Module 8

BANK RECONCILIATION
8
______________________________________________________________________________ MODULE
Learning Objectives:
1. To describe the nature of a bank reconciliation statement.

2. To identify common reconciling items and describe each of them.
3. To analyze the effects of the identified reconciling items.
4. To prepare a bank reconciliation statement.
Bank Reconciliation Statement
A bank reconciliation statement is a report that is prepared for the purpose of bringing the balances of cash (a)
per records and (b) per bank statement into agreement.
More specifically, bank reconciliations are prepared to

a. Explain the difference between the cash balance reported on the bank statement and the cash balance
in the accounting books.
b. Arrive at the adjusted (correct) cash balance to be shown in the financial statements.
c. Provide information for reconciling journal entries.
Bank reconciliations are prepared on a monthly basis, immediately upon receipt of monthly bank statements
from banks.
When a business has more than one bank account, separate bank reconciliations are made for each of those
accounts.
Pro forma Bank Reconciliation Statement
ABC Company
Bank Reconciliation
For the month ended July 31, 2020
Balance per books, end xx Balance per bank statement, end xx

Add: Credit Memos (CM) xx Add: Deposit in Transit (DIT) xx
Less: Debit Memos (DM) xx Less: Outstanding Checks (OC) xx
Add/Less: Book errors xx Add/Less: Bank errors xx
Adjusted balance xx Adjusted balance xx
 Balance per books, end. - the cash balance in the accounting records as of the end of the current month.
In the pro forma statement above, "Balance per books, end." is the cash balance in the accounting
records as of August 31, 2016.
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 Balance per bank statement, end. - the ending cash balance in the bank statement of the current
month. In the pro forma statement above, "Balance per bank statement, end." is the cash balance on
the bank statement as of August 31, 2016.
 Credit memos - These are additions (bank credits) made by the bank to the depositor's bank account
but not yet recorder by the depositor.
Examples of credit memos include:

i. Collections made by the bank on behalf of the depositor.
ii. Interest income earned by the deposit.
iii. Proceeds from loan directly credited or added by the bank to the depositor's account.
 Debit memos - These are deductions (bank debits) made by the bank to the depositor's bank account
but not yet recorded by the depositor.
Examples of debit memos include:

i. Bank service charges representing bank charges for fees, interest, penalties, and surcharges.
ii. No sufficient funds checks (NSF) or Drawn against insufficient funds checks (DAIF) - These are
checks deposited and already recorded by the bank but subsequently returned to the depositor
because the drawer's fund is insufficient to pay for the check.
iii. Automatic debits, such as when the depositor and the bank agree that the bank will make
automatic payments of bills on behalf of the depositor.
iv. Payment of loans - This represents payment of loan which the depositor agreed to be made out
directly from its bank account.
 Book errors - errors committed by the depositor (e.g., erroneous recording in the accounting books).
 Deposits in transit - are deposits already made but not yet received by the bank, or received by the
bank but not yet credited to the depositor's bank account. Deposits in transit often occur when
deposits are mailed to the bank, placed in an overnight depository, made through check and the check
has not yet cleared, or made after the bank's cut-off.
 Outstanding checks - These are checks drawn and released to payees but are not yet encashed with
the bank.
Outstanding checks exclude the following:

i. Certified checks - The bank, when certifying checks, automatically debits (reduces) the depositor's
account and assumes direct liability on paying the certified checks to the payee. Certified checks are
already deducted from the account thus, they are no longer outstanding.
ii. Stale checks (checks that remain outstanding for a relatively long period of time) are reverted back to
cash, meaning they are added back to the cash balance per books, and are excluded from outstanding
checks.
 Bank errors - errors committed by the bank.
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Credit memos, debit memos, and book errors are referred to as book reconciling items.
Deposits in transit, outstanding checks, and bank errors are referred to as bank reconciling items.
Illustration 1: You received your July 20x1 bank statement. The July 31, 20x1 cash balance in your accounting
books is 300,000 while the cash balance shown on the bank statement is 430,000. You determined the
following reconciling items:
a. Credit memo - 190,000

b. Debit memo - 30,000
c. Deposits in transit - 50.000
d. Outstanding checks - 20,000
Prepare the bank reconciliation statement.
Illustration 2: On October 1, 2018, you opened a checking account for your business for an initial deposit of
10,000. During the month, you wrote checks totalling 5,000 and made a 2,000 deposit on October 29, 2018.
Accordingly, the ending balance of your "Cash in bank" account per accounting records is P7,000.
Today, November 3, 2018, you received the October 31, 2018 bank statement and found out that your account
balance is 16,400.
You started your investigation for the difference and discovered the following:
a. One of your customers deposited 12,000 to your bank account as payment for a purchase.
b. The bank paid your Globe internet bill of 1,600 on your behalf. You have agreed to this arrangement.
c. Your 2,000 deposit on October 29, 2018 was not yet reflected on the bank statement because the
deposit was through check and it takes about 3 days for a check to clear the bank.
d. Of the total 95,000 checks you have written, only 4,000 were encashed by the payees.
Prepare for a bank reconciliation statement.
Illustration 3: You received your August 20x1 bank statement. The August 31, 20x1 cash balance in your
accounting books is P520,000, while the cash balance shown on the bank statement is P410,000. You
determined the following information:
a. Check No. 2345 for P45,000, issued to a supplier, is not yet presented to the bank for payment.
b. A P205,000 check deposit, with deposit slip no. 0989, is not yet credited to your account.
c. A customer deposited P60,000 to your bank account. You have not yet recorded this collection of
account receivable in your accounting books.
d. The bank paid P10,000 monthly mobile phone charges directly out of your account.
Prepare the bank reconciliation statement
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BANK RECONCILIATION

1. To describe the nature of a bank reconciliation statement.

Bank Reconciliation Statement

More specifically, bank reconciliations are prepared to

Pro forma Bank Reconciliation Statement

Balance per books, end xx Balance per bank statement, end xx

Examples of credit memos include:

Examples of debit memos include:

Outstanding checks exclude the following:

 Bank errors - errors committed by the bank.

a. Credit memo - 190,000

Prepare the bank reconciliation statement.

Prepare for a bank reconciliation statement.

Prepare the bank reconciliation statement

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