FABM2 – June 17, 2021

ASYNCHRONOUS ACTIVITY

1. Study the given lessons, answer the questions that follow.

2. Perform the Practice Tasks.
Sketchnoting and learning log is NOT REQUIRED for the 4th Quarter.
3. Please send images/pictures of outputs/answer sheet thru FB Messenger.
Thanks, happy working. <3

BANK RECONCILIATION

A. Nature of Bank Reconciliation Statement

Banks generally require that every deposit is accompanied by a signed and dated deposit slip.
Every withdrawal must be paired with a signed and dated check. These documents are kept by the
bank to resolve any disputes that may arise regarding a transaction.

The bank also sends the business a monthly statement that summarizes the activity associated
with the account. This statement lists all deposits and withdrawals. It includes a copy of each
transaction’s documentation. Generally, the person in charge of the business’s books receives this
documentation and compares it to the business records and those to the bank’s, the company can
use the documentation enclosed with the statement to determine where the discrepancy is and
contact the people involve with the questionable transactions.

It is normal for a company's bank balance as per accounting records to differ from the balance
as per bank statement. The difference between these figures is the reasons why companies prepare
a bank reconciliation statement.

Bank reconciliation statement is a report which compares the bank balance as per company's
accounting records with the balance stated in the bank statement. It is an internal control that ensures
that then cash in its accounts is equal to what it has recorded in its books.

The two common causes of the discrepancy in figures are:

1. Time lags that prevent one of the parties (company or the bank) from recording the transaction
in the same period as the other party.

Transactions may be recorded by the bank before it will be recorded in the accounting books.
It may also be the other way, the accounting books may be ahead of the bank records. Such
timing differences will result in reconciling items only if the cut-off date occurs between the
date the bank and the accounting books record the transaction.

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.

Importance of Bank Reconciliation:

• 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, 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 are 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.
The most common format of a bank reconciliation statement is shown below:

For the learners, the

adjusted method will be used.
The two remaining methods
will be discussed in higher
accounting subjects in case
they wish to pursue an
accounting degree. In
practice anyway, the adjusted
method is the commonly used
method.

B. Bank Reconciling Items

Bank reconciliations are prepared by bank depositors when they receive their monthly bank
statements. The reconciliation is made to check any required adjustments to the cash balance.

The most common format of a bank reconciliation statement is shown below:

The key terms to be aware of when dealing with a bank reconciliation are:

• Deposits in transit are amounts already received and recorded by the company but
are not yet recorded by the bank.

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 to report the true amount of cash.

A deposit in transit is on the company's books, but it isn't on the bank statement.

• 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.

Example: On January 29, 2015, Juan issued a check to Maria amounting to P2,000.
The check was then recorded by Juan in his books as a deduction to his
cash. It so happens 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 January 30,
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
outstanding check.
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.

• Bank errors are mistakes made by the bank. It could include the bank recording an
incorrect amount, entering an amount that does not belong on a company's bank
statement, or omitting an amount from a company's bank statement.
The company should notify the bank of its errors. Depending on the error, the correction
could increase or decrease the balance shown on the bank statement. Since the company did not
make the error, the company's records are not changed.

• Bank service charges are fees deducted from the bank statement for the bank's
processing of the checking account activity
Examples:
- accepting deposits
- posting checks
- mailing the bank statement

Other types of bank service charges include the fee charged when a company overdraws its
checking account and the bank fee for processing a stop payment order on a company's check.
The bank might deduct these charges or fees on the bank statement without notifying the company.
When that occurs, the company usually learns of the amounts only after receiving its bank
statement. Because the bank service charges have already been deducted on the bank statement,
there is no adjustment to the balance per bank. However, the service charges will have to be
entered as an adjustment to the company's books. The company's Cash account will need to be
decreased by the amount of the service charges.

• NSF check is a check that was not honored by the bank of the person or company writing the
check because that account did not have a sufficient balance. As a result, the check is returned
without being honored or paid. NSF is the acronym for not sufficient funds. When the NSF check
comes back to the bank in which it was deposited, the bank will decrease the checking account of
the company that had deposited the check. The amount charged will be the amount of the check
plus a bank fee.

Because the NSF check and the related bank fee have already been deducted on the bank
statement, there is no need to adjust the balance per the bank. However, if the company has not yet
decreased its Cash account balance for the returned check and the bank fee, the company must
decrease the balance per books in order to reconcile.

• Check printing charges occur when a company arranges for its bank to handle the
reordering of its checks. The cost of the printed checks will automatically be deducted
from the company's checking account.

Because the check printing charges have already been deducted on the bank statement, there
is no adjustment to the balance per bank. However, the check printing charges need to be an
adjustment on the company's books. They will be a deduction to the company's Cash account.

• Interest earned will appear on the bank statement when a bank gives a company interest on its
account balances. The amount is added to the checking account balance and is automatically on
the bank statement. Hence there is no need to adjust the balance per the bank statement. However,
the amount of interest earned will increase the balance in the company's Cash account on its books.

• Notes Receivable are assets of a company. When notes come due, the company might ask its
bank to collect the notes receivable. For this service the bank will charge a fee. The bank will
increase the company's checking account for the amount it collected (principal and interest) and will
decrease the account by the collection fee it charges. Since these amounts are already on the bank
statement, the company must be certain that the amounts appear on the company's books in its
Cash account.

• Errors in the company's Cash account result from the company entering an incorrect amount,
entering a transaction that does not belong in the account, or omitting a transaction that should be in
the account. Since the company made these errors, the correction of the error will be either an
increase or a decrease to the balance in the Cash account on the company's books.
• 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.

C. The Bank Reconciliation Process

Step 1.
Adjusting the Balance per Bank
The first step is to adjust
the balance on the bank
statement to the true, adjusted, or
corrected balance.

Step 2. Adjusting the Balance

per Books
The second step of the bank
reconciliation is to adjust the
balance in the company's Cash
account so that it is the true,
adjusted, or corrected balance.

Step 3. Comparing the Adjusted

Balances

After adjusting the balance per bank (Step 1) and after adjusting the balance per
books (Step 2), the two adjusted amounts should be equal. If they are not equal, you must
repeat the process until the balances are identical. The balances should be the true, correct
amount of cash as of the date of the bank reconciliation. The adjusted cash balance will
appear as the Cash in Bank in the Statement of Financial Position (Balance Sheet).
PRACTICE TASKS:

A. Word Search
Look for the terms relevant to bank reconciliation. The statements below will
help you know what words to look for.

1. A written, dated, and signed instrument that directs a bank to pay a specific sum of money to
the bearer is a ______.

2. A _______ statement is a summary of financial transactions that occurred at a certain

institution during a specific time period.

3. A _________ memo is an item on a company's bank account statement that increases a

company's checking account balance.

4. A _________ memo is an item on a company's bank account statement that reduces the
company's checking account balance

5. A fee assessed to an account by a financial institution is a bank ______.

6. A bank reconciliation is a document that matches the cash balance on the company's
_________ to the corresponding amount on its bank statement.

7. In bank reconciliation, the ________ on the bank statement is adjusted for outstanding
checks and uncleared deposits.

8. Errors are either added to or subtracted from the bank balance or book balance depending
on their _______ on the balances.
9. The purpose of the bank reconciliation is to be certain that the company's ________ account
is complete and accurate.
10. When a company writes a check, the company's Cash account is credited (and another
account is debited) using the ______ of the check.
B. Given the cash account and bank statement of Kimura Trading, compute the total deposit in
transit or undeposited collection and outstanding checks as of end of March, 2020.

a. Total Deposit in transit - _________________

b. Total Outstanding Check - _______________

C. Classify the following items as to reconciling items per bank or per books.
Indicate whether the adjustment is an addition or deduction.

Outstanding checks Deposit in Transit

Bank Service Charge Book errors
Bank Errors NSF Check
Debit Memo Credit Memo
Interest Earned Direct Collection of a Note Receivable

Reconciliation per Bank Reconciliation per Accounting

Books

D. Analyze the following information and determine whether each reconciling

item is included in the balance per bank or balance per book.

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.

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.