CHAPTER 2 BANK RECONCILIATION

o Bank Reconciliation is necessary

only for Demand Deposits or
BANK DEPOSITS checking account.

(3) Kinds of Bank Deposits o The person authorized to draw

checks against the account will
 Demand Deposits be required to sign cards
 Saving Deposits furnished by the bank, to show
 Time Deposit the specimen signature to be
used on the checks.
DEMAN DEPOSIT ( noninterest bearing)
 Current account/ Checking account/ o Specimen Signature- filed by
Commercial deposit the bank so that any teller who
may be unfamiliar with a
 are covered by deposits slips
depositor’s signature can test
 withdrawable on demand by
the authenticity of a check by
drawing checks against the bank. comparing the card and check
SAVING DEPOSIT ( Interest bearing) signed.

 The depositor is given a passbook upon o Bank will request that the
the initial deposit. directors pass a resolution
 Passbook is required when making authorizing certain officers of
deposits and withdrawals the corporation as signatories
 Anytime but bank sometimes may of checks and that a copy of this
require notice of withdrawal. resolution be filed with the
TIME DEPOSIT ( Interest bearing) bank.

 Similar to saving deposit in the sense ILLUSTRATION: affecting the depositor and the
that it is interest bearing. bank.
 Is evidenced, however, by a formal Assume the Company X (the depositor)
agreement in an instrument called collected P100,000 from a customer in settle of
certificate of deposits. any account. The collection is deposited at the
 May be preterminated or withdrawn on First bank.
demand or after a certain period of
time agreed upon. Collection:

Cash/CIB 100,000
AR 100,000

Book of the bank:

Cash 100,000
Company X 100,000
 o The journal entry of the book of the o When the depositor’s account is
bank is made for our purpose to decreased, the same is debited.
facilitate the illustration.
o In practice, The account credited by the
bank is Demand Deposit account but EXPLANATION
the same is posted to the subsidiary
ledger of Company X. Two accounts have equal or the same
o When the bank credits the account of balances because they are reciprocal
the depositor, Company X. It recognizes accounts.
its liability to the depositor. When one account is debited, the other
o Legally, when a deposit is made, there account is credited or vice-versa.
exists a debtor- creditor relationship Two account cover or reflect the same
between the bank and depositor. item or transaction.
(Bank- debtor and Depositor- creditor) If no errors are committed in recording,
o When the account of the depositor is and the same information has been
increased the same is credited. recorded by both accounts, the wo
should have equal or the same balance.
But very frequently, there are items on
the depositors’ book which do not
ILLUSTRATION:
appear on the bank records as of the
Assuming, Company X subsequently issued a same date.
check for 30,000 in payment of an account
Ex:
payable.
Check issued by the depositor are not yet
book of Company X:
presented for payment to the bank or
AP 30,000 depositors may have been made after the
bank records are sent out to the depositor.
Cash 30,000
Less frequently, there items on the
bank records which do not appear
Book of the bank: on the depositor’s book.

Company X 30,000 Ex:

Cash 30,000  Charged the depositor’ account with

service charges which the depositor
may not know about until report is
o When a check is issued, the payee will received.
present the same to the bank for  Notes endorsed to the bank for
payment. collection have been collected by the
o The depositor is actually ordering the bank and credited to the depositor’s
bank to pay the payee out of its deposit account but notice of collection is not
in the bank. yet received from the bank by the
o This is the reason the bank debits the depositor.
account of the depositor thereby
reducing its liability to the depositor.
Bank Reconciliation

 Is a statement which brings into Reconciling Items

agreement the cash balance per book
End of every month comparison between the
and cash balance per bank.
cash records of the depositors and the bank
 Usually prepared monthly because the
statement received from the bank will yield the
bank provides the depositor with the
ff. reconciling items:
bank statement at the end of every
month.

Bank Statement is a monthly report of the bank 1. Book Reconciling Items:

to the depositor showing: - Credit memo
- Debit memo
- Errors
a) The cash balance per bank at the
beginning
2. Bank Reconciling Items:
b) The deposits made by the depositor and
- Deposit in transit
acknowledged by the bank
- Outstanding Checks
c) The check drawn by the depositor and
- Errors
paid by the bank
d) The daily cash balance per bank during
CREDIT MEMOS
the month.
Refers to items not representing deposits
credited by the bank to the account of the
depositor but not yet recorded by the depositor
Bank Statement is an exact copy of the
as cash receipts.
depositor’s ledger in the record of the bank.

When the bank statement is received, attached Have Effect of increasing the Bank Balance.
thereto are the depositor’s canceled checks and
any debit or credit memoranda that have
Example:
affected the depositor’s account.
a) Notes receivable collected by the bank
The cancelled checks are the checks issued by
in favor of the depositor and credited to
the depositor and paid by the bank during the
the account of the depositor
month.
b) Proceeds of bank loan credited to the
Canceled Checks- canceled by stamping or account of the depositor
punching to show that they have been paid. c) Matured time deposits transferred by
the bank to the current account of the
depositor.
DEBIT MEMOS DEPOSIT IN TRANSIT

Refers to items not representing checks paid by Are collections already recorded by the
the bank which are charged or debited by the depositor as cash receipts but not yet reflected
bank to the account of the depositor but not yet on the bank statement.
recorded by the depositor as cash
disbursement.
Includes:
The debit memos have the effect of decreasing
the bank balance. a) Collection already forwarded to the
bank for deposit but too late appear in
the bank statement.
Example: b) Undeposited collections or those still in
the hands of the depositor. In effect,
a) NSF or no sufficient fund checks/ DAIF
these are cash on hand awaiting to
(Drawn Against Insufficient Fund)
deliver to the bank.
- Checks deposited but returned by the
bank because of insufficiency of fund.

OUTSTANDING CHECK

b) Technically defective Checks Are checks already recorded by the depositor as

- Checks deposited but returned by the cash disbursement but not yet reflected on the
bank because of technical defects such bank statement.
as absence of signature/
Includes:
countersignature, erasure not
countersigned, mutilated checks, Checks drawn and already given to payee but
conflict amount in words and amount in not yet presented for payment.
figures.
Certified checks- one where the bank has
stamped on its face the word “accepted” or
“certified”
c) Bank Service Charges
- Includes bank charges for interest, When certified, the account of the depositor is
collection, checkbook and penalty. immediately debited or charged to insure the
eventual payment of the check.

Certified Checks should be deducted from the

d) Reduction of loan
total outstanding checks ( if included therein)
- Pertains to amount deducted from the
because they are no longer outstanding for
current account of the depositor in
bank reconciliation purposes.
payment for loan which the depositor
owes to the bank and which has already
matured.
FORMS OF BANK RECONCILIATION

a) Adjusted balance method

- Book balance and bank balance are
brought to correct cash balance that
must appear on the balance sheet.
b) Book to Bank method
- Book balance is reconciled with the
bank balance or the book balance is
adjusted.
c) Bank to Book method
- Bank balance is reconciled with book
balance or the bank balance is adjusted.

Adjusted Balance method is preferred over the

two.

Adjusted