Department of Education

Region III
DIVISION OF MABALACAT CITY

Name: _______________________________ Grade & Strand: ________________

School: _______________________________ Date: __________________________

LEARNING ACTIVITY SHEET

ABM 12 FUNDAMENTALS OF ABM 2 (Q2-WK1-2)
Bank Reconciliation

I. Introduction
Recall from the earlier module that cash is an important asset. It is
therefore essential for us to know how much cash the company can use
for its operation. Recall it further that we made it a policy to deposit all
cash receipts and use for disbursements. This implies that under an ideal
scenario, all cash that the company owns are kept in the bank. On the
other hand, we learned from the previous chapters that the company keeps
a detailed transaction (cash receipt journal, a cash disbursement journal
and a cash general ledger account. So part of our procedure should be
determined whether our cash records agrees with our inventory of cash I
bank. This procedure is called the bank reconciliation.

II. Learning Competency

This Learning Activity Sheets was designed and written with
you in mind. It is here to help you Describe the nature of a bank
reconciliation statement. (ABM_FABM12- IId-10), Identify common
reconciling items and describe each of them. (ABM_FABM12-IId-11),
Analyze the effects of the identified reconciling items. (ABM_FABM12-
IId-12)
III. Objectives

After going through this Learning Activity Sheets, you are expected to:

1. Identify common reconciling items and describe each of them

2. Describe the nature of a bank reconciliation statement.
3. Prepare a bank reconciliation statements
IV. Discussion

There are different approaches in preparing the bank reconciliation

statements. We will use the unadjusted and adjusted balance format. This
format facilitates the determination of the correct cash balance. Moreover,
after considering all reconciling items, the adjusted bank balance will
equal the book balance. Only at this point can we say that cash is fully
reconciled.
Bank Reconciliation Format
I. Book II. Books
Unadjusted Balance P xxx Unadjusted Balance P xxx
Add: Reconciling Items xxx Add: Reconciling xxx
Items
Less Reconciling items Xxx Less Reconciling Xxx
items
Adjusted Balance Pxxx Adjusted Balance Pxxx
Figure 1: Bank Reconciliation Format

What is the purpose of a bank reconciliation? Let us look at the

scenario below to understand the use of a bank reconciliation.

On January 1 2019, the company collected 10,000 from its bank

accounts receivable. The collection was deposited to open savings account
in ABC Bank. The following journal entry was made for this transaction
Cash in Bank- ABC bank 10,000
Accounts Receivable 10,000
Let assume that we left this deposit in the bank. There were no other
transaction on this cash accounts. On December 2019, the cash in bank-
ABC will have a ledger balance of 10,000. This is from the deposit entry on
January 1, 2021.
At the end of the year we receive the bank statement from ABC Bank.
What do you think the balance of this account according to the bank
statement?
Per bank statement, the balance of the account is 10.050. This gives
us a problem. The accounting record shows cash balance at 10,000. Do
we conclude the bank made an error because we sure there were no
movements in this cash accounts? Definitely not, We do not made such
conclusion without careful analysis of facts.
Now, we perform the bank reconciliation. We compare the details of
the bank statement with the ledger account. In this scenario there are no
other transaction recorded on the ledger account except for the original
entry. On the other hand we noted that the bank statement shows interest

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of P50 earned by the savings account. From this analysis we conclude that
the interest earned by the savings account was not yet recorded in the
accounting books. We also know that the interest income credited by the
bank should be recorded in the accounting books because it is usable
cash.
I. Bank II. Books
Unadjusted Balance 10,050 Unadjusted Balance 10,050
Add:
Interest Income 50
Earned

Adjusted Balance 10,050 Adjusted Balance 10,050

Figure 2 shows the bank reconciliation for this scenario

From the bank reconciliation< we prepare the journal entry to adjust for
interest income as follows.

Cash 50

Interest Income 50
In the next section we will discuss the different kinds of reconciling items,
We will classify these items into 1. Timing Differences; 2. Errors

Timing Differences

In our analysis we may find transaction that were recorded by the bank
before it was recorded in the accounting books. It may also be the other
way around. The accounting books may be ahead of the bank records.
Such as timing differences will result in reconciling items only if the cut-
off date occurs between the dates the bank and the accounting books
record the transaction.

We divide our discussion of the timing differences into two parts- 1.

Reconciling items on the side of the bank; 2. Reconciling items on the side
of the accounting records.

1. Reconciling items on the bank side

A. Outstanding checks
Recall from the previous chapter . The cash accounts is credited when the
a checked is issued. On the other hand, checks are deducted from the
bank account when the payee deposits or cashed the checks. Let s examine
the scenario below:

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 June 28, 2020 ABC company issued a 10,000 check in the favour of
Laxamana Inc. Check was also recorded on the
accounting books on this date

June 29,2020 ABC Company informed Laxamana Inc.that their check

is ready for pick up

June 30,2020 The messenger of Laxamana Inc. picked up checked

from the office of ABC company

July 1, 2020 The checked was deposited in BDO bank.

July 3,2020 The checked cleared through the banking system. The
bank deducted 10,000 from ABC checking account

We can clearly see the timing difference in the above scenario. The checked
was credited in the accounting records in June, However the deduction in
the bank account occurred in July. Therefore if we look at the balance of
the accounting records and the bank as of June 30,2020, assuming no
other reconciling items, we will see that the bank records have a balance
greater than the accounting records.
This checked is referred to as outstanding check. As of the cut-off date,
the checked is already receive by the payee but not yet cleared by the bank.
Which of the two records is correct? In this case the accounting books is
correct. Recall that our objectives is to determine the amount the amount
of cash that the company can use. The amount 10,000 is already promised
to Laxamana Inc. as of June 30 and should not be used for any purpose.
Therefore , the correct adjustments is to deduct the amount of the
outstanding checks from the unadjusted bank balance.

B. Deposit in Transit

Deposit in transit refers to two items. (1) amount that the deposited in the
bank after the cut-off time; and (2) amount that is received by the company
for deposit but not yet deposited in the bank. To explain this further, Lets
study the two examples below.

Example 1: Amount that is deposited in the bank after the cut- off time.

June 30, 2020

1:00 pm ABC company received a 5,000 checked from

customer. Collection was promptly recorded in the
accounting books.

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 2:30 pm ABC company deposited the 5,000 checked in GHI
bank. The teller informed you that their cut-off time for
the checked deposit is 11:00 AM> Late deposit was
stamped on the deposit slip.

July 1,2020 Checked deposit was credited in ABC company’s bank

account

All banks have cut-off time for checked deposits. It ranges from 11:00 AM
to 1:00PM. If a checked deposit was made after the cut-off time, It will be
reflected on the bank account in the next working day. Deposits received
during the weekends ( for those banks with weekend services) are recorded
on the succeeding Monday.

Example 2: Amount that is received by the company but not yet

deposited in the bank

June 30, 2020

3;00 PM ABC company receive 15,000 checked from a

customer

4:00PM ABC company personnel prepared deposit slip for the

checked

July 1,2020 Checked deposited to ABC Company’s bank account

In example 2, the checked was received after the normal bank closing time
of 3:00Pm. The deposit slip was prepared but was receive by the bank and
recorded the deposit the next day.
From the above example, we see the effects of the timing differences in the
recording above transaction. The collection were recorded in the
accounting books on the June 30. On the other hand, the checked deposits
were credited to the bank account on July 1. Therefore if we look at the
balance of the accounting records and the bank record as of June 20,2020.
Assuming no other reconciling items, we will see that the accounting books
have a balance greater than the bank records.

2. Reconciling Items on the book side

A. Collection receive by the bank
In some cases, customers deposits their payment directly to the supplier’s
bank. However, the customers may not have informed the supplier. In this
case the deposit is already recorded in the bank account but not in the

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accounting books. Since cash was appropriately receive, it was correctly
added to the bank account. Therefore the correct adjustments is to add
the amount of collection to the unadjusted book balance. The journal entry
to adjust for collections receive by the bank I given below.

Cash xxx
Accounts Receivable xxx

A debit entry in the bank account deduction. On the other hand a credit
entry is an addition. Why is this so? From the point of view of the bank,
deposit accounts are liability to their depositors. Recall that liability has a
credit normal balance. Hence, bank account will be increase by credits and
decreased by debit in the accounting books of the bank. Debit memo refers
to the deduction made by the bank checks such as bank service charge.
Debit memos are already deducted in the bank record 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 is receive.
Therefore correct adjustments is to deduct the amount of the debit to the
adjusted book balance. The adjusted journal entry to adjust for the debit
memo is given below.

Accounts receivable/ Accrued Expenses XXX

Cash XXX

The direct opposite of debit memo is credit memo. Examples 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. How
ever there is no basis to record the credit memo in the accounting books
prior to receiving the bank statement. The correct adjustments is to add
the amount of credit memo to adjust book balance.

The journal entry to record the credit memo in the accounting book is given
below

Cash XXX
Accounts receivable XXX

B. Non- Sufficient Funds ( NSF) Check

NSF checks refers to check received ad deposited by the account holder
there are dishonored by the issuing bank because the issuer does not have
enough funds on his checking accounts to cover the check. Recall that the
entry to debit cash was made upon receipt of this check. Therefore, it was
already added to the accounting books as part of cash. How ever the

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company learned from the bank statement that the checked was
dishonored by the issuers bank. The bank had correctly deducted the NSF
in the record, Therefore the correct adjustments to reflect the NSF checks
is to deduct the amount from the adjusted accounting records. The journal
entry to adjust for NSF checks is given below.

Accounts Receivable XXX

Cash XXX

PER BANK PER ACCOUNTING BOOKS

Unadjusted Balance xxx Unadjusted Balance xxx
Add: Add:
Deposit in transit xxx Credit memo xxx
Interest Income
Collection Receive by the bank
Less: Less:
Outstanding Checks xxx Debit memo xxx
Bank fees
NSF checked receive
Adjusted Balance xxx Adjusted Balance xxx
Figure 3: shows the summary of Reconciling Items resulting from timing
differences

Errors
It is common for either the bank or the company’s accountant to make
an erroneous entry in their books. These errors should be carefully
analyzed and adjustment should be made on the side of the committed
error. For example, the amount of the check receive was P9,540. It was
recorded as a debit to cash in the accounting books for P 9,450. In this
case the adjustment should be to add P90 to the unadjusted accounting
records. If the bank committed an error in the recording for the correction
should be made on the side of the bank.

Sample comprehensive problem: David Company

The balance of the general ledger cash accounts as of December 31,2019
is P 7, 120. On the other hand, the bank statement showed a December
balance of P6,580. You were ask to prepare the bank reconciliation
statement for the company’s bank account.
Your analysis of the bank statement and general ledger account revealed
the following
Deposit in Transit 1,345

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 Credit Memo for direct collection of note receivable 755
Credit memo for interest income 65
Auto debit of cellphone bill 290
Customers NSF check 455
Outstanding Checks 575
Debit memo for bank charges 25
A checked receive from a customer was recorded in the accounting
books for 3, 280. The bank statement revealed that the customer checked
cleared at the correct amount of 3, 280.
The bank deducted 360 from the account of David’s for a checked
issued by Elvira’s Inc.
Required: Prepare the bank reconciliation statement as of December 31,
2020 For David’s Bank account.

Solution:
Bank Book
Unadjusted balance, December 2019 6,580 7,120
Add:
Deposit in transit 1,354
Credit memo for collection of note 755
receivable
Credit memo for interest income 65
Errors 360 540
Less:
Auto debit for cellphone bill 290
Debit memo for bank charges 25
Customer NSF check 455
Outstanding Checks 575
Adjusted Balance December 2019 P7,710 P7,710

V. ACTIVITY
Activity #1
Identify whether the following independent transaction is a book or a bank
reconciling. In addition, determine the amount of the error and state
whether the amount will be added or deducted in the preparation of the
bank reconciliation (use adjusted method)

1. Eagle Repairs received P1,500 from Jane. The bookkeeper recorded the
amount as P500.
2. Nation Bank collected from the customer of Eagle the sum of P5,000
representing payment of the said customer to Eagle. No entry was made in
the books of Eagle

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3. The bank teller deducted CK 123 for P3,500 from the account of Eagle.
The said check was issued by Egles Company a different depositor of the
bank.
4. The bookkeeper of Eagle recorded Check No. 345 in the Cash
Disbursement Journal as P5,205. The correct amount of the check was
P5,250
5. The deposits of Eagle earned interest of P100 for the month. Eagle does
not have knowledge of interest earned until it receives the bank statement

Activity #2
Given the above information, tell whether it is a book reconciling or a bank
reconciling item. Prepare a bank reconciliation statement.
1. The bank statement for August 2014 shows an ending balance of
Php3,490.

2. On August 31 the bank statement shows charges of Php35 for the

service charge for maintaining the checking account

3. On August 28 the bank statement shows a return item of Php100 plus

a related bank fee of Php10. The return item is a customer's check that
was returned because of insufficient funds.

4. The bank statement shows a charge of Php80 for check printing on

August 20.

5. The bank statement shows that Php8 was added to the checking
account on August 31 for interest earned by the company during the
month of August.

6. The bank statement shows that a note receivable of Php1,000 was

collected by the bank on August 29 and was deposited into the company's
account. On the same day, the bank withdrew Php40 from the company's
account as a fee for collecting the note receivable.

7. The company's Cash account at the end of August shows a balance of

P967.

8. During the month of August the company wrote checks totaling more
than Php50,000. As of August 31 Php3,021 of the checks written in August
had not yet cleared the bank and Php200 of checks written in June had
not yet cleared the bank.

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9. The Php1,450 of cash received by the company on August 31 was
recorded on the company's books as of August 31. However, the Php1,450
of cash receipts was deposited at the bank on the morning of September
1.

10. On August 29 the company's Cash account shows cash sales of

Php145. The bank statement shows the amount deposited was actually
Php154. The company reviewed the transactions and found that Php154
was the correct amount.

VI. Assessment
Bank reconciliation problem:
The bank statement for Juan Company shows a balance per bank of
P15,907.45 on April 30,2015.
On this date the balance of cash per books is P11,589.45.
Additional information are provided below:
Deposits in transit: April 30 deposit (received by the bank on May 1)
P2,201.40
Outstanding checks: No. 453-P3,000.00
No. 457-P1,401.30
No. 460-P1,502.70

Errors: Juan wrote check no. 443 for P1,226.00 and the bank correctly
paid that amount. However, he recorded the check as P1,262.00.

Bank memoranda:
Debit– NSF check from Pedro P425.60 .
Debit– Charge for printing company checks P30.00
Credit – Collection of note receivable for P1,000 plus interest earned of
P50, less bank collection fee of P15.00.

Required: Prepare a bank reconciliation statement using the adjusted

method. Hint: Bank Debit Memo are deductions made by the bank to the
account of the depositor Bank Credit Memo are additions made by the
bank to the account of the depositor

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VII. Reflection

After answering the activity and assessment part of this learning

activity sheet. Answer the following statements with a yes or a no to
reflect on your understanding about the topic.

Do I understand the reason for the preparation of a ( ) Yes ( ) NO

bank Reconciliation statements?
Can I identify and describe the nature of common bank ( ) Yes ( ) NO
reconciling items?
Am I able to prepare bank reconciliation statement? ( ) Yes ( ) NO

Am I able to prepare adjusting entries based on the ( ) Yes ( ) NO

bank reconciliation statement?

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 VIII. Reference

Books
 Beticon J., Domingo J., Yabut F., Malogod M., Fundamentals of
Accounting, Business and Management 2,Vibal Group
 Salazar D., (2017) Fundamentals of Accounting, Business and
Management 2
 Teaching Guide for Senior High School: Fundamentals of
Accounting, Business and Management 2
 Ong F., Gomendoza J., Fundamentals of Accounting, Business and
Management 2
 Binuya MVJ., Fundamentals of Accounting, Business and
Management 2

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Assessment
Activity 2 Activity 1
1. Book. P1,000 will
be added to the
books
2. Book. P5,000 will
be added to the
books.
3. Bank. P3,500 will
be added to bank
records.
4. Book. P45 will be
deducted in the
book records.
5. Book. P100 is
added to the
book records
Answer Key IX.
X. Development Team

Development Team of the Learning Activity Sheets

Writer: Riza M. Laxamana

Editor: Anthony Rayley M. Cabigting, DEM
Reviewer:
Illustrator:
Layout Artist:
Management Team: Engr. Edgard C. Domingo, PhD, CESO V
Leandro C. Canlas, PhD, CESE
Elizabeth O. Latorilla, PhD
Sonny N. De Guzman, EdD
Elizabeth C. Miguel, EdD

For inquiries or feedback, please write or call:

Department of Education – Division of Mabalacat

P. Burgos St., Poblacion, Mabalacat City, Pampanga

Telefax: (045) 331-8143

E-mail Address: mabalacatcity@deped.gov.ph

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