Basic Reconciliation

Statement
 Nature of the Bank Reconciliation
Statement
• It is a report which compares the bank balance as per
company's accounting records with the balance stated in
the bank statement
• It is made due to the difference between the bank
balance from the company’s accounting records from
their bank statement
• Most of the common causes of discrepancies are:
• Time differences in recording and processing the
transactions
• Recording errors
 Nature of the Bank Reconciliation
Statement
• Most of the common causes of discrepancies are:
• Time differences in recording and processing the
transactions
• Recording errors
• The statement helps in finding and correcting errors on
both of the parties records
Nature of the Bank Reconciliation
Statement
• Bank Reconciliation statements act as the control mechanism on the flow of
Cash which is both the most vulnerable and important asset of an entity.
• It helps uncover irregularities such as unauthorized bank withdrawal
• Personnel responsible on accounting and authorizing of bank transactions are
separated to those responsible for preparing and monitoring bank
reconciliation statements.
• It can provide comfort to companies that their records are correct if the bank
balance appearing in the accounting records can be confirmed to be correct by
comparing it with the bank statement balance
• Monthly preparation of bank reconciliation assists in the regular monitoring of
cash flows of a business.
Preparation of a Bank Reconciliation
Statement
• There are three types of preparing a Bank
Reconciliation Statement:
• Adjusted Method wherein the balances per bank
and per book are separately determined.
• Book to Bank Method wherein the book balance is
adjusted to agree with the bank balance.
• Bank to Book Method wherein the bank balance is
adjusted to agree with book balance.
Example of a Bank Reconciliation
Statement
 Key Terms

• Deposits in transit are amounts already received and

recorded by the company, but are not yet recorded by
the bank.
• 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.
 Key Terms
• 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.
 Key Terms
• Bank errors are mistakes made by the bank.
• They 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.
 Key Terms

• 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.
 Key Terms

• 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.
 Key Terms
• Bank service charges are fees deducted from the
bank statement for the bank's processing of the
checking account activity
• Examples include 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.
 Key Terms
• 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
 Key Terms
• NSF check (Not Sufficient Funds) 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.
• 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.
 Key Terms

• 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.
 Key Terms
• 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.
 Key Terms
• 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.
 Key Terms
• 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.
 Key Terms
• 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.
 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. The items necessary for this step are
listed in the following schedule:
 The Bank Reconciliation Process
• 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. Examples of the items
involved are shown in the following schedule:
The Bank Reconciliation Process
 The Bank Reconciliation Process
• 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 Set 1
Identify checks outstanding as of end of May 2016
For the month of May 2016, Tope Company issued the As per the bank statement received by Tope, the following
following checks as recorded in its Cash Disbursement checks were presented and paid by the bank:
Journal:
 Practice Set 2
Compute for the deposit in transit or undeposited collection as of end of April 2016 .
Note: It is the policy of the company to deposit collection within the following day from the date of collection.
The cash receipts journal of Malaya Merchandising reflected The bank statement for April 2016 revealed following deposits
the following collections for the month of made:
April 2016: