MODULE 7: BANK

The Bank Reconciliation Statement content

and format:

RECONCILIATION STATEMENT ● Balance per book, end. –the cash balance in the
accounting records as of the end of the current
A Bank Reconciliation Statement is prepared by an month.
entity to reconcile the cash-in-bank account balance in ● Balance per bank statement, end. –the ending
the entity’s book versus the balance as reported by the cash balance in the bank statement of the current
bank in the bank statement. It is a report that is prepared month.
for the purpose of bringing the balances of cash (a) per
record and (b) per bank statement into agreement. Bank Reconciling Items:
● Deposit in Transits - Cash that has been received
More specifically, bank reconciliations are prepared to:
by an entity and was recorded in the cash-in-bank
a. explain the difference between the cash balance
account balance as a deposit. However, this
reported on the bank statement and the cash
deposit that has been sent to the bank has not yet
balance in the accounting books.
been processed nor posted by the bank, thus, not
b. arrive at the adjusted (correct) cash balance to be
reflecting in the bank statement. It often occurs
shown in the financial statements.
when deposits are mailed to the bank, placed in
c. provide information for reconciling journal entries.
an overnight depository, made through check and
the check has not yet cleared, or made after the
Take note that:
bank’s cut-off.
● Bank Reconciliations are prepared on a monthly
➢ Adjustment in account balance: Positive (+)
basis, immediately upon receipt of monthly bank
statements from banks.
● Outstanding Checks - Checks that the company
● When a business has more than one bank
had issued and recorded as a credit entry in the
account, separate bank reconciliations are made
entity’s cash-in-bank account. However, these
for each of the accounts held.
checks were not yet presented for payment and
have not yet been cleared from the bank account
 from which it is drawn. Take note that it excludes ● Debit memos - Items charged against the
certified checks and stale checks. company’s bank account that is not yet recorded in
➢ Adjustment in account balance: Negative (-) the company’s ledger.

● Bank Errors - Erroneous debits and credits by the Examples are:

bank in the entity’s account. a. Bank service charges.
➢ Adjustment in account balance depends on b. No sufficient funds checks (NSF) or Drawn against
the situation; it can be positive (+) or insufficient funds checks (DAIF) - checks deposited and
negative (-). already recorded by the bank but subsequently returned
to the depositor because the drawer’s fund is insufficient
Ledger Balance Reconciling Items: to pay the check.
c. Automatic debits, e.g., automatic payments of bills by
● Credit memos - Items credited by the bank to the
the bank on behalf of the depositor.
bank account of the entity that is not yet recorded
d. Payment of loans
by the firm in their books. These include notes
➢ Adjustment to a cash account: Negative (-)
payable collected by the bank on the behalf of the
entity and interest earned in putting their cash in
● Book errors - Erroneous debits and credits of cash
the bank.
in the entity’s ledger.
➢ Adjustment to a cash account depends on
Examples are:
the situation; It can be positive (+) or
a. Collections made by the bank on
negative (-).
behalf of the depositor.
b. Interest income earned by the
● Sample Format:
depositor.
c. Proceeds from loans directly
credited or added by the bank to the
depositor’s account.
➢ Adjustment to a cash account: Positive (+)
Adjusted balance method: Book - to - Bank method:
Bank Balance Ledger Balance Ledger Balance

+ Deposit in transit + Notes collected by the + Collections by the bank

bank
+ Interest earned
- Outstanding Checks + Interest earned
- NSF checks
+/- Bank errors - NSF checks
- Service charge
= ADJUSTED - Service charge
BALANCE +/- Book errors

+/- Book errors - Deposit in transit

= ADJUSTED + Outstanding Checks

BALANCE
+/- Bank errors
Bank - to - Book method:
= BANK BALANCE
Bank Balance

+ Deposit in transit Things to Remember:

● To correct an overstated credit, you need to make
- Outstanding Checks
a debit.
+/- Bank errors ● To correct an overstated debit, you need to make
- Collections by the bank a credit.
● To correct an understated credit, you need to
- Interest earned
make a credit.
+ Service charge ● To correct an understated debit, you need to make
+ NSF checks a debit.

+/- Book errors

= LEDGER BALANCE
Basic Internal Controls over Cash: KathNiel Forever Company maintains cash in ABM
Internal control is any action taken or process set Soc Bank. The Following information was made
by management that is designed to help the business available for the month of August 2020:
organization achieve its objectives.
● The bank statement at the end of the month
1. Bank reconciliation – It is an internal control over cash shows P 10,000.
receipts and cash disbursement. It ● Deposits not yet reflected in the bank statement,
helps reveal errors. As internal control, bank P 84,000.
reconciliations must be performed regularly. ● Checks issued but not yet encashed by the
holders that have already been recorded as a
2. Imprest system – It requires that all cash receipts credit to the cash-in-bank, P 65,000.
should be deposited intact and all cash ● The bank made an error of debiting the account of
disbursement should be made through checks. KathNiel Forever Company which was actually a
debit for Brilliantes Company, P 4,000.
3. Check Disbursement Voucher – It is a report prepared ● The ledger shows a cash-in-bank balance of
for each check written. The purpose of CDV is to provide P12,000.
reasonable assurance that each check written is properly ● Notes receivables collected by the bank for
authorized. KathNiel Forever company amounted to P 16,000.
● Interest earned by KathNiel Forever company from
4. Petty Cash Voucher - It is similar to CDV. It is used to keeping their cash at ABM Soc Bank is P 5,000.
provide reasonable assurance that all ● ABM Soc Bank charred KathNiel Forever
disbursements from the petty cash fund are properly Company P 1,000 service charges directly debited
authorized. to their account as seen in the bank statement.
● KathNiel Forever Company received a check from
PREPARATION OF BANK RECONCILIATION Brilliantes Company amounting to P7,000 but it
was drawn against insufficient funds.
STATEMENT:
● There was a bank related transaction that
erroneously credited the ledger balance of a
cash-in-bank account amounting to P 8,000.
ADJUSTED BALANCE METHOD:
ADJUSTING ENTRIES:
KathNiel Forever Company
Bank Reconciliation Statement
August 31, 2020

Bank statement balance P 10,000

Add: Deposits in transit 84,000

Less: Outstanding Checks - 65,000

Add: Bank error 4,000

Adjusted cash-in-bank P 33,000

balance

Ledger statement balance P 12,000

Add: Notes collected by the 16,000

bank

Add: Interest earned 5,000

Less: Bank service charges - 1,000

Less: NSF check - 7,000

Add: Book error 8,000

Adjusted cash-in-bank P 33,000

balance
BANK - TO - BOOK METHOD: BOOK - TO - BANK METHOD:

KathNiel Forever Company KathNiel Forever Company

Bank Reconciliation Statement Bank Reconciliation Statement
August 31, 2020 August 31, 2020

Bank statement balance P 10,000 Ledger balance P 12,000

Add: Deposit in transits 84,000 Add: Notes collected by the 16,000

bank
Less: Outstanding checks - 65,000
Add: Interest earned 5,000
Add: Bank error 4,000
Less: Bank service charges - 1,000
Less: Notes collected by the - 16,000
bank Less: NSF check - 7,000

Less: Interest earned - 5,000 Add: Book error 8,000

Add: Bank service charges - 1,000 Less: Deposits in transit - 84,000

Add: NSF check 7,000 Add: Outstanding Checks 65,000

Less: Book error 8,000 Less: Book error 4,000

Bank statement balance P 12,000 Bank statement balance P 10,000