ACCT202 Notes #3 Bank Reconciliation PDF

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1.3.3 Bank Reconciliation Cash is one of the most susceptible to misappropriation and losses. Companies establish internal control measures to safeguard all cash receipts and disbursements. Therefore, companies would deposit all cash receipts in the bank and disbursements are made by issuance of checks. The petty cash fund is maintained in order to pay for minor expenses and keep small change in custody. For internal control purposes, current day’s receipts are deposited intact and in no way be used for any disbursements. The record of all cash receipts and disbursements must be accounted for. The company must periodically prove the balance in the general ledger by comparing actual cash on hand (undeposited cash, petty cash fund, change fund) against company records. A bank reconciliation compares company’s record and the bank’s record of the company’s cash. Bank Deposits Most companies maintain a general checking account or otherwise known as a demand deposit. It is a noninterest bearing deposit account that allows deposits but withdrawals are mainly through checks. Savings deposits on the other hand are interest bearing to which a passbook is given to depositor to show record of deposits and withdrawal in the account. Some companies may sometimes avail of a combination deposit of savings and checking where its checking account is linked to the passbook savings account. In this way, maintaining balance in checking account is kept at a minimum while the bulk is in the savings accounts where interest is earned. All check issuances are posted as withdrawals in the passbook account. Reconciliation of Balances At the end of each calendar month the bank supplies each customer with a bank statement (a copy of the bank's account with the customer) together with the customer's checks that the bank paid during the month. If neither the bank nor the customer made any errors, if all deposits made and all checks drawn by the customer reached the bank within the same month, and if no unusual transactions occurred that affected either the company's or the bank's record of cash, the balance of cash reported by the bank to the customer equals that shown in the customer's own records. This condition seldom occurs due to one or more of the reconciling items presented below (adopted from Kieso, et.al. 2019): Reconciling Items  Deposits in Transit. End‐of‐month deposits of cash recorded on the depositor's books in one month are received and recorded by the bank in the following month.  Outstanding Checks. Checks written by the depositor are recorded when written but may not be recorded by (may not “clear”) the bank until the next month.  Bank Charges. Charges recorded by the bank against the depositor's balance for such items as bank services, printing checks, not‐sufficient‐funds (NSF) checks, and safe‐deposit box rentals. The depositor may not be aware of these charges until the receipt of the bank statement.  Bank Credits. Collections or deposits by the bank for the benefit of the depositor that may be unknown to the depositor until receipt of the bank statement. Examples are note collection for the depositor and interest earned on interest‐bearing checking accounts.  Bank or Depositor Errors. Errors on either the part of the bank or the part of the depositor cause the bank balance to disagree with the depositor's book balance.

Hence, a company expects differences between its record of cash and the bank's record. Therefore, it must reconcile the two to

determine the nature of the differences between the two amounts. A bank reconciliation is a schedule explaining any differences between the bank's and the company's records of cash. If the difference results only from transactions not yet recorded by the bank, the company's record of cash is considered correct. But, if some part of the difference arises from other items, either the bank or the company must adjust its records. The Bank and Book Transactions The cash records of the company and of the bank should match. Any entry in the books of the company should have a corresponding entry in the books of the bank. For cash receipts for example, the company debits Cash in Bank while the bank credits Company’s account. Example: Assume that BA Company maintains a deposit in DC Bank. When BA Company collects cash from a customer (assuming from sales) for P50,000, the said amount is deposited to DC Bank. The journal entries in both books are: BA Company: Cash in Bank (DC Bank) Sales

50,000 50,000

Upon deposit to the bank, DC Bank records: Cash 50,000 BA Company

50,000

Assume further that BA Company issued a check for P15,000 in payment for an accounts payable, the entries to be made are: BA Company: Accounts Payable Cash in Bank (DC Bank)

15,000

DC Bank: BA Company Cash

15,000

15,000

15,000

If no other transactions occurred, then the cash ledger balance in BA Company would be P35,000, while DC Bank will report a P35,000 balance in BA Company’s account. In most instances, the two records are not in balance because of time difference. The company may have on hand cash collections that are still undeposited to the bank. Upon receipt of cash, an entry has been made debiting the Cash in Bank account; therefore, the cash ledger would be greater than the balance in the bank’s records. Also the company may have issued check in payment of an obligation, passing an entry crediting Cash in Bank. The check may not have yet been presented to the bank, thus no corresponding entry debiting the company’s account has yet been made. On the side of the bank, they are may be items that the bank record in the depositor’s account which have not yet taken up in the company’s books. Examples: 1. The bank charged the company with service charges, debiting the account. 2. The bank may have collected notes receivable of the company and credited to the company’s account.

The Statement of Bank Reconciliation

The bank reconciliation brings into agreement the cash balance per book and cash balance per bank. The company’s cash ledger balance is reconciled with the bank statement issued by the bank. The bank statement is a monthly report issued by the bank to its depositors. It contains: 1. The cash balance per bank at the beginning of the month. 2. The deposits made by the depositor acknowledged by the bank. 3. The checks issued by the company and paid by the bank. 4. The cash balance per bank at the end of the month. Specific Explanation of Reconciling Items (Valix) Credit Memos – refer to items not representing deposits credited by the bank to the account of the deposit but not yet recorded by the deposit as cash receipts. The credit memos have the effect of increasing the bank balance. Examples: 1. Note receivable collected by bank in favor of the depositor and credited to the account of the depositor. 2. Proceeds of bank loan credited to the account of the depositor. 3. Matured time deposits transferred by the bank to the current account of the depositor. Debit Memos – refer to items not representing checks paid by bank which are charged or debited by the bank to the account of the depositor but not yet recorded by the deposit as cash disbursements. The debit memos have the effect of decreasing the bank balance. Examples: 1. NSF or no sufficient fund checks (or drawn against insufficient fund, DAIF) – these are checks deposited but returned by the bank because of insufficiency of fund. 2. Technically defective checks – 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 mount in figures. 3. Bank service charges – these include bank charges for interest, collection, checkbook and penalty. 4. 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 – are collections already recorded by the company as cash receipts but not yet reflected on the bank statement. These include: 1. Collections already forwarded to the bank for deposit but too late to appear in the bank statement. 2. Undeposited collections or those still in the hands of the company. In effect, these are cash on hand awaiting delivery to the bank for deposit. Outstanding Checks – are checks already recorded by the depositor as cash disbursements but not yet reflected on the bank statement. These include: 1. Checks drawn and already given to payees but not yet presented for payment. 2. Certified checks – a certified check is one where the bank has stamped on its face the word “accepted” or “certified” indicating sufficiency of fund. The account of the depositor is immediately debited or charged to insure the eventual payment of the check.

Forms of Bank Reconciliation 1. Adjusted balance method – the book balance and the bank balance are brought to a correct cash balance that must appear in the statement of financial position. 2. Book to bank method – the book balance is reconciled with the bank balance or the book balance is adjusted to equal the bank balance. 3. Bank to book method – the bank balance is reconciled with the book balance or the bank balance is adjusted to equal the book balance. Proforma Reconciliation Adjusted Balance Method Book balance Add: credit memos Total Less: debit memos Adjusted book balance

xxx xxx xxx xxx xxx

Bank balance xxx Add: deposits in transit xxx Total xxx Less: outstanding checks xxx Adjusted bank balance xxx Note: any errors are reconciling items of the party which committed them. Book to Bank Method Book balance Add: credit memo Outstanding checks Total Less: debit memos Deposit in transit Bank balance Bank to Book Method Bank balance Add: Deposit in transit Debit memo Total Less: Outstanding checks Credit memos Book balance

xxx xxx xxx xxx xxx

xxx xxx xxx xxx

xxx xxx xxx xxx xxx

xxx xxx xxx xxx

Illustration A. (Kieso) Nugget Mining Company's books show a cash balance at the Denver National Bank on November 30, 2019, of $20,502. The bank statement covering the month of November shows an ending balance of $22,190. An examination of Nugget's accounting records and November bank statement identified the following reconciling items. 1. 2.

A deposit of $3,680 that Nugget mailed November 30 does not appear on the bank statement. Checks written in November but not charged to the November bank statement are:

Check #7327 #7348 #7349 3.

$150 4,820 31

Nugget has not yet recorded the $600 of interest collected by the bank November 20 on Sequoia Co. bonds held by the bank for Nugget.

4. 5.

6.

7.

Bank service charges of $18 are not yet recorded on Nugget's books. The bank returned one of Nugget's customer's checks for $220 with the bank statement, marked “NSF.” The bank treated this bad check as a disbursement. Nugget discovered that it incorrectly recorded check #7322, written in November for $131 in payment of an account payable, as $311. A check for Nugent Oil Co. in the amount of $175 that the bank incorrectly charged to Nugget accompanied the statement.

The general ledger of the company will show cash in bank account for January of P50,000. The bank statement for January received from First Bank:

Nugget reconciled the bank and book balances to the correct cash balance of $21,044.

Additional information:  The CM of P15,000 on January 26 represents proceeds of not collected by the bank in favor of the company.  The RT of P5,000 represents check of customer deposited previously but returned by the bank because of “no sufficient fund” or NSF.

The journal entries required to adjust and correct Nugget's books in early December 2019 are taken from the items in the “Balance per books” section and are as follows. To record interest on Sequoia Co. bonds, collected by bank Cash 600 Interest Revenue 600 To correct error in recording amount of check #7322 Cash 180 Accounts Payable 180 To record bank service charges for November Office Expense (bank charges) 18 Cash

18

To record customer's check returned NSF Accounts Receivable 220 Cash

220

After posting the entries, Nugget's cash account will have a balance of $21,044. Nugget should return the Nugent Oil Co. check to Denver National Bank, informing the bank of the error. Comprehensive Illustration (Valix) The cash records of Company X shoe the following for the month of January:

General procedures: 1. Determine the balance per book and the balance per bank: P50,000 for the books and P84,000 for the bank. 2. Trace the cash receipts to the bank statement to ascertain whether there are deposits not yet acknowledged by the bank. o Cash receipt of P40,000 on Jan 31 does not appear in the bank statement. This represents deposit in transit. 3. Trace the checks issued to the bank statement to ascertain whether there are checks not yet presented for payment. o Checks no. 725 for P37,000 and 726 for P28,000 do not appear in the bank statement. These are outstanding checks. 4. The bank statement should be examined to determine whether there are bank credits or bank debits not yet recorded by the depositor. There is CM for P15,000 and DM for returned check of P5,000 and service charge of P1,000. 5. Watch out of errors. Bank Reconciliations:

Adjusting entries: To record the note collected by bank: Cash in bank 15,000 Notes receivable

15,000

To record the NSF customer check: Accounts receivable 5,000 Cash in bank

5,000

To record the bank service charge: Bank service charge 1,000 Cash in bank

1,000

Some errors and their correction: 1. Understatement of cash receipts on the book of the depositor. Example, the collection from customer which is deposited amounts to P10,000 but recorded in the book only as P1,000. There is an understatement of cash receipt of P9,000. The error is added to the book balance and adjusted as follows: Cash in bank Accounts receivable

9,000 9,000

2. Understatement of checks drawn by depositor. For example, a check in payment of accounts payable amounting to P20,000 is recorded in the books as P2,000. There is an understatement of cash disbursement and a consequent overstatement of book balance in the amount of P18,000. The error is deducted from the book balance and adjusted as follows: Accounts payable Cash in bank

18,000 18,000

3. Deposit of another entity is credited by the bank to the account of the depositor. This is a deduction from the bank balance because it erroneously increased the account balance of the depositor in the bank. No adjustment is necessary on the book of the depositor. 4. Check of another entity charged to the account of the depositor. This is an addition to the bank balance because it erroneously decreased the account balance of the depositor in the bank. No adjustment is necessary on the book of the depositor....