BANK RECONCILIATION:

Under the imprest system of internal control, a checking account is opened which will serve as the
paper trail of al receipts and disbursements. This is because all daily cash receipts are deposited intact the
following day in the checking account, while checks from the checking account are issued in payment of
expenses. Before a check can be prepared, there must be a voucher authorizing its preparation. Such voucher
is signed by an authorized signatory who shall be held accountable for the issuances of the check. Small
expenses, on the other hand, are paid from the petty cash fund. At the end of the month, a bank reconciliation
is prepared to reconcile the “Cash in Bank” account of the business entity and its counterpart in the bank’s
records which is the bank’s subsidiary ledger.
To illustrate a bank reconciliation, assume that ABC Co. received P100,000 from cash sales on April 1,
2020. This is recorded by ABC by debiting “Cash in Bank” and crediting “Sales.” The following day, April 2,
2020, the P100,000 is deposited in the bank. The bank prepares an entry by debiting “Cash” and crediting
“ABC Co.” for P100,000. The “ABC Co.” is a subsidiary ledger account of the bank which is credited to
recognize liability by the bank to ABC Co. To continue, assume that on the same day, ABC Co. issued a
P20,00 check to a supplier in payment of an account. ABC Co. will record this transaction by debiting
“Accounts Payable” and crediting “Cash in Bank” once the P20,000 check is presented to the bank for payment.
The bank debits to “ABC Co.” and credits “Cash.” The debit represents a reduction of liability to ABC Co.
Based on the foregoing, the “cash in bank” account and the “ABC Co.” subsidiary account should have equal
balances because what is debited in one account is credited in the other and vice-versa. However, this is not
always the case because of timing differences. For example, the practice of depositing cash receipts in the
following day can bring about different balances on balance sheet date because the bank is delayed in
recording the deposits. The deposit not yet reflected in the bank’s subsidiary record is known as “Deposit in
Transit.” Another example of timing difference is when issued checks of the business entity is not yet recorded
by the bank because it has not yet been presented to the bank for payment. Such check is known as
“Outstanding Check”. On the other hand, the business entity is delayed in recording debit memos and credit
memos. Debit memos are bank debits/charges (e.g. service charge), while credit memos are bank credits (e.g.
Bank loan, approved and credited to the company’s account which will be known by the business entity only
upon receiving the bank statement. It is only then that the business entity can prepare adjusting entries. These
are the reasons why a bank reconciliation has to be prepared. The purpose is to reconcile the book balance
with the bank balance and to determine the correct balance of the “Cash in Bank” account on balance sheet
date.
ABC Co. employs the voucher system in controlling expenses. The data required to reconcile its
book and bank balances have been abstracted from various documents which documents which
are reproduced below:
Bank Reconciliation – Oct 31, 2019:
Balance per bank statement
Add: Deposit in Transit P 6,501.37
Total 748.80
Less: Outstanding Checks: P 7,250.17
# 606 P 79.27
# 611 184.96
#613 296.61
# 614 35.24 596.08
Adjusted balance per bank P 6,654.09
Cash Receipts Journal – November:
Date Amount Date Amount Date Amount
Nov. 1 746.47 Nov. 10 869.23 Nov. 22 757.85
3 839.99 15 576.71 24 797.90
8 791.79 17 859.04 29 522.95
Check Register – November:
Check# Amount Check# Amount Check# Amount Check# Amount
615 121.89 620 67.25 625 362.77 630 VOID
616 119.44 621 298.66 626 299.37 631 83.95
617 385.53 622 339.33 627 537.01 632 152.68
618 604.84 623 66.20 628 330.95 633 349.86
619 506.88 624 620.13 629 343.76 634 505.65
635 486.39
Deposits per November Bank Statement:
Date Amount Date Amount Date Amount
Nov. 1 748.80 Nov. 9 791.79 Nov. 18 859.04
2 746.47 11 869.23 23 775.85
4 839.99 16 576.71 30 797.90
Checks Paid per November Bank Statement:
Check# Amount Check# Amount Check# Amount Check# Amount
606 79.27 617 385.53 622 339.33 627 537.01
613 296.61 618 604.84 623 66.20 628 330.95
614 35.24 619 506.88 624 620.13 631 83.95
615 121.89 620 67.25 625 326.77 632 152.68
616 119.44 621 298.66 626 299.37 635 486.39
Bank Memorandums – November:
Date D e s c r i p t i o n Amount
Nov. 7 CM – Note Collected (Principal) 600.00
(Interest) 14.00
18 DM – NSF Check 95.03
30 DM – Service Charge 6.65
Required:
1. Prepare a bank reconciliation (adjusted balance method) as of Nov. 30, 2019. If errors recording receipts or
checks are discovered, assume that error was made by ABC Co.
2. Journalize the adjusting entries.
3. Using the same information, prepare a bank reconciliation on Nov. 30, 2019 using “book to bank” and “bank
to book” methods.
4. Prepare a proof of cash (adjusted balance method.
5. Show computation of deposit in transit and outstanding checks on Nov 30, 2019 assuming they are not given.
Requirement No. 1
The first step is to determine the Nov. 30 unadjusted book balance and the Nov. 30 unadjusted bank
balance because they are not given in the problem. In actual practice, this is just simple because the bank
statement will provide the Nov. 30 unadjusted bank balance while the “Cash in Bank” account in the general
ledger will provide the Nov. 30 unadjusted book balance. The basic formula to determine unadjusted ending
balances is:
Beg. Balance PLUS Receipts LESS Disbursements
The computation is as follows:
Book balance, Nov. 01 P 6,654.09
Add: Book Debits (Total November Cash Receipts) 6,761.93
Less: Book Credits (Total of November Check Registers) 6,582.54
Unadjsuted Book Balance, Nov. 30 P 6,833.48
The Nov. 01 book balance is actually the Oct. 31 adjusted bank balance because the adjusted book
balance is equal to adjusted bank balances. The adjusted balance is used because the book prepared
adjusting entries at the end of each month so that the Cash in Bank balance will be equal to the adjusted
balance per book which is the correct cash balance.
Bank balance, Nov. 01 P 6,654.09
Add: Bank Credits (Total November bank deposits and credit memos) 6,761.93
Less: Bank Debits (Total of November checks paid and debit memos) 6,582.54
Unadjsuted Book Balance, Nov. 30 P 6,833.48
The Nov. 01 bank balance is actually the unadjusted Oct. 31 bank balance which is carried forward to
Nov. 01. It should be emphasized that the bank does not prepare adjusting entries at the end of each month.
The preparation of the bank reconciliation (adjusted balance method) is shown below together with
explanatory notes:
ABC Company
Bank Reconciliation
Nov. 30, 2019
Book balance P 6,833.48
Add: CM – note collected by bank P 614
Understated receipts 18
Overstated disbursements 36 668
Total P 7,501.48
Less: DM – Service Charge P 95.03
DM – Service Charge 6.65 101.68
Adjusted book balance P 7,399.80

Bank balance P 8,261.08

Add: Deposit in Transit 522.95
Total P 8,784.03
Less: Outstanding Checks
#611 P 184.96
#629 343.76
#633 349.86
#634 505.65 1,384.23
Adjusted bank balance P 7,399.80
The book reconciling items are the credit memos and the debit memos because these are already
recorded by the bank as credits and debits, respectively, but not yet recorded by the book. The book errors are
also reconciling items for the book in the same manner that bank errors are reconciling items for the bank. It is
only when a bank makes an error that it adjusts its records.
The bank reconciling items are the deposits in transit and outstanding checks because these are
already recorded by the book as receipts and disbursements, respectively, but not yet recorded by the bank.
The deposit in transit is determined by comparing the beginning deposit in transit and the November book
receipts with the deposits per bank statement. Any item of receipt that does not enter the bank as deposit is
considered as ending deposit in transit. Normally, the receipts for the last day of the month become the ending
deposit in transit because it is deposited by the following day. The ending outstanding checks are determined
by comparing the beginning outstanding checks and the checks issued during November with the checks paid
by the bank per bank statement. Any check that does not enter the bank as disbursement is considered as an
outstanding check. If a check is outstanding for a considerable period of time, it become a stale check.
Requirement No. 2
Adjusting entries:
1. Cash in Bank 614 3. Cash in Bank 36
Notes Receivable 600 Accounts Payable 36
Interest Income 14 4. Accounts Receivable 95.03
2. Cash in Bank 18 Bank Service Charge 6.65
Accounts Receivable 18 Cash in Bank 101.68
The basis for the adjusting entries is the book reconciling items (i.e. credit memos, debit memos, book error). If
the source of cash receipt is not stated in the problem, the assumption is that it came from collection of
accounts receivable. If the source of cash disbursement is not stated in the problem, the assumption is that it is
in payment of accounts payable. After the adjusting entries are posted to the general ledger, the “Cash in Bank”
account will have a balance equal to the adjusted book balance.

Requirement No. 3
Book to bank method
Book balance, Nov. 30 P 6,833.48
Add: CM-note collected by bank P 614
Understated receipts 18
Overstated disbursements 36
Outstanding checks 1,384.23 2,052.23
Total P 8,885.71
Less: DM-NSF Check P 95.03
DM-Service Charge 6.65
Deposit in Transit 522.95 624.63
Bank balance, Nov. 30 P 8,261.08
This reconciliation starts with the Nov.30 book balance and ends with the Nov. 30 bank balance.
Basically, in this method, the book is following the bank. This is the reason why the book reconciling items
treatment is the same as in the adjusted balance method (e.g. credit memos are added, and debit memos are
deducted) while the bank reconciling items treatment is reversed (e.g. outstanding checks are added rather
than deducted and deposit in transit is deducted rather than added).
Bank to book method
Bank balance, Nov. 30 P 8,261.08
Add: Deposit in Transit P 522.95
DM-NSF Check 95.03
DM-Service Charge 6.65 624.63
Total P 8,885.71
Less: Outstanding checks P 1,384.23
CM-note collected by bank 614
Understated receipts 18
Overstated disbursements 36 2,052.23
Book balance, Nov. 30 P 6,833.48
In this method, the bank is following the book. This is the reason why the bank reconciling items
treatment is the same (e.g. the deposit in transit is still added while the outstanding checks are still deducted)
while the treatment for book reconciling items is reversed (e.g. credit memo is deducted instead of added and
debit memos are added back). Even the book errors are followed by the bank (e.g. understated receipts are
deducted instead of added).

Requirement 4:
Proof of Cash (Adjusted Balance Method)
N o v e m b e r
Oct. 31 Receipts Disbursements Nov. 30
Book balances P 6,654.09 P 6,761.93 P 6,582.54 P 6,833.48
CM-note collected by bank 614 614
DM-NSF check 95.03 (95.03)
DM-Service charge 6.65 (6.65)
Errors:
Understated receipts 18 18
Overstated check . . (36) 36
Adjusted book balance P 6,654.09 P 7,393.93 P 6,648.22 P 7,399.80
 N o v e m b e r
Oct. 31 Receipts Disbursements Nov. 30
Bank balances P 6,501.37 P 7,619.78 P 5,680.07 P 8,261.08
Deposit in transit:
Oct. 31 748.80 (748.80)
Nov. 30 522.95 522.95
Outstanding checks:
Oct. 31 (596.08) (596.08)
Nov. 30 . . 1,384.23 (1,384.23)
Adjusted bank balance P 6,654.09 P 7,393.93 P 6,648.22 P 7,399.80

For the book and bank balances, notice that the formula used is the same as in requirement no. 1 (i.e.
Beg. Balance + receipts – disbursements = end. Balance). Actually, a new equation can be prepared which is
“Beg. Balance + Receipts = Disbursements + End. Balance” (Note: Check the equality of the equation). If there
is an unknown item, it can be computed using the equation. For example, of P6,761.93 receipts is unknown, it
can be computed by adding disbursements and ending balance and subtracting the beginning balance
(P6,582.54+P6,833.48-P6,654.09=P6,761.93).
The note collected by the bank is added to the November book receipts because it is a November
receipt which has not yet been recorded by the book. Increase in November receipts will correspondingly
increase the ending balance. Notice that equality of the equation (Beg. Bal + Rec. = Disb. + End.Bal) is
maintained because P614 is increased on the left side of the equation and P614 is increased on the right side
of the equation. The NSF check is added to November disbursement because it is a November bank
disbursement which has not yet been recorded by the book. Increase in November disbursement will
correspondingly decrease the ending balance. Again, notice that the equality of the equation has been
preserved. The understated receipt is shown as addition to receipts with a corresponding increase in ending
balance in order to correct the understatement of receipts. The overstated check is shown as a deduction from
disbursements with a corresponding increase in ending balance.
The Oct. 31 deposit in transit is deducted from November receipts and added to Oct. 31balance
because it is actually an October deposit which was recorded by the bank as a November deposit. Again,
notice the equality of the equation (P0 on the left side of the equation and P0 on the right side of the equation).
The Nov. 30 deposit in transit is added to November receipts with a corresponding increase in ending balance
because it has not yet been recorded by the bank as a deposit. The Oct. 31 outstanding check is shown as a
deduction from the November disbursements, and was deducted from the Oct. 31 balance because it is a
disbursement for October that was recorded as a November disbursement.
Requirement No. 5
Computation of Deposit in Transit, Nov. 30:
Deposit in Transit, Oct. 31 P 748.80
Add: November book debits P 6,761.93
Add: Understated receipts 18 6,779.93
Total deposits to be credited by bank P 7,528.73
Deposits credited by bank:
Bank credits P 7,619.78
Less: CM-note collected by bank 614 7,005.78
Deposit in transit, Nov. 30 P 522.95
Deposit in transit, Oct. 31plus November book receipts should enter the bank as deposits. Any receipt
that does not enter the bank as deposit is the deposit in transit Nov. 30. The November book debits should
represent the correct amount of receipts. Any credit memo included in the balance should be deducted and
any error should be corrected. In the same manner, the bank credits should represent receipts that entered the
bank as deposits. Any credit memo mingled with the bank credits should be removed and any bank error
should be corrected.
Computation of Outstanding Checks, Nov. 30:
Outstanding Checks, Oct. 31 P 596.08
Add: November book credits P 6,582.54
Less: Overstated disbursement 36 6,546.54
Total checks to be paid by bank P 7,142.62
Checks paid by bank:
Bank debits P 5,860.07
DM-NSF check (95.03)
DM-service charge (6.65) 5,758.39
Outstanding Checks, Nov. 30 P 1,384.23
 Outstanding checks, Oct. 31 plus November book disbursements (i.e. checks issued by the company)
should enter the bank as disbursements: Any book disbursement that does not enter the bank as disbursement
(i.e. checks paid) will be included in the outstanding checks, Nov. 30. The November book credits should
represent the correct amount of checks issued. Any debit memo included in the book credits should be
removed and any errors should be corrected. In the same manner, the November bank debits should represent
checks paid by the book. Any debit memo mingled with the bank debits should be removed and any bank error
should be corrected.