m1 Bank Recon

FABM2
BANK RECONCILIATION
Control features in every company is the monthly bank reconciliation. This done to show that
there is no discrepancy between the cash balance to book records and the cash balance per
bank. Due to timing differences and errors, the need for such procedures arise.
 Deposit in Transit. Amount deposited by the depositor at the end of the month which was
received by the bank too late to appear in the bank statement for the same month. It has been
recorded by the depositor but not recorded by the banks.
 Outstanding Checks. Amount of the checks issued by the depositor but not yet presented for
payment to the bank by the holders thereof. These checks have been recorded by the depositor
but not yet recorded by the bank.
 NSF Checks. Amount of the checks accepted by the depositor from customers in the course of
business deposited at the bank, but returned by the bank to the depositor due to the
insufficiency or lack of funds at the drawee banks in the name of the drawers. These items have
been debited by the depositor while the book has credited the items at the same of deposit. The
amount of the Checks should be debited back to the customers.
 Bank collections in favor of the depositor. Collections made by the bank acting as an agent for
the depositor. The bank records the amount to the credit of the depositor. This collection may
not have been recorded by the depositor. These are relayed to the depositor thru credit memos.
Reduction of loan. Amount deducted from the depositor’s account in the bank books as payment
of loan due from the depositor. This charge may not have been recorded by the depositor when
he receives the bank statement showing such deduction. The depositor is informed by means of
notice or debit memo.
 Interest credit by the bank. Amounts credited to the account of the depositor by the bank for
the interest due to on the deposit of the depositor. These are relayed to the depositor by means of
credit memo.
 Commissions charged by the bank. Amounts deducted by the bank from the depositor’s
balance representing the compensation charged by the bank from its services to the depositor.
Nature of Bank Reconciliation
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:
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 other party in recording transactions

Example: A check was issued to Meralco by the company amounting to Php1,000. The company
recorded this as Php 100. When the check was presented, the bank paid Meralco Php 1,000. In
the records of the company, it was Php 100 while in the records of the bank it’s Php 1,000. There
is in this case an error that will cause the difference between the company’s record and the bank
records.
Importance of Bank Reconciliation are as follows:
1. Preparation of bank reconciliation helps in the identification of errors in the accounting

records of the company or the bank.
2. Cash is the most vulnerable asset of the 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.
3. 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.
1
4. 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.
c. Bank to Book Method wherein the bank balance is adjusted to agree with book balance.
For this module, the adjusted method will be used. The two remaining methods will be discussed
in higher accounting subjects in case they wish to pursue an accounting degree. In practice
anyway, the adjusted method is the commonly used method.
The most common format of a bank reconciliation statement is shown below:
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.
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.
• 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.
• 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.
• 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.
• Interest earned will appear on the bank statement when a bank gives a company interest on its account
balances.
• Notes Receivable are assets of a company. When notes come due, the company might ask its bank to
collect the notes receivable.
• 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.

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FABM2

2. Errors by other party in recording transactions

Importance of Bank Reconciliation are as follows:

1. Preparation of bank reconciliation helps in the identification of errors in the accounting

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

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