Int Acc Chapter 2 - Valix, Robles, Empleo, Millan PDF

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CHAPTER 2 (BANK RECONCILIATION)**▲Kinds of Bank Deposits Demand deposit –** the current account or checking account or commercial deposit where deposits are covered by deposit slips and where funds are withdrawable on demand by drawing checks against the bank. - A demand deposit is noninterest beari...

Description

CHAPTER 2 (BANK RECONCILIATION)

Company X

▲Kinds of Bank Deposits

30,000

Cash

• Demand deposit – the current account or checking account or commercial deposit where deposits are covered by deposit slips and where funds are withdrawable on demand by drawing checks against the bank. - A demand deposit is noninterest bearing • Saving deposit - In a saving deposit, the depositor is given a passbook upon the initial deposit. The passbook is required when making deposits and withdrawals. - Withdrawals are made anytime but the bank sometimes may require notice of withdrawal.

30,000

- When a check is issued, the payee will present the same to the bank for payment. - The depositor is actually ordering the bank to pay the payee out of its deposit in the bank. - This is the reason the bank debits the account of the depositor thereby reducing its liability to the depositor. - Thus, when the depositor's account is decreased, the same is debited.

- A saving deposit is interest bearing.

- At this point, when balances are extracted, the cash in bank account on the depositor's book has a balance of P70,000 and the Company X account on the book of the bank has also a balance of P70,000.

• Time deposit

■ Explanation

- The time deposit is similar to saving deposit in the sense that it is interest bearing. - A time deposit is evidenced, however, by a formal agreement embodied in an instrument called certificate of deposit.

- The two accounts have equal or the same balances because they are reciprocal accounts. - This means that when one account is debited, the other account is credited or vice versa.

- Time deposit may be preterminated or withdrawn on demand or after a certain period of time agreed upon.

- The reason for this is that the two accounts cover or reflect the same items or transactions. - Thus, if no errors are committed in recording, and the same information has been recorded by both accounts, the two should have equal or the same balances.

▲ Bank Reconciliation - A bank reconciliation is necessary only for a demand deposit or checking account. - When an account is opened at the bank, the person authorized to draw checks against the account will be required to sign cards furnished by the bank, to show the specimen signatures to be used on the checks. - These specimen signatures will be filed by the bank so that any teller who may be unfamiliar with a depositor's signature can test the authenticity of a check by comparing the depositor's signature on the card with the signature on the check. - If the depositor is a corporation, the bank will request that the directors pass a resolution authorizing certain officers of the corporation as signatories of checks and that a copy of this resolution be filed with the bank. • Fundamental Transactions Affecting the Depositor and the Bank. Assume that Company X (the depositor) collected P100,000 from a customer in settlement of an account. The collection is deposited at the First Bank.

- But very frequently, there are items on the depositor’s book which do not appear on the bank records as of the same date. - For example, checks issued by the depositor are not yet presented for payment to the bank or deposits may have been made after the bank records are sent out to the depositor. - And less frequently, there are items on the bank records which do not appear on the depositor's book. For example: a. The bank may have charged the depositor's account with service charges which the depositor may not know about until a report is received from the bank. b. Notes endorsed to the bank for collection have been collected by the bank and credited to the depositor's account but notice of collection is not yet received from the bank by the depositor. In the light of the foregoing, it becomes necessary to prepare a bank reconciliation.

Book Cash (or cash in bank) Accounts receivable

100,000 100,000

• Bank reconciliation – a statement which brings into agreement the cash balance per book and cash balance per bank. - The reconciliation is usually prepared monthly because the bank provides the depositor with the bank statement at the end of every month.

Bank Cash

100,000 Company X

100,000

■ Bank statement – a monthly report of the bank to the depositor showing: a. The cash balance per bank at the beginning

- The journal entry on the books of the bank shows the credit is Company X account. This is made, for our purpose, to facilitate, the illustration.

b. The deposits made by the depositor and acknowledged by the bank

- In practice, however, the account credited by the bank is demand deposit account but the same is posted to the subsidiary ledger of Company X.

d. The daily cash balance per bank during the month

- When the bank credits the account of the depositor, Company X, it recognizes its liability to the depositor. - Legally, when a deposit is made, there exists a debtor-creditor relationship between the bank and the depositor, the bank being the debtor, and the depositor being the creditor. - Hence, when the account of the depositor is increased the same is credited. Let us assume further that Company X subsequently issued a check for P30,000 in payment of an account payable. Book Accounts payable Cash Bank

30,000 30,000

c. The checks drawn by the depositor and paid by the bank

- The bank statement is an exact copy of the depositor's ledger in the records of the bank. - When the bank statement is received, attached thereto are the depositor's cancelled checks and any debit or credit memoranda that have affected the depositor's account - The cancelled checks are the checks issued by the depositor and paid by the bank during the month. - These are called cancelled checks because they are literally cancelled by stamping or punching to show that they have been paid.

▲ Reconciling Items • Book reconciling items: ■ Credit memos ■ Debit memos ■ Errors • Bank reconciling items

• 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. • Book to bank method – under this method, the book balance is reconciled with the bank balance or the book balance adjusted to equal the bank balance. • Bank to book method – under this method, the bank balance is reconciled with the book balance or the bank balance is adjusted to equal the book balance.

■ Deposits in transit ■ Outstanding checks

- The first method is preferred over the other two.

■ Errors ▲ Proforma reconciliation • Credit memos – items not representing deposits credited by the bank to the account of the depositor but not yet recorded by the depositor as cash receipts.

• Adjusted balance method Book balance

xxx

- The credit memos have the effect of increasing the bank balance.

Add: Credit memos

xxx

Total

xxx

■ Examples of Credit Memos

Less: Debit memos

xxx

a. Notes receivable collected by bank in favor of the depositor and credited to the account of the depositor.

Adjusted book balance

xxx

Bank balance

xxx

Add: Deposits in transit

xxx

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 – 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 depositor as cash disbursements. - The debit memos have the effect of decreasing the bank balance.

Total

xxx

Less: Outstanding checks Adjusted bank balance

xxx xxx

- The reconciling items of the book are simply termed as credit memos and debit memos. - No details are shown to simplify the illustration.

■ Examples of Debit Memos

- In actual formal reconciliation, details will have to be shown.

a. No Sufficient Fund Checks (NSF) – checks deposited but returned by the bank because of insufficiency of fund.

- Moreover, errors are excluded because no definite rule can be made whether these are to be added or deducted.

- The other name for NSF is DAIF or drawn against insufficient fund

- Errors will have to be analyzed for proper treatment.

b. Technically Defective Checks – checks deposited but returned by the bank because of technical detects such as absence of signature or countersignature, erasures not countersigned, mutilated checks, conflict between amount in words and amount in figures.

- However, errors are reconciling items of the party which committed them.

c. Bank Service Charges – include bank charges for interest, collection, checkbook and penalty.

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

d. Reduction of Loan – 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.

■ Explanation

• Deposits in Transit – collections already recorded by the depositor as cash receipts but not yet reflected on the bank statement

- 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.

■ Inclusion in Deposits in Transit

- Consequently, the book balance is understated in relation to the correct cash balance.

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.

- It will be observed 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.

- The adjusted balance method means that the book balance and the bank balance are adjusted to equal 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 overstated in relation to the correct cash balance.

• Outstanding checks – checks already recorded by the depositor as cash disbursements but not yet reflected on the bank statement.

- Hence, debit memos are deducted from the book balance.

■ Inclusion in Outstanding Checks

- Consequently, the bank balance is understated in relation to the correct cash balance.

a. Checks drawn and already given to payees but not yet presented for payment.

- Deposits 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.

- Hence, deposits in transit are added to the bank balance

b. Certified checks – a check where the bank has stamped on its face the word "accepted" or "certified" indicating sufficiency of fund

- 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.

- When the bank certifies a check, the account of the depositor is immediately debited or charged to insure the eventual payment of the check.

- Consequently, the bank balance is overstated in relation to the correct cash balance.

- Certified checks should be deducted from the total outstanding checks (if included therein) because they are no longer outstanding for bank reconciliation purposes.

- Hence, outstanding checks are deducted from the bank balance.

▲ Forms of Bank Reconciliation

• Book to Bank Method

Book balance Add: Credit memos Outstanding checks

xxx xxx

Total

xxx

The cash records of Company X show the following for the month of January

xxx

Jan. 5

xxx

Less: Debit memos Deposits in transit

xxx xxx

Bank balance

xxx

- 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.

Jan. 6

Cash Disbursements Check No. 721 5,000

13

20,000

7

Check No. 722

10,000

25

30,000

10

Check No. 723

18,000

31

40,000

14

Check No. 724

2,000

150,000

28

Check No. 725

37,000

31

Check No. 726

28,000

xxx

- 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 the treatment is simply "reversed."

Cash Receipts 60,000

100,000 The general ledger of the company shows the cash in bank account for January as follows: Cash in bank – First Bank Jan. 31

CR

150,000

Jan. 31

CD

100,000

The balance of the cash in bank on the depositor’s book is P50,000 ■ Bank statement

■ Explanation of Reversal Rule

The following is the bank statement for January received from the First Bank:

- The book to bank method means that the book balance is adjusted to equal the bank balance. - Deposits 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 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 bank. 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.

xxx

The following data are gathered in connection with the CM and DM appearing on the bank statement: a. The CM of P15,000 on January 26 represents proceeds of note collected by the bank in favour of the company

xxx

b. The RT of P5,000 represents check of customer deposited previously but returned by the bank because of “no sufficient fund” or NSF

• Bank to book method Bank balance Add: Deposits in transit

xxx

Debit memos

xxx

Total

xxx

Less: Outstanding checks

xxx

Credit memos

xxx

Book balance

▲ General Procedures in Preparing the Reconciliation. xxx

a. Determine the balance per book and the balance per bank.

xxx

- As mentioned earlier, the cash in bank account on the book of the depositor has a debit balance of P50,000.

- 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".

- The bank balance is shown on the bank statement as the final item, P84,000. b. Trace the cash receipts to the bank statement to ascertain whether there are deposits not yet acknowledged by the bank. - In the illustrative problem, the cash receipt of P40,000 on January 31 does not appear in the bank statement. - This represents deposit in transit.

- 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.

c. Trace the checks issued to the bank statement to ascertain whether there are checks not yet presented for payment.

■ Explanation of Reversal Rule

- These are outstanding checks.

- The bank to book method means that the bank balance is adjusted to equal the book balance.

d. The bank statement should be examined to determine whether there are bank credits or bank debits not yet recorded by the depositor.

- Debit memos already decreased the bank balance but have no effect on the book balance because they are not yet recorded by the depositor.

- In the illustrative problem there is CM of P15,000 and DM for returned check of P5,000 and service charge of P1,000.

- Consequently, the bank balance is understated in relation to the book balance. Hence, debit memos are added to the bank balance.

e. Watch out for errors.

- On the other hand, credit memos already increased the bank not yet recorded by the depositor book balance - Hence, credit memos are deducted from 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 • Illustration

- In the illustrative problem, Check Nos. 725 for P37,000 and 726 for P28,000 do not appear in the bank statement.

- Again, errors are reconciling items of the party which committed them. - In the illustrative problem, there are no errors committed. At this point, a formal reconciliation may be prepared because all the reconciling items have already been determined. • Adjusted Balance Method Balance per book

50,000

Add: Note collected by bank

15,000

Total Less: NSF customer check

65,000 5,000

Service charge

1,000

6,000

Adjusted book balance

59,000

Balance per bank

84,000

Add: Deposit in transit

40,000

Total

124,000

Less: Outstanding checks: Check No. 725

37,000

Check No. 726

28,000

Adjusted bank balance

65,000 59,000

- 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

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: Cash in bank

- Only the book reconciling...