Fundamentals of Accountancy,

Business and Management 2

Lesson 10 – Bank Reconciliation Statement
Introduction
Since most companies use double-entry accounting or bookkeeping, any omission or
error in the company's general ledger Cash account also means that another general ledger
account will have a corresponding omission or error. For example, if a company had wired
money from its bank account for emergency computer maintenance services and had not
recorded the credit to its Cash account, it is also omitting the debit to the account Computer
Maintenance Expense. The bank reconciliation could prevent this company from issuing an
incorrect balance sheet (incorrect Cash and incorrect Retained Earnings) and an incorrect
income statement (expenses would be too low, net income would be too high).
There are different approaches to preparing the Bank Reconciliation Statement. We will use the
unadjusted to 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 adjustment book balance. Only at this point can we say that cash is fully reconciled.
Learning Objectives
• At the end of this lesson, the learners should be able to :
❑Describe the nature of a bank reconciliation statement;
❑Identify common reconciling items and describe each one of
them;
❑Analyze the effects of the identified reconciling items; and
❑Prepare a bank reconciliation statement;
Why prepare a Bank Reconciliation?
To be certain that the amount of cash reported on the company's balance
sheet (and the balance in its general ledger Cash account) is the correct
amount. The additions and deductions on the bank statement are compared (or
reconciled) with the items that are entered in the company's general ledger
Cash account. Some differences, such as outstanding checks and deposits in
transit, are noted as simply timing differences.
 The two common causes of the discrepancy in figures are:
• Time lags that prevent one of the parties (company or the bank) from recording the
transaction in the same period as the other party.
Example: A bank statement that ends January 30, 2019, and then the company was 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 a deposit but it is however
recorded in the accounting records of the company.
• 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’s records.
 The importance of Bank Reconciliations are as follows:
• 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 by uncovering irregularities such as
unauthorized bank withdrawals. However, in order for the control process to work effectively,
it is necessary to segregate the duties of persons responsible for accounting and authorizing
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 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.

• 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.
 JUAN COMPANY
BANK RECONCILIATION STATEMENT
APRIL 30, 20XX

Unadjusted balance per bank PXXX Unadjusted balance per book PXXX
Add: Deposit in Transit XXX Add: Bank Collection PXXX
Total PXXX Interest Earned XXX XXX
Less: Outstanding check Total PXXX
Check No: YYY PXXX Less: Bank Service Charge PXXX
Check No: ZZZ XXX XXX NSF XXX
Adjusted bank balance PXXX Check printing Charges XXX XXX
*Add/Deduct Bank Errors Adjusted book balance PXXX
*Add/Deduct: Errors in
Company’s Cash Account
Bank Reconciliation
• Withdrawal Slip
is a bank document on which a person writes the date, account number,
and amount of money to withdraw from a bank. It is called a withdrawal slip
because it is used to make a withdrawal from a person’s account. It includes
important information that allows the bank to keep an accurate record of the
withdrawal and provide the required amount.
• Deposit Slip
is a form supplied by a bank for a depositor to fill out, designed to
document in categories the items included in the deposit transaction. The
categories include type of item, if it is a cheque, where it is from such as a local
bank or a state if the bank is not local. The teller keeps the deposit slip along
with the deposit (cash and cheques), and provides the depositor with a receipt.
• Bank Reconciliation
A process of bringing into agreement the bank balance per bank and the bank balance per
record of the depositor.
• Bank Balance
The balance is reported by the bank as of a specific date.
• Book Balance
The balance is reported by the depositor as of a specific date.
• Check
The bank instrument used to withdraw cash from a checking account
• Drawee
The bank against which a check withdrawal is addressed; is also called a drawee bank.
• Drawer
The signor of a withdrawal check or party giving the order to pay.
• Payee
The person or entity to whom payment is to be made.
• Bank Signature Card
A bank record showing the specimen signature of the bank depositor. The card is
a reference to prove the authenticity of the signature of the bank client or bank
depositor.
• Bank Statements
Are reports from bank to client showing addition to and deduction from bank
balance for a period of time.
• Cash Book
The record of the bank depositor or bank client showing deposits and
withdrawals and the end of period balance for a certain period of time.
Bank Reconciliation
• Deposit in Transit
Are bank deposits reflected in the record of the depositor but not yet reflected in the bank
statement. 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 in
order 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 Check
Are checks drawn by the depositor and posted as a reduction in the depositor’s records but not
yet posted as a reduction from the depositary bank’s record. 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 error
are mistakes made by the bank. Bank errors 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.

• Bank service charges

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,
• NSF (Non-sufficient fund) 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 from 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 book 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 from 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.
There 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.
• Debit Memo (DM)
A bank form and entry for bank balance deduction initiated by the bank. This is other than
checks drawn against the bank.
• Credit Memo (CM)
A bank form and entry for bank balance addition initiated by the bank. This is other than the
deposits by the client.
• Petty Cash Fund
An amount in coins and currency held by the petty cash custodian for small cash payments that
cannot be conveniently paid by checks.
Sample Problem
• MAD Traders received the September bank statement that showed a
balance of P 77,620 as September 30, 2019 Other information is as
follows:
• Balance per checkbook, P 76,330
• Check outstanding: No. 3406 P 2,240, No. 3416 P 2,809, No. 3419 P
14,481, No. 3428 P 990
• Customer’s check returned marked “NSF” P 1,360
• August 31 deposit not recorded in the bank statement P 16,860
• Bank service charge for the month P 1,100
• Check No. 3431 in payment of MERALCO bill for P 2,120.00 had been
recorded in the books as P 2,210.00
 MAD Traders
BANK RECONCILIATION STATEMENT
September 30, 2019

Unadjusted balance per bank P 77,620 Unadjusted balance per book P76,330
Deposit in Transit 16,860 Book error (2,210-2,120) 90
Total P 94,480 Total P 76,420
Outstanding check NSF P 1,360
Check No: 3406 P 2,240 Bank Service Charge 1,100 2,460
Check No: 3416 2,809 Adjusted Balance per Book P 73,960
Check No: 3419 14,481
Check No: 3428 990 20,520
Adjusted balance per Bank P 73,960
Lesson Summary
1. Bank reconciliation is the procedure to reconcile the unadjusted bank and book balances to the correct cash balance.
a. Reconciling items that result from timing differences occur when transactions are recorded on the bank’s and the
company’s accounting books at different dates.
i. Outstanding check refer to checks issued and delivered to the designated payee but have not yet cleared the bank. The
correct adjustment is to deduct the amount of the outstanding checks from the adjusted bank balance.
ii. Deposit in transit refers to deposits that did not meet the bank’s cut-off time and are not recorded in the bank statement
until the following period. The correct adjustment is to add the deposit in transit to the unadjusted bank balance.
iii. Collections received directly by the bank are added to the unadjusted book balance.
iv. Debit and credit memo refers to additions and deductions from the account that were not initiated by the depositor.
Examples are interest income, interest expense, and bank service charges. The unadjusted book balance is adjusted for
debit and credit memos.
v. NSF checks are checks dishonored by the bank because the balance of the issuer’s checking account is not enough to
cover the amount of the check. It should be deducted from the unadjusted book balance.
b. Errors are unintentional mistakes. It should be carefully analyzed to determine the proper adjustment to the bank
reconciliation.