BANK RECONCILIATION
Learning Objectives
At the of end lesson, the student shall be able to:
• Define what is bank reconciliation
• Define what is bank statement
• Identify book and bank reconciling items
• Prepare bank reconciliation.
• Define what is proof of cash
• Prepare a proof of cash.
Bank deposits
There are three kinds of bank deposits, namely:
Demand deposit – This is the current account or checking account or commercial deposit where deposits are
covered by deposit slips and where funds are withdrawable on demand by drawing checks against the bank.
A demand deposit is noninterest bearing.
Saving deposit – The depositor is given a passbook upon the initial deposit. The passbook is required when
making deposits and withdrawals.
Withdrawals are made anything but the bank sometimes may require notice of withdrawal. A saving deposit
is interest bearing.
Time deposit – This is similar to saving deposit in the sense that it is interest bearing. A time deposit is
evidenced, however, by a formal agreement embodied in an instrument called certificate of deposit.
Time deposit may be pre-terminated or withdrawn on demand or after a certain period of time agreed upon.
What is bank reconciliation?
A bank reconciliation is a statement which brings into agreement the cash balance per book and cash balance
per bank. It is usually prepared monthly because the bank provides the depositor with the bank statement at
the end of every month.
A bank statement is a monthly report of the bank to the depositor showing the cash balance per bank at the
beginning, the deposits acknowledged, the checks paid, other charges and credits and the daily cash balance
per bank during the month.
Actually, the bank statement is an exact copy of the depositor’s ledger in the records of the bank.
When the bank statement is received, attached thereto are the depositor’s canceled checks and any debit or
credit memoranda that have affected the depositor’s account.
,The canceled checks are the checks issued by the depositor and paid by the bank during the month. They are
called canceled checks because they are literally canceled by stamping or punching to show that they have
been paid.
Reconciling items
At the end of every month, comparison between the cash records of the depositor and the bank statement
received from the bank will yield the following reconciling items:
1. Book reconciling items:
a) Credit memos
b) Debit memos
c) Errors
2. Bank reconciling items
a) Deposit in transit
b) Outstanding checks
c) Errors
Credit memos
Credit memos refer to the items not representing deposits credited by the bank to the account of the depositor
but not yet recorded by the depositor as cash receipts. They have the effect of increasing the bank balance.
Typical examples of credit memos are:
a. Notes receivable collected by bank in favour of the depositor and credited to the account of the
depositor.
b. proceeds of bank loan credited to the account of the depositor
c. matured time deposits transferred by the bank to the current account of the depositor.
Debit memos
Debit memos refer to items not presenting checks paid by bank which are charged or debited by the bank to
the account of the depositor but not yet recorded by the depositor as cash disbursements. They have the
effect of decreasing the bank balance.
Typical examples of debit memos are:
a. NSF or no sufficient fund checks – These are checks deposited but returned by the bank because of
insufficient of fund. The other name for NSF is DAIF or “drawn against insufficient fund”.
b. Technically defective checks – These are checks deposited but returned by the bank because of
technical defects such as absence of signature or countersignature, erasures not countersigned,
mutilated checks, conflict between amount in words and amount in figures.
c. Bank service charge – These include bank charges for interest, collection, check book and penalty.
d. Reduction of loan – This pertains to amount deducted from the current account of the depositor in
payment for loan which the depositor owes to the bank and which has already matured.
, Deposit in transit
Deposit in transit are collections already recorded by the depositor as cash receipts but not yet reflected on
the bank statement.
Deposit in transit include:
a. Collections already forwarded to the bank for deposit but too late to appear in the bank statement.
b. Undeposited collections of those still in the hands of the depositor. In effect, these are cash on hand
awaiting delivery to the bank for deposit.
Outstanding checks
Outstanding checks are checks already recorded by the depositor as cash disbursement but not yet reflected
on the bank statement. Outstanding checks include:
a. Checks drawn and already given to payees but not yet presented for payment.
b. Certified checks – A certified check is one where the bank has stamped on its face the word
“accepted” or “certified” indicating sufficiency of fund.
When the bank certifies a check, the account of the depositor is immediately debited or charged to
insure the eventual payment of the check.
Certified checks should be deducted from the total outstanding checks (if include therein) because
they are no longer outstanding for bank reconciliation purposes.
Forms of bank reconciliation
The following formats may be used in reconciling the book balance and the bank balance:
a. Adjusted balance method – Under this method, the book balance and the bank balance are brought to
a correct cash balance that must appear on the balance sheet.
b. Book to bank method – Under this method, the book balance is reconciled with the bank balance or
the book balance is adjusted to equal the bank balance.
c. Bank to Book method – Under this method, the bank balance is reconciled with the book balance or
the bank balance is adjusted to equal the book balance.
The first method is preferred over the other two.
Proforma reconciliation
Adjusted balance method
Book balance xx
Add: Credit memos xx
Total xx
Less: Debit memos xx
Adjusted book balance xx
Learning Objectives
At the of end lesson, the student shall be able to:
• Define what is bank reconciliation
• Define what is bank statement
• Identify book and bank reconciling items
• Prepare bank reconciliation.
• Define what is proof of cash
• Prepare a proof of cash.
Bank deposits
There are three kinds of bank deposits, namely:
Demand deposit – This is the current account or checking account or commercial deposit where deposits are
covered by deposit slips and where funds are withdrawable on demand by drawing checks against the bank.
A demand deposit is noninterest bearing.
Saving deposit – The depositor is given a passbook upon the initial deposit. The passbook is required when
making deposits and withdrawals.
Withdrawals are made anything but the bank sometimes may require notice of withdrawal. A saving deposit
is interest bearing.
Time deposit – This is similar to saving deposit in the sense that it is interest bearing. A time deposit is
evidenced, however, by a formal agreement embodied in an instrument called certificate of deposit.
Time deposit may be pre-terminated or withdrawn on demand or after a certain period of time agreed upon.
What is bank reconciliation?
A bank reconciliation is a statement which brings into agreement the cash balance per book and cash balance
per bank. It is usually prepared monthly because the bank provides the depositor with the bank statement at
the end of every month.
A bank statement is a monthly report of the bank to the depositor showing the cash balance per bank at the
beginning, the deposits acknowledged, the checks paid, other charges and credits and the daily cash balance
per bank during the month.
Actually, the bank statement is an exact copy of the depositor’s ledger in the records of the bank.
When the bank statement is received, attached thereto are the depositor’s canceled checks and any debit or
credit memoranda that have affected the depositor’s account.
,The canceled checks are the checks issued by the depositor and paid by the bank during the month. They are
called canceled checks because they are literally canceled by stamping or punching to show that they have
been paid.
Reconciling items
At the end of every month, comparison between the cash records of the depositor and the bank statement
received from the bank will yield the following reconciling items:
1. Book reconciling items:
a) Credit memos
b) Debit memos
c) Errors
2. Bank reconciling items
a) Deposit in transit
b) Outstanding checks
c) Errors
Credit memos
Credit memos refer to the items not representing deposits credited by the bank to the account of the depositor
but not yet recorded by the depositor as cash receipts. They have the effect of increasing the bank balance.
Typical examples of credit memos are:
a. Notes receivable collected by bank in favour of the depositor and credited to the account of the
depositor.
b. proceeds of bank loan credited to the account of the depositor
c. matured time deposits transferred by the bank to the current account of the depositor.
Debit memos
Debit memos refer to items not presenting checks paid by bank which are charged or debited by the bank to
the account of the depositor but not yet recorded by the depositor as cash disbursements. They have the
effect of decreasing the bank balance.
Typical examples of debit memos are:
a. NSF or no sufficient fund checks – These are checks deposited but returned by the bank because of
insufficient of fund. The other name for NSF is DAIF or “drawn against insufficient fund”.
b. Technically defective checks – These are checks deposited but returned by the bank because of
technical defects such as absence of signature or countersignature, erasures not countersigned,
mutilated checks, conflict between amount in words and amount in figures.
c. Bank service charge – These include bank charges for interest, collection, check book and penalty.
d. Reduction of loan – This pertains to amount deducted from the current account of the depositor in
payment for loan which the depositor owes to the bank and which has already matured.
, Deposit in transit
Deposit in transit are collections already recorded by the depositor as cash receipts but not yet reflected on
the bank statement.
Deposit in transit include:
a. Collections already forwarded to the bank for deposit but too late to appear in the bank statement.
b. Undeposited collections of those still in the hands of the depositor. In effect, these are cash on hand
awaiting delivery to the bank for deposit.
Outstanding checks
Outstanding checks are checks already recorded by the depositor as cash disbursement but not yet reflected
on the bank statement. Outstanding checks include:
a. Checks drawn and already given to payees but not yet presented for payment.
b. Certified checks – A certified check is one where the bank has stamped on its face the word
“accepted” or “certified” indicating sufficiency of fund.
When the bank certifies a check, the account of the depositor is immediately debited or charged to
insure the eventual payment of the check.
Certified checks should be deducted from the total outstanding checks (if include therein) because
they are no longer outstanding for bank reconciliation purposes.
Forms of bank reconciliation
The following formats may be used in reconciling the book balance and the bank balance:
a. Adjusted balance method – Under this method, the book balance and the bank balance are brought to
a correct cash balance that must appear on the balance sheet.
b. Book to bank method – Under this method, the book balance is reconciled with the bank balance or
the book balance is adjusted to equal the bank balance.
c. Bank to Book method – Under this method, the bank balance is reconciled with the book balance or
the bank balance is adjusted to equal the book balance.
The first method is preferred over the other two.
Proforma reconciliation
Adjusted balance method
Book balance xx
Add: Credit memos xx
Total xx
Less: Debit memos xx
Adjusted book balance xx
