BOOK AND BANK ERRORS

• There are instances where the records per book/bank have

mistakes on recording items, such as:
• Understatement/overstatement of amounts, which can lead to
understatement/overstatement of cash balance;
• Erroneous deposits/withdrawals; and
• Mistake by bank in crediting/debiting the amount to the company
Illustration 1

• Deposit of P10,000 recorded by bank as P1,000.

• Who committed the error? Bank.
• Effect: Understatement of cash balance by P9,000.
• Remedy: Increase cash by P9,000.

• Explanation: The bank only recorded P1,000 deposit when the proper
amount should be P10,000. Because the deposit is understated, the effect
on the overall cash balance is understated as well. To remedy this,
increase cash by P9,000.

To recap: increase cash because the bank understated in its records.

Illustration 2

• Deposit of P1,000 recorded by bank as P10,000

• Who committed the error? Bank.
• Effect: Overstatement of cash balance by P9,000.
• Remedy: Decrease cash by P9,000.

• Explanation: Bank recorded P10,000 deposit, which is in excess of

the correct amount of deposit. Since the bank made a cash
overstatement in recording the deposit, the bank should decrease
its cash by P9,000.
Illustration 3

• Check #332 properly drawn and recorded for P18,000 in payment of

accounts payable was recorded by bank as P10,000.
• Who committed the error? Bank
• Effect: Overrstatement of cash balance by P8,000.
• Remedy: Decrease cash by P8,000.

• Explanation: Bank has an overstated cash balance by P8,000

because the bank didn’t record enough cash withdrawal in its
record, thus the overstatement. The remedy is to decrease further
the cash by P8,000.
Illustration 4

• Check #332 properly drawn and recorded for P10,000 in payment

of accounts payable was recorded by bank as P18,000.
• Who committed the error? Bank
• Effect: Understatement of cash balance by P8,000.
• Remedy: Increase cash by P8,000.

• Explanation: Bank has an understated cash balance by P8,000

because the bank made excess withdrawals in its record. The
remedy is to increase further the cash by P8,000.
Illustration 5

• Bank deposit properly recorded as P10,000 recorded in the books

as P1,000.
• Who committed the error? Book.
• Effect: Understatement of cash balance by P9,000.
• Remedy: Increase cash by P9,000.
Illustration 6

• Deposit of P1,000 properly recorded by bank was recorded by book

as P10,000
• Who committed the error? Book.
• Effect: Overstatement of cash balance by P9,000.
• Remedy: Decrease cash by P9,000.
Illustration 7

• Check #332 properly recorded by bank for P18,000 in payment of

accounts payable was recorded in the books as P10,000.
• Who committed the error? Book
• Effect: Overstatement of cash balance by P8,000.
• Remedy: Decrease cash by P8,000.
Illustration 8

• Check #332 properly recorded by bank for P10,000 in payment of

accounts payable was recorded in the books as P18,000.
• Who committed the error? Book
• Effect: Understatement of cash balance by P8,000.
• Remedy: Increase cash by P8,000.
Illustration 9

• Bank erroneously deposited P15,000 to Jonah Company, which was

meant to be for Jonas Company. (Assume you are Jonah Company)
• In this case, since the bank deposited P15,000 to Jonah Company and not in
Jonas Company, the deposit is not yours. Therefore, deduct P15,000 from
the bank account because the bank made an error in depositing P15,000
that does not represent your deposit.
• Check withdrawn for P10,000 debited to Jonah Company instead
of Jonas Company. (Assume you are Jonah Company)
• In this case, bank recorded a withdrawal of P10,000 to Jonah Company
instead of Jonas Company. Since the check withdrawn does not represent
your check withdrawn, add back P10,000.