NAME: GRADE & STRAND:

Fundamentals of Accountancy, Business and Management 2

LESSON 9: Bank Reconciliation Statement

WHAT I NEED TO KNOW?

In this lesson, you will be able to;
 Describe the nature of a bank reconciliation statements
 Analyze the effects of the identified reconciling items
 Prepare a bank reconciliation statement

WHAT I KNOW?
Answer the following questions. Write your answer on the space provided. Limit your answer
in two sentences only.
1. what is current account
2. Who are the parties involved in the issuance of a check.
3. What is a bank statement
4. What are the contents of a bank statement?
5. The purpose of a bank statement.

WHAT’S IN?
In this lesson, you must bear in mind that transactions are recorded in the books of
accounts based on business documents or media. Media is a banking terminology that refers
to the basis of the transaction as in posting media. Thus, bank records the activities of the
depositor when actual deposits are made (media – deposits slips) and when checks (media)
are uncashed or received from PCHC clearing. On the part of the depositor, he or she may
adopt the Imprest cash system wherein collections are debited to cash in bank even if actual
deposits may be done on the following banking day. In addition, it takes up disbursement as
credits to cash in bank on issue date. Thus, there may be timing differences in the recording
of cash in the bank transactions by the bank and the depositor.

An accounting tool used by business and individuals to know the true balance of cash
in a bank account is the bank reconciliation statement. Under the adjusted balances method
of bank reconciliation, the balance per bank is reconciled with the balance per depositor’s
books.
To understand a bank reconciliation, you must recall the learning you acquired in the
previous lesson – the bank debits, what the depositor credits such as check payments, and
the bank credits what the depositor debits such as collections deposited with the bank.
Further, there are transactions that are recorded by the bank ahead of the depositor such as
proceeds of loan, note collection, service charges, and daif (drawn against insufficient funds)
check. The depositor records these transactions when they receive the corresponding debit
or credit memo from the bank.

Page 1 of 10
 WHAT IS IT?

Nature of Bank Reconciliation Statement

It is normal for a company's bank balance as per accounting records to differ from the
balance as per bank statement. The difference between these figures is the reasons why
companies prepare a bank reconciliation statement. Bank reconciliation statement is a report
which compares the bank balance as per company's accounting records with the balance
stated in the bank statement.

The two common causes of the discrepancy in figures are:

• Time lags that prevent one of the parties (company or the bank) from recording the
transaction in the same period as the other party. Example: A bank statement that ends
January 30, 2015 and then the company were able to collect cash of P20,000 at 5:00 PM.
Bank usually closes at 3:00 PM because of this, the cash collected will not be reflected in the
bank as deposit but it is however recorded in accounting records of the company.
• Errors by either party in recording transactions
Example: A check was issued to Meralco by the company amounting to P1000. The company
recorded this as P100. When the check was presented, the bank paid Meralco P1,000. In the
records of the company it was P100 while in the records of the bank it’s P1,000. There is in
this case an error that will cause the difference between the company’s records and the bank
records.

The importance of Bank Reconciliations are as follows:

• Preparation of bank reconciliation helps in the identification of errors in the accounting
records of the company or the bank.
• Cash is the most vulnerable asset of an entity. Bank reconciliations provide the
necessary control mechanism to help protect the valuable resource through uncovering
irregularities such as unauthorized bank withdrawals. However, in order for the control
process to work effectively, it is necessary to segregate the duties of persons responsible for
accounting and authorizing of bank transactions and those responsible for preparing and
monitoring bank reconciliation statements.
• If the bank balance appearing in the accounting records can be confirmed to be correct
by comparing it with the bank statement balance, it provides added comfort that the bank
transactions have been recorded correctly in the company records.
• Monthly preparation of bank reconciliation assists in the regular monitoring of cash
flows of a business.

There three methods of preparing bank reconciliation statement, namely:

a. Adjusted Method wherein the balances per bank and per book are separately
determined.
b. Book to Bank Method wherein the book balance is adjusted to agree with the bank
balance.
Page 2 of 10
 c. Bank to Book Method wherein the bank balance is adjusted to agree with book
balance.

The most common format of a bank reconciliation statement is shown below:

JUAN COMPANY
BANK RECONCILIATION STATEMENT APRIL 30, 20XX
Unadjusted Book xxxxx Unadusted Bank Balance xxxx
Balance
Deposit in Transit xxxx
Bank Debit Memo Outstanding Checks xxxx
NSF Check xxxxx
Printing Charge xxxxx
Bank Credit Memo
Collection xxxxx
Errors xxxxx
Adjusted Book Balance xxxxx Adjusted Bank Balance xxxxxx

The key terms to be aware of when dealing with a bank reconciliation are:
• Deposits in transit are amounts already received and recorded by the company, but
are not yet recorded by the bank.

For example, a retail store deposits its cash receipts of August 31 into the bank's night
depository at 10:00 p.m. on August 31. The bank will process this deposit on the morning of
September 1.

As of August 31 (the bank statement date) this is a deposit in transit.

Because deposits in transit are already included in the company's Cash account, there
is no need to adjust the company's records. However, deposits in transit are not yet on the
bank statement. Therefore, they need to be listed on the bank reconciliation as an increase
to the balance per bank in order to report the true amount of cash.

A deposit in transit is on the company's books, but it isn't on the bank statement.
• 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.

Checks written during the last few days of the month plus a few older checks are likely
to be among the outstanding checks.
Page 3 of 10
 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.

Illustration of an Outstanding Check:

On January 29, 2015, Juan issued a check to Maria amounting to P2,000. The
checks was then recorded by Juan in his books as a deduction to his cash. It so happen that
the bank was closed on that day and Maria was able to visit the bank and have it encashed
on February 1, 2015 only. In the bank statement received by Juan from his bank ending
January30,2015, the P2,000 check was not deducted however it was already deducted in the
books of Juan on January 29, 2015. The P2,000 check is called an outstanding check.

• Bank errors are mistakes made by the bank. Bank errors could 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.
• Bank service charges are fees deducted from the bank statement for the bank's
processing of the checking account activity Examples:
- 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.

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 of the service charges.

Page 4 of 10
• NSF check 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.
NSF is the acronym for not sufficient funds. 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.
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.

• 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.
• 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.

• 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.

• 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.

Page 5 of 10
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:

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

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).
Page 6 of 10
 WHAT’S MORE?
Answer the ff.:
For the month of May 2016, Tope Company issued the following checks as recorded in its
Cash Disbursement Journal:
Check Date Check No Payee Amount
5/2/2016 1256 Jane 2,000
5/10/2016 1257 May 300
5/15/2016 1528 Nicole 4,500
5/18/2016 1259 Kathy 8,700
5/30/2016 1260 Perry 1,200

As per the bank statement received by Tope, the following checks were presented and paid by the
bank:

Check No Payee Amount

1256 Jane 2,000
1259 Kathy 8,700
1260 Perry 1,200

Instruction: Identify checks outstanding as of end of May 2016. Write your answer below.
___________________________________________________

WHAT I HAVE LEARNED?

Due to timing differences in recording, a bank reconciliation statements is needed to find
adjusted balances which treated items appropriately. A simple approach is to remember bank
accounting for deposits and issues of checks. On the part of the bank, deposits are their liabilities;
they are credited. Issues of checks are reductions in those liabilities and are treated as debits. Thus
a student, you must remember that cash in bank is an asset of the depositor, and deposits to the
current account are debited. In turn, issues of checks or payments drawn against the current account
are credit to cash in bank. Therefore, you can clearly see that the depositor debits (we debit)
increases in the current account, while the bank credits them (you credit). The depositor credits (we
credit) reductions, but the bank debits them (you credit).

To reconcile the bank statements with the cash in bank balance per depositor’s books, you
must analyze the items causing the discrepancies between :”we debit” and “you credit” between “we
credit” and “you debit”. Always remember that you must make the adjustment based on the correct
treatment of the reconciling item. The depositor’s books are adjusted to properly records items that
are missing them. However, the corrections to the bank statement are tools of the depositor only but
are not recorded in the bank statement unless the bank affirms that it committed error/s.
Page 7 of 10
 WHAT I CAN DO?
Identify whether the following independent transaction is a book or a bank reconciling. In
addition, determine the amount of the error and state whether the amount will be added or
deducted in the preparation of the bank reconciliation (use adjusted method). Write your answer on
the space provided.
1. Eagle Repairs received P1,500 from Jane. The bookkeeper recorded the amount as P500.
________________________________________________________________________
2. Nation Bank collected from the customer of Eagle the sum of P5,000 representing payment
of the said customer to Eagle. No entry was made in the books of Eagle.
________________________________________________________________________
3. The bank teller deducted CK 123 for P3,500 from the account of Eagle. The said
check was issued by Egles Company a different depositor of the bank.
_________________________________________________________________

ASSESSMENT

Bank reconciliation problem. For your answer used the space below of the page 8.
The bank statement for Juan Company shows a balance per bank of P15,907.45 on April 30,2015.
On this date the balance of cash per books is P11,589.45.
Additional information are provided below:
Deposits in transit: April 30 deposit (received by the bank on May 1) P2,201.40
Outstanding checks: No. 453-P3,000.00
No. 457-P1,401.30
No. 460-P1,502.70
Errors: Juan wrote check no. 443 for P1,226.00 and the bank correctly paid that amount.
However, he recorded the check as P1,262.00.
Bank memoranda:
Debit– NSF check from Pedro P425.60 .
Debit– Charge for printing company checks P30.00
Credit – Collection of note receivable for P1,000 plus interest earned of P50, less bank collection fee
of P15.00.
Required: Prepare a bank reconciliation statement using the adjusted method.
Hint: Bank Debit Memo are deductions made by the bank to the account of the depositor
Bank Credit Memo are additions made by the bank to the account of the depositor

Reference:
Book:
Durana, Merlita M., Fundamentals of Accountancy, Business and Management 2 (2017), Diwa
Learning System Inc.
Rabo, et.al., Fundamentals of Accountancy, Business and Management 1 (2016), Vibal Group, Inc.

Unpublished References:
Published by the Commission on Higher Education, 2016
Chairperson: Patricia B. Licuanan, Ph.D
Page 8 of 10
 NAME: GRADE & STRAND:
Fundamentals of Accountancy, Business and Management 2
Module 8: ANSWER SHEETS

General Instructions: This answer sheet is use for the answer and solutions purposes only,
if the answer sheet is not enough you can use another separate sheet (short bond paper)
and please attached it in this answer sheet.

WHAT I KNOW?

WHAT’S MORE

Page 9 of 10
 WHAT I CAN DO?

ASSESSMENT

Page 10 of 10