Chapter 3: Bank Reconciliation

Bank Reconciliation – is the process of bringing into agreement the balance as per
cashbook (bank column) and the balance per bank statement. It is normally prepared on
a monthly basis.

Bank Statement – a statement sent by the bank to the account holder showing
summary of transactions between him/her and the bank e.g deposits and withdrawals,
or payment and the running balance after each transactions.

When a cheque is banked or cash is deposited, thue customer’s account will be

credited in the bank. The person who made a deposit or banking will debit his or her
cashbooks. Conversely, when the customer makes a withdrawal or payments out of his
bank account, his/her account will be debited in the bank and he/she will credit his/her
cash book.

Cash Book Cash in Bank

Cash in on hand xx
Sales xx

Cash in Bank xx Cash on hand xx

Cash on hand Deposit Liability xx

IMPORTANCE OF BANK RECONCILIATION

1. Bank recon strengthens an organization’s internal control systems through

detection and prevention of fraud.

2. Bank recon leads accuracy in records.

3. Bank Recon helps to explain the variance between the cash book and bank
statement and provide information on reconciling journal entries.

Reasons for discrepancy between cash book and bank statement balances

1. Direct Debits (Debits in bank statement not credited to the cash book) –
Debit memo

These are payments that are affected by the bank without requiring a cheque to
be issued by the account holder. Since cheques are not issued for such
payments, they are not recorded in the cash book yet debited in the bank
statement. These includes bank charges and standing orders such as insurance
monthly payment, utilities auto-debit, installment loans and among others.

2. Direct Credits (Credits in Bank Statement not debited to the cash book) –
Credit Memo
 These are receipts that are directly credited to the bank statement without having
been debited in the cash book such as interest received, dividends, other
payments from customers made directly in the account holder’s bank account.

3. Unpresented cheques (Outstanding checks)

These are cheques that are drawn and credited in the cash book but not
presented to the bank for encashment or payment. These cheques are not
debited to the bank statement.

4. Uncredited cheques (Deposit in transits)

These are cheques or cash deposited to the bank and debited to the cash book
but not credited by the bank.

5. Clerical errors

Errors made in recording amounts or wrong postings in the cash book or bank
statement will also cause the cash and bank balance unreconciled.

6. Dishonored cheques

Is one that the bank has refused to pay or recognized as an instrument for
transferring money from one person to another. These are recorded in the cash
book but either not recorded in the bank statement or recorded in such a way
that there is no effect on the bank statement balance. Some of the reasons for
dishonored cheques as NSF, Difference in amount and words, different
signatures, staled check, alterations in the checks, doubted payee and among
others.

SAMPLE BANK RECON FORMAT

Unadjusted Book Xx Unadjusted Bank balance Xx

Balance
CM Xx DIT Xx
(DM) (xx) (OC) (xx)
+- Errors Xx(xx) +-errors XX(XX)
Adjusted Book Balance xx Adjusted Bank Balance xx

Book Errors

Nature of Error Effect on ending Correction

balance of cash
Understatement in book Understatement Debit +
debit
 Understatement in book overstatement Credit -
credit
Overstatement in book Overstatement Credit-
debit
Overstatement in book Understatement Debit +
credit

Bank Errors
Nature of Error Effect on ending Correction
balance of cash
Understatement in bank Understatement Credit +
debit
Understatement in bank overstatement Debit -
credit
Overstatement in bank Overstatement Debit -
debit
Overstatement in bank Understatement Credit +
credit

APPLICATIONS AND ACTIVITIES

Problem 1 – Proceed to Classroom discussion Problem 6

Problem 2:
Luke Co. is preparing its December 30, 20x1 bank reconciliation. Relevant information is shown
below:
Balance per books 1,480
Balance per bank statement 2,800
Collection on note by bank (including ₱250 interest) 2,500
NSF check returned by bank 500
Bank service charges for December 70
Deposits in transit 2,200
Outstanding checks (including certified checks of
₱100) 1,000

 A ₱600 loan amortization of Luke Co. was erroneously debited by the bank to Tarzan Co.’s
account. Luke made the correct entry.
 A ₱650 collection of accounts receivable was erroneously recorded in the books as ₱560.
The actual amount deposited to the bank is ₱650.

Problem 3: JK Co. had the following bank reconciliation at March 31, 20x1:
Balance per bank statement, 3/31/x1 56,500
Add deposit in transit 10,300
66,800
Less outstanding checks 15,600
Balance per books, 3/31/x1 51,200

Data per bank for the month of April 20x1:

Deposits………………………………………...….58,400
Disbursements ……………………………………49,000

All reconciling items at March 31, 20x1 cleared the bank in April. Outstanding checks at April 30,
20x1 totaled ₱10,000. There were no deposits in transit at April 30, 20x1. What is the cash
balance per books at April 30, 20x1?

Problem 4:
Marvels Company had the following bank reconciliation at March 31:
Balance per bank statement, 3/31 ........................ ₱ 93,000
Add: Deposit in transit ................................. 20,600
₱113,600
Less: Outstanding checks ................................ (25,200)
Balance per books, 3/31 ................................. ₱ 88,400

Data per bank statement for the month of April follow:

Deposits .............................................. ₱116,800
Disbursements ......................................... 79,400
All reconciliation items at March 31 cleared through the bank in April. Outstanding checks at
April 30 totaled ₱10,000. What is the amount of cash disbursements per books in April?
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