Bank Reconciliation

Bank Reconciliation
● 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.
● 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.
Two common causes of the discrepancy in figures:
1. Time lags- that prevent one of the parties (company or the bank) from recording
the transaction in the same period as the other party.
2. Errors by either party in recording transactions.
Importance of Bank Reconciliation
● 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.
● 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.
Three methods of preparing bank reconciliation statement
1. Adjusted Method wherein the balances per bank and per book are separately
determined.
2. Book to Bank Method wherein the book balance is adjusted to agree with the
bank balance.
3. Bank to Book Method wherein the bank balance is adjusted to agree with book
balance.
Key terms needed in Bank Reconciliation
● Deposits in transit are amounts already received and recorded by the company, but are not
yet recorded by the bank.
● Deposit in transit refers to two items (1) Amount that is deposited in the bank after the
cut-off time; and (2) Amount that is received by the company for deposit but not yet
deposited in the bank.

Example 1: Amount that is deposited in the bank after the cut-off time.
June 30,2021

1pm ABC Company received a P5,000 check from a customer. Collection was promptly
recorded in the accounting books.

2:30pm ABC Company deposited the P5,00 check in GHI bank. The teller informed you that
their cut-off time for check deposit is 11:00 am. Late deposit was stamped on the
deposit slip.

July 1, 2021 Check deposit was credited in ABC Company’s bank account.
● 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
● 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.

Example:

June 28, 2021 ABC Company issued a P10,000 check in favor of Grace Inc. Check was also
recorded on the accounting books this date.

June 29, 2021 ABC Company informed Grace Inc. that their check is ready for pick-up.

June 30,2021 The messenger of Grace Inc. picked up the check from the office of ABC
Company.

July 1, 2021 The check was deposited in GHI Bank.

July 3, 2021 The check cleared through the banking system. The bank deducted P10.000
from ABC’s checking account.
● 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.
Bank Errors
● 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.
Bank Service Charge
● 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.

● 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.
NSF Check (non-sufficient fund)
● 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.
● 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
● 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
● 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
● 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.
Errors in Company’s Books
● 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:
Step 2: Adjusting the Balance per book -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).