Bank Reconciliation intermediate Accounting 1 PDF

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Summary

Bank ReconciliationBank deposits Three kinds of bank deposits: Demand deposit = this is the current account or checking account or commercial deposit where deposits are covered by deposit slips and where funds are withdrawals on demand by drawing checks against the bank. = non-interest bearing 2) Sa...

Description

Bank Reconciliation Bank deposits Three kinds of bank deposits: 1) Demand deposit= this is the current account or checking account or commercial deposit where deposits are covered by deposit slips and where funds are withdrawals on demand by drawing checks against the bank. = non-interest bearing 2) Saving deposit= the depositor is given a passbook upon the initial deposit. = passbook is required when making deposits and withdrawals. Withdrawals are made anytime but the bank sometimes may require notice of withdrawal. = interest bearing. 3) Time deposit= this is similar to saving deposit in the sense that it is interest bearing. = it is evidenced; however, by a formal agreement embodied in an instrument called certificate of deposit. = may be predetermined or withdrawn on demand on or after a certain period of time agreed upon.

What is bank reconciliation? Bank reconciliation is a statement which brings into agreement the cash balance per book and cash balance per bank. = it is usually prepared monthly because the bank provides the depositor with the bank statement at the end of every month. Bank statement= is a monthly report of the bank to the depositor showing the cash balance per bank at the beginning, the deposits acknowledged, the checks paid, other charges and credits and the daily cash balance per bank during the month. = is an exact copy of the depositor’s ledger in the records of the bank. = when it is received, attached thereto are the depositor’s canceled checks and any debit or credit memoranda that have affected the depositor’s account. Canceled checks= are the checks issued by the depositor and paid by the bank during the month. = they are called cancelled checks because they are literally canceled by stamping or punching to show that they have peen paid.

Reconciling items At the end of every month, comparison between the cash records of the depositor and the bank statement received from the bank will yield the following reconciling items: 1) Book reconciling items: a. Credit memos b. Debit memos c. Errors 2) Bank reconciling items: a. Deposit in transit b. Outstanding checks c. Errors

Credit memos = refer to items not representing deposits credited by the bank to the account of the depositor but not yet recorded by the depositor as cash receipts. = have the effect of increasing the cash balance. = typical examples of credit memos are: a) Notes receivable collected by the bank in favor of the depositor and credited to the account of the depositor. b) Proceeds of bank loan credited to the account of the depositor. c) 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 nut not yet recorded by the depositor as cash disbursements. = have the effect of decreasing the cash balance. Typical examples of debit memos are: a) NSF or no sufficient fund checks= these are checks deposited but returned by the bank because of insufficiency of fund. = other name of NSF is DAIF or “Drawn against insufficient fund”.

b) Technically defective checks= these are 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 amount in figures. c) Bank service charges= these include bank charges for interest, collection, checkbook and penalty. d) 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 depositor as cash receipts but not yet reflected on the bank statement. Deposit in transit include: a) Collections already forwarded to the bank for deposit but too late to appear in the bank statement. b) Undeposited collections or those still in the hands of the depositor. 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. Outstanding checks include: a) Checks drawn and already given to payees but not yet presented for payment. b) Certified checks – is one where the bank has stamped on its face the word “accepted” or “certified” indicating sufficiency of fund. When the bank certifies a check, the account of the depositor is immediately debited or charged to insure the eventual payment of the check. Certified checks should be deducted from the total outstanding checks (if included therein) because they are no longer outstanding for bank reconciliation purposes.

Forms of bank reconciliation The following formats may be used in reconciling the book balance and the bank balance: a) Adjusted balance method – under this method, the book balance and the bank balance are brought to a correct cash balance that must appear on the balance sheet.

b) Book to bank method – under this method, the book balance is reconciled with the b ank balance or the book balance is adjusted to equal the bank balance. c) Bank to book method – under this method, the bank balance is reconciled with the is reconciled with the book balance or the bank balance is adjusted to equal the book balance.

The first method is preferred over the other two.

Proforma reconciliation Adjusted balance method Book balance

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Add: Credit memos

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Total

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Less: Debit memos

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Adjusted book balance

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Bank balance

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Add: Deposit in transit

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Total

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Less: Outstanding checks

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Adjusted bank balance

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The reconciling items of the book are simply termed as credit memos and debit memos. In actual formal reconciliation, details will have to be shown. Moreover, errors are excluded because no definite rule can be made whether these are to be added or deducted. Errors will have to be analyzed for proper treatment. But errors are reconciling items of the party which committed them. It will observe that under the adjusted balance method, the credit memos are always added to the book balance and the debit memos are always deducted from the book balance.

Deposits in transit are always added to the bank balance and the outstanding checks are always deducted from the bank balamce.

The above procedures can be explained as follows: The adjusted balance method means that the book balance and the bank balance are adjusted to equal the correct cash balance. Credit memos already increased the bank balance but have no effect on the book balance because the credit memos are not yet recorded by the depositor. Consequently, the book balance is understated in relation to the correct cash balance. Hence, credit memos are added to the book balance. Debit memos already decreased the bank balance but have no effect on the book balance because the debit memos are not yet recorded by the depositor. Consequently, the book balance is understated in relation to the correct cash balance. Hence, credit memos are added to the book balance. Debit memos already decreased the bank balance but have no effect on the book balance because debit memos are not yet recorded by the depositor. Consequently, the book balance is overstated in relation to the correct cash balance. Hence, debit memos are deducted from the book balance. Deposit in transit already increased the book balance but have no effect on the bank balance because the deposits are not yet recorded by the bank. Consequently, the bank balance is understated in relation to the correct cash balance. Hence, deposits in transit are added to the bank balance. Outstanding checks already decreased the book balance but have no effect on the bank balance because the checks are not yet paid by the bank. Consequently, the bank balance is overstated in relation to the correct cash balance. Hence, outstanding checks are deducted from the bank balance.

Book to bank method Book balance Add: Credit memos Outstanding checks

xx xx xx

Total

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Less: Debit memos Deposit in transit Bank balance

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xx xx

When the reconciliation starts with the book balance and ends with the bank balance, the usual book reconciling items are treated in the same manner they are treated in the “adjusted balance method”, that is, credit memos are added and debit memos are deducted. However, with respect to the bank reconciling items treatment is simply “reversed”. Thus, since the deposit in transit is added to the bank balance, it is now deducted from the book balance, and since the outstanding check is deducted from the bank balance, it is now added to the book balance.

The explanation for the “reversal rule” on the treatment of the ban k reconciling items may be stated as follows: The book to bank method means that the book balance is adjusted to equal the bank balance. Deposit in transit already increase the book balance but have no effect on the bank balance because the deposits are not yet recorded by the bank. Consequently, the book balance is overstated in relation to the bank balance. Hence, deposits in transit are deducted from the book balance following the book to bank method. On the other hand, outstanding checks already decreased the book balance but have no effect on the bank balance because the checks are not yet paid by the ba nk. Consequently, the book balance is understated In relation to the bank balance. Hence, outstanding checks are added to the book balance, following the book to bank method.

Bank to book method Bank balance Add: Deposit in transit Debit memos

xx xx xx

Total

xx xx

Less: Outstanding checks

xx

Credit memos

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Book balance

xx xx

When the reconciliation starts with the bank balance and ends with the book balance, the usual bank reconciling items are treated in the same manner they are treated in the “adjusted balance method”, that is, deposit in transit is added and outstanding check is deducted. However, with respect to the book reconciling items, the treatment is simply “reversed”. Thus, since the credit memos are added to the book balance, they are now deducted from the bank balance, and since the debit memos are deducted from the book balance, they are now added to the bank balance.

The explanation for the “reversal rule” on the treatment of the book reconciling items may be stated as follows: The bank to book method means that the bank balance is adjusted to equal the book balance. Debit memos already decreased the bank balance but have no effect on the book balance because they are not yet recorded by the depositor. Consequently, the bank balance is understated in relation to the book balance, Hence, debit memos are added to the bank balance. On the other hand, credit memos already increased the bank balance but have no effect on the book balance because they are not yet recorded by the depositor. Consequently, the bank balance is overstated in relation to the book balance. Hence, credit memos are deducted from the bank balance.

General procedures in preparing the reconciliation a) Determine the balance per book and the balance per bank b) Trace the cash receipts to the bank statement to ascertain whether there are deposits not yet acknowledged by the bank. c) Trace the checks issued to the bank statement to ascertain whether there are checks not yet presented for payment. d) The bank statement should be examined to determine whether there are bank credits or bank debits not yet recorded by the depositor. e) Watch out for errors. Errors are reconciling items of the party which committed them

Preparation of adjusting entries Only the book reconciling items require adjusting entries on the book of depositor. This is but understandable. The adjustments are necessary to bring the cash in bank balance to its correct balance for statement presentation purposes. a) To record the note collected by bank: Cash in bank

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Notes receivable

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b) To record the NSF customer check: Accounts receivable

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Cash in bank

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c) To record the bank service charge: Bank service charge Cash in bank

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Some errors and their treatment a) Understatement of cash receipts on the book of depositor. For 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

xx

Accounts receivable

xx

b) Understatement of checks drawn by depositor. For example, a check in payment of account payable amounting to P20,000 is recorded in the book 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

xx xx

c) 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.

d) 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....