St. Vincent de Ferrer College of Camarin, Inc.

Second Semester SY: 2021-2021

Intermediate Accounting 1
BSA-1 3-6PM T, 6-9PM T n 3-6PM Th
Prof. Mario U. Madrid, CPA/MBA

Week 5- PrProof of Cash

Objectives:

To be able to prepare a two-date bank reconciliation

To know the computation of deposits in transit and outstanding checks

To know the reconciliation of cash receipts per ledger with cash receipts
per bank statement

To know the reconciliation of cash disbursement per ledger

with cash disbursements per bank statement

To understand the nature of proof of cash

To be able to prepare a reconciliation showing proof of cash

Two-date bank reconciliation

so called "two-dates" because it literally involves two dates.

same procedures followed for a one-date reconciliation

becomes complicated only when certain facts or data are omitted

hence the necessity for computing them

the omitted information may be any one or a combination of the following:

a. Book balance- beginning and ending

b. Bank balance- beginning and ending

c. Deposits in transit - beginning and ending

d. Outstanding checks- beginning and ending

If the ending balances are not given, the following formulas

may help.

If the beginning balances are omitted, the formulas should simply

be reversed or just work back.
Computation of book balance

Balance per book- beginning of month XX

Add: Book debits during the month XX

Total XX
Less: Book credits during the month XX

Balance per book- end of month XX

Book debits refer to cash receipts or all items debited to the

cash in bank account.

Book credits refer to cash disbursements or all items credited

to the cash in bank account

In a T-account form, the cash in bank in bank may appearas follows:

Cash in bank
Balance - beginning XX Book credits XX
Book debits XX Balance - ending XX

Computation of bank balance

Balance per bank- beginning XX

Add: Bank credits during the month XX

Total XX
Less: Bank debits during the month XX
 Balance per bank- end of month XX

Bank credits refer to all items credited to the account of of the depositor which include
deposits acknowledged by bank and credit memos.

* In the absence of any statement to the contrary, bank credits are assumed to be deposits
acknowledged by bank.

Bank debits refer to all items debited to the account of the depositor which include
checks paid by bank and debit memos.

* In the absence of any statement to the contrary, bank debits are assumed to be checks
paid by bank.

In a T-account form, the depositor's account, Company X, will appear as follows:

Company X
Bank debits XX Balance - beginning XX
Balance-ending XX Bank credits XX

Computation of deposits in transit

Deposits in transit- beginning of month XX

Add: Cash receipts deposited during the month XX

Total deposits to be acknowledged by bank XX

Less: Deposits acknowledged by bank during the month XX
Deposits in transit- end of month XX

Computation of outstanding checks

Outstanding checks- beginning of the month XX

Add: checks drawn by depositor during the month XX

Total checks to be paid by bank XX

Less: checks paid by bank during the month XX

Outstanding checks- end of month XX

Illustration:

Cash in bank per ledger

Balance, January 31 50,000

Book debits for February, including January CM
for note collected of P15,000 200,000
Book credits for February, including NSF check of P5,000 and
service charge of P1,000 for January 180,000

Bank statement for February

Balance, January 31 84,000

Bank credits for February, including CM for note collected of
P20,000 and January deposit in transit of P40,000 170,000
 Bank debits for February, including NSF check of P10,000 and
January outstanding check of P65,000 130,000

Bank reconciliation for January

Balance per book, January 31 50,000

Note collected by bank in January 15,000

Total 65,000
NSF check for January - 5,000
Service charge for January - 1,000

Adjusted book balance 59,000

Balance per bank, January 31 84,000

Deposit in transit 40,000

Total 124,000
Outstanding check for January 65,000

Adjusted bank balance 59,000

Bank reconciliation for the month of February requires:

1 Computation of balance per book
2 balance per bank
3 deposits in transit
4 outstanding checks
Computation of book balance
Balance per book - January 31 50,000
Add: Book debits during February 200,000
Total 250,000
Less: Book credits during February 180,000
Balance per book - February 70,000

Computation of bank balance

Balance per bank- January 31 84,000

Add: Bank credits during February 170,000

Total 254,000
Less: bank debits during February 130,000

Balance per bank- February 124,000

Computation of deposit in transit

Deposit in transit- January 31 40,000

Add: Cash receipts deposited during February:
Book debits 200,000
Less: January CM for note collected * 15,000 185,000

Total 225,000
Less: Deposits acknowledged by bank in February:
Bank credits 170,000
Less: February CM for note collected** 20,000 150,000

Deposit in transit - February 28 75,000

 * The January CM of P15,000 is deducted from the book debits of
P200,000 because this item is a cash receipt not representing
deposit for the month of February.
All items debited to the cash in bank account which do not represent
deposits should be deducted from the book debits total to arrive
at the cash receipts deposited.

** The February CM of P20,000 for note collected is deducted from the bank credits
because this is not a deposit.

All items credited to the depositor's account which do not represent deposits should be
deducted from the bank credits to determine the deposits acknowledged by bank.

Bank credits are assumed to be deposits acknowledged by bank in the absence

of any statement to the contrary.

Computation of outstanding checks

Outstanding checks- January 31 65,000

Add: Checks drawn by depositor during February:
Book credits 180,000
Less: January DMs * 6,000 174,000

Total 239,000
Less: Checks paid by bank during February:
Bank debits 130,000
Less: February NSF** 10,000 120,000

Outstanding checks- February 28 119,000

 * The January DMs of P6,000 are deducted from the bank credits, because
they are cash disbursements not representing checks.
All items not representing checks credited to the cash in bank account should
be deducted from the book credits total to arrive at the checks drawn by the depositor.
But as a rule, all book credits in the absence of any statement to the contrary are
assumed to be checks issued.

** The February DM for NSF check of P10,000 is deducted from the bank debits because this
is not a bank disbursement representing a check paid.

All items debited to the account of the depositor not representing checks paid should be
deducted from the bank debits total to arrive at the checks paid by the bank.

But as a rule, all bank debits in the absence of any statement to the contrary are
assumed to be checks paid by the bank.

Company X
Bank Reconciliation
February 28

Balance per book 70,000

Note collected by bank in February 20,000

Total 90,000
NSF check for February - 10,000

Adjusted book balance 80,000

 Balance per bank 124,000
Deposit in transit for February 75,000

Total 199,000
Outstanding checks for February - 119,000

Adjusted bank balance 80,000

Proof of Cash

Is an expanded reconciliation in that it includes proof of receipts and disbursements.

is useful in discovering possible discrepancies in handling cash particularly when cash receipts
have been recorded but have not been deposited.

There are three forms of proof of cash, namely:

a. Adjusted balance method

b. Book to bank method
c. Bank to book method

Summary
Jan-31 Feb-28
Balance per book 50,000 70,000
Balance per bank 84,000 124,000
Book debits * 200,000
Book credits ** 180,000
Bank debits * 130,000
Bank credits ** 170,000
Deposits in transit 40,000 75,000
 Outstanding checks 65,000 119,000
NSF check 5,000 10,000
Service charge 1,000 -
Note collected by bank 15,000 20,000

* The book debits and credits, and the bank debits and credits for
** January are not listed anymore because they are not necessary.
The proof cash pertains to the receipts and disbursement for the
current month of February.

Adjusted balance method

COMPANY X
PROOF OF CASH
For the month of February
Disburse-
Jan-31 Receipts ments February 28
Balance per book 50,000 200,000 180,000 70,000
Note collected:
January 15,000 - 15,000
February 20,000 20,000
NSF check:
January - 5,000 - 5,000
February 10,000 - 10,000
Service charge:
January - 1,000 - 1,000

Adjusted book balance 59,000 205,000 184,000 80,000

Balance per bank 84,000 170,000 130,000 124,000

 Deposits in transit:
January 40,000 - 40,000
February 75,000 75,000
Outstanding checks:
January - 65,000 - 65,000
February 119,000 - 119,000

Adjusted bank balance 59,000 205,000 184,000 80,000

General comments

a. The January 31 and February 28 columns require no further explanation. They represent the usual
reconciliations discussed earlier.
b. The receipts and disbursements column pertain to the current month of February. Actually, the proof
of cash is a reconciliation of the receipts and disbursements for the current period.
c. The proof of cash, following the adjusted balances method, means that the book receipts and
disbursements, and the bank receipts and disbursements for the current month are adjusted
to equal the correct receipts and disbursements for the current month.

Comments on the book items

a. Credit memos of the previous month do not affect the bank receipts for the current month
but increased the book receipts for the current month because the credit memos for the
previous month are recorded only by the depositor during the current month.

Consequently, the book receipts for the current month are overstated in relation to the correct
receipts for the current month. Hence, the credit memos of the previous month are deducted
from the book receipts for the current month.
 Thus, the January note collected amounting to P15,000, is deducted from the February book receipts.

b. Credit memos of the current month already increased the bank receipts for the current month
but have no effect on the book receipts for the current month because the credit memos of
the current month are not yet recorded by the depositor during the current month.

Consequently, the book receipts for the current month are understated in relation to the correct
receipts for the current month. Hence, the credit memos of the previous month are added
to the book receipts for the current month.

Thus, the February note collected, amounting to P20,000, is added to the February book receipts.

c. Debit memos of the previous month do not affect the bank disbursements for the current
month but increased the book disbursements for the current month because the debit memos
of the previous month are recorded only by the depositor during the current month.

Consequently, the book disbursements for the current month are overstated in relation to
the correct disbursements for the current month. Hence, the debit memos of the previous
month are deducted from the bank disbursements for the current month.

Thus, the January NSF of P5,000 and January service charge of P1,000 are deducted from
the February book disbusements.

d. Debit memos of the current month already increased the bank disbursements for the
current month but have no effect on the book disbursements for the current month because
the debit memos of the current month are not yet recored by the depositor.

Consequently, the book disbursements for the current month are understated in relation to
the correct disbursements for the current month. Hence, the debit memos of the current
 month are added to the book disbursements for the current month.

Thus, the February NSF of P10,000 is added to the February book disbursements.

Comments on the bank items

a. Deposits in transit of previous month do not affect book receipts for the current month but
increased bank receipts for the current month because the deposits are recorded only by
the bank during the current month.
Consequently, the bank receipts for the current month are overstated in relation to
the correct receipts for the current month. Hence, the deposits in transit of the previous
month are deducted from bank receipts for the current month.
Thus, January deposit in transit of P40,000 is deducted from the February bank receipts.

b. Deposts in transit of the current month already increased book receipts but have no effect on the
bank receipts for the current month because the deposits are not yet recorded by the bank
during the current month.

Consequently, the bank receipts for the current month are understated in relation to
the correct receipts for the current month. Hence, the deposits in transit of the previous
month are added to the bank receipts for the current month.

Thus, February deposit in transit of P75,000 is added to the February bank receipts.

c. Outstanding checks of the previous month do not affect the book disbursements but increased
the bank disbursements for the current month because the outstanding checks of the previous
month are paid only by the bank during the current month.

Consequently, the bank disbursements for the current month are overstated in relation to
the correct disbursements for the current month. Hence, the outstanding checks of the previous
 month are deducted from the bank disbursements for the current month.

Thus, the January outstanding check of P65,000 is deducted from the February bank disbursements.

d. Outstanding checks of the current month increased the book disbursement for the current month
but have no effect for the bank disbursements for the current month because the checks are not
yet paid by bank during the current month.

Consequently, the bank disbursements for the current month are understated in relation to
the correct disbursements for the current month. Hence, the outstanding checks of the current
month are added to the bank disbursements for the current month.

Thus. the February outstanding check of P119,000 is added to the February bank disbursements.

Book to bank method

COMPANY X
PROOF OF CASH
For the month of February
Disburse-
Jan-31 Receipts ments February 28
Balance per book 50,000 200,000 180,000 70,000
Note collected:
January 15,000 - 15,000
February 20,000 20,000
NSF check:
January - 5,000 - 5,000
February 10,000 - 10,000
Service charge:
January - 1,000 - 1,000
 Deposits in transit
January - 40,000 40,000
February - 75,000 - 75,000
Outstanding checks
January 65,000 65,000
February - 119,000 119,000

Adjusted book balance 84,000 170,000 130,000 124,000

Comments:

a. The book reconcilint items- note collected, NSF check and service charge - are treated in the same
manner following the adjusted balance.

b. The bank reconcilint items - deposit in transit and outstanding checks- are treated in the reverse.

c. The book to bank proof of cash means that the book receipts and disbursements are adjusted to
equal the bank receipts and disbursements.

d. Deposits in transit of previous month do not effect the book receipts for the current month but
increased the bank receipts of the current month.

Consequently, the book receipts for the current month are understated in relation to
the bank receipts for the current month. Hence, the deposits in transit of of the previous
month are added to the book receipts for the current month.

Thus, the January deposit in transit of P40,000 is added to the February book receipts.

e. Deposits in transit of the current month increased the book receipts for the current month but have
no effect on the bank receipts for the current month. Consequently, the book receipts for the
 current month are overstated in relationto the bank receipts for the current month. Hence, deposits
in transit of the current month are deducted the book receipts for the current month.

Thus, the February deposit in transit of P75,000 is deducted from the February book receipts.

f. Outstanding checks of previous month do not affect the book disbursements for the current month
but increased the bank disbursements for the currrent month. Consequently, the book disbursements
for the current month understated in relation to to the bank disbursements for the current month.
Hence,outstanding checks of the previous month are added to the book disbursements for the
current month.
Thus, the January outstanding check of P65,000 is added to the February book disbursements.

g. Otustanding checks of the current month increased the book disbursement for the current month
but have no effect yet on the bank disbursements for the current month.

Consequently, the book disbursements for the current month are overstated in relation to the
bank disbursements for the current month. Hence, outstanding checks of the curretn month are
deducted from the book disbursements for the current period.
Thus, the February outstanding check of P119,000 is deducted from the February book disbursements.

Bank to book method

COMPANY X
PROOF OF CASH
For the month of February
Disburse-
Jan-31 Receipts ments February 28
Balance per bank 84,000 170,000 130,000 124,000
Deposit in transit:
January 40,000 - 40,000
February 75,000 75,000
 Outstanding checks:
January - 65,000 - 65,000
February 119,000 - 119,000
Note collected:
January - 15,000 15,000
February - 20,000 - 20,000
NSF check:
January 5,000 5,000
February - 10,000 10,000
Service charge:
January 1,000 1,000

Adjusted book balance 50,000 200,000 180,000 70,000

Comments

a. The bank reconciling items- deposit in transit and outstanding check- are treated in the same manner
following the adjusted balance method.

b. The book reconciling items - note collected, NSF and service charge- are treated in the reverse.

c. The bank to book proof of cash means that the bank receipts and disbursements for the current month
are adjusted to equal the book receipts and disbursements for current month.

d. Credit memos of previous month do not affect the bank receipts for the current month but increased
the book receipts for the current month. Consequently, the bank receipts for the current month
are understated in relation to the book receipts for the current month.

Hence, the credit memos of the previous month are added to bank receipts for the current month.
 Thus, the January note collected of P15,000 is added to the Febraury bank receipts.

e. Credit memos of the current month increased the bank receipts for the current monthbut have no
effect yet on the book receipts for the current month.

Consequently, the bank receipts of the current month are overstated in relation to
the book receipts for the current month. Hence, the credit memos of the current
month are deducted from the bank receipts for the current month.

Thus, the February note collected of P20,000 is deducted from the February bank receipts.

f. Debit memos of previous month do not affect the bank disbursements for the current month but
increased the book disbursements for the current month.

Consequently, the bank disbursements of the current month are understated in relation to
the book disbursements for the current month. Hence, the debit memos of the previous
month are added to the bank disbursements for the current month.

Hence, the January NSF of P5,000 and the January service charge of P1,000 are added to the
February bank disbursements.

g. Debit memos of current month increased the bank disbursements for the current month but
have no effect yet on book disbursements for the current month.

Consequently, the bank disbursements of the current month are overstated in relation to
the book disbursements for the current month. Hence, the debit memos of the current
month are deducted from the bank disbursements for the current month.

Thus, the February NSF of P10,000 is deducted from the February bank disbursements for
current month.
Problem Solving

Problem 3-1

Sasay Company provided the following data for the month of July:

Cash in bank

Balance June 30 1,000,000

Book debits for July including June CM
for note collected, P300,000 4,000,000
Book credits for July including June NSF of P100,000
and service charge of P4,000 3,600,000
1,400,000

Bank statement for July

Balance June 30 1,650,000

Bank debits for July including service charge of 1,000
and June outstanding checks of P854,000 2,500,000
Bank credits for July including CM for bank loan of P500,000
and June deposit in transit of P400,000 3,500,000
2,650,000
Required:
Prepare bank reconciliation on June 30 and July 31 and adjusting
entries on July 31.

Bank Reconciliation- June 30

Book balance 1,000,000

Add: credit memo for note collected 300,000
Total 1,300,000
Less: NSF check 100,000
Service charge 4,000 104,000
Adjusted book balance 1,196,000

Bank balance 1,650,000

Add: Deposit in transit 400,000
Total 2,050,000
less: Outstanding checks 854,000
Adjusted bank balance 1,196,000

Bank Reconciliation- July 31

Book balance 1,400,000

Add: Credit memo for bank loan 500,000
Total 1,900,000
Less: Service charge 1,000
Adjusted book balance 1,899,000

Bank balance 2,650,000

 Add: Deposit in transit 1,100,000 *
Total 3,750,000
Less: Outstanding checks 1,851,000 **
Adjusted bank balance 1,899,000

* Computation of the deposit in transit for July 31:

Deposit in transit, June 30 400,000
Add: Deposits during July:
Book debits 4,000,000
less: June credits for note collected 300,000 3,700,000
Total 4,100,000
Less: Deposits credited by bank during July:
Bank credits 3,500,000
Less Credit memo for bank loan 500,000 3,000,000
Deposit in transit, July 31 1,100,000 *

** Computation of outstanding checks for July 31:

Outstanding checks, June 30 854,000
Add: checks drawn by Company during July:
Book credits 3,600,000
Less: June Debits memo for:
NSF check 100,000
Service charge 4,000 104,000 3,496,000
Total 4,350,000
Less: checks paid by the bank during July:
 Bank debits 2,500,000
July service charge 1,000 2,499,000
Outstanding checks, July 31 1,851,000 **

Adjusting entries:

1 Cash in bank 500,000

Bank loan payable 500,000

2 Bank service charge 1,000

Cash in bank 1,000

Problem 3-2

Beehive Company provided the following information:

Balance per book October 31 600,000

Receipts per book for November (collection from customer,
P100,000 recorded as P10,000 2,200,000

Disbursements per book for November (check for P300,000 in payment

of account recorded as P30,000) 1,800,000 1,000,000

Balance per bank statement November 30 930,000

Deposit in transit October 31 300,000
Outstanding checks November 30 400,000
Bank receipts for November including an erroneous credit
of P100,000 which should have been credited to Beeline Company 2,500,000
Bank disbursements for November including check of Beeline
Company, P200,000 1,970,000

Required:

Prepare bank reconciliation on October 31 and November 30, and

adjusting entries on November 30.

Reconciliation- October 31

Adjusted book balance 600,000

Bank balance, October 31 400,000 *

Add: Deposit in transit 300,000
Total 700,000
Less: Outstanding check 100,000 **
Adjusted bank balance 600,000

Reconciliation- November 30

Book balance 1,000,000

Add: Understatement of collection from customer (100,000-10,000) 90,000
Total 1,090,000
Less: understatement of check disbursements (300,000-30,000) 270,000
Adjusted book balance 820,000

Bank balance 930,000

Add: Deposit in transit 190,000 ***
Check of Beeline Company charged in error 200,000 390,000
Total 1,320,000
 Less : Outstanding checks 400,000
Deposit of Beeline Company erroneously
credited 100,000 500,000
Adjusted bank balance 820,000

Adjusting entries:

1 Cash in bank 90,000

Accounts receivable 90,000

2 Accounts payable 270,000

Cash in bank 270,000

Computation of outstanding check - October 31

Outstanding checks- October 31 (SQUEEZE) 100,000 *

Add: checks issued by depositor:
Book disbursements 1,800,000
Understatement of check paid 270,000 2,070,000
Total 2,170,000
Less: checks paid by bank:
Bank disbursements 1,970,000
Check of Beeline Co. charged in error 200,000 1,770,000
Outstanding checks- November 30 400,000

Computation of deposit in transit- November 30

Deposit in transit- October 31 300,000

Add: cash receipts deposited during November:
 Book receipts 2,200,000
Understatement of collections 90,000 2,290,000
Total 2,590,000
Less: deposits credited by bank during November
Bank receipts 2,500,000
Deposit of Beeline erroneously credited - 100,000 2,400,000
Deposit in transit- November 30 190,000 ***