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Senior High School

FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 2 QUARTER 2: Module 3

Bank Reconciliation Statements

Department of Education ● Republic of the Philippines

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Fundamentals of Accountancy, Business and Management 2 Senior High School Alternative Delivery Mode First Edition, 2020

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Introductory Message

Dear Teachers and Learners! The writer welcomes you all to this Fundamentals of Accountancy, Business and Management 2 Modules. This material tries to bring you with the preparation and analysis of financial statements of a service business and merchandising business using horizontal and vertical analyses and financial ratios. Knowledge and skills in the analysis of financial statements will aid the future entrepreneurs in making sound economic decisions. As your partner in learning, I hope that you will not miss out every detail that the writer would like you to learn in this material. Do enjoy as there are challenging and interesting activities inside this learning modules. Congratulations in advance for this will make you the master of your own learning. Ops! you wait for a while, for an easy use of this material take note of some few reminders 1. Take your time to read every detail that this module contains. 2. This material contains Module 3 and each of which is provided with activities/tests that will surely lead you to learn. 3. Here are the Icons used as your guide in every part of the lesson.

Icons of this Module What I Need to Know

This part contains learning objectives that are set for you to learn as you go along the module.

What I know

This is an assessment as to your level of knowledge to the subject matter at hand, meant specifically to gauge prior related knowledge. This part connects previous lesson with that of the current one.

What’s In

What’s New

This is an introduction of the new lesson through various activities before it will be presented to you

What is It

This is a discussion of the activities as a way to deepen your discovery and understanding of the concept.

What’s More

This is a follow-up activity that is intended for you to practice further in order to master the competencies. This activity is designed to process what you have learned from the lesson

What I Have Learned

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What I can do

This is a task that is designed to showcase your skills and knowledge gained, and applied into real-life concerns and situations.

4. Please do follow the directions given per activity so your experience to the use of this material will be meaningful and fruitful. 5. Answer all the tests in this material. 6. As a courtesy to the future users, PLEASE DO NOT WRITE ANYTHING ON ANY PART OF THIS MODULE. Write your answer/s on a separate sheet of paper, notebook, workbook or whichever is specified by your facilitator

Special Reminders for you learners; 1. Answer every activity intelligently and diligently. 2. Write your answer as directed by your facilitator. 3. Feel free to approach or communicate your teacher/facilitator whenever you need help. 4. Don’t forget to put a smiley face if you finish the activity within the allotted time.

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Table of Contents Page What This Module is About………………………………………………….. Icons of this Module…………………………………………………………..

Module 3 Bank Reconciliation Statements Activity 1.3.1 Compute Me 1.3.2 Identify Me 1.3.3 Reconcile Me

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Bank Reconciliation Statements

What’s In A business keeps most of its cash in one or more checking accounts. The checking account gives the depositor company a double record of its cash transactions where the accounting records maintained by the depositor and the records provided by the bank. In connection with this lesson, a bank statement is made at the end of the month to reconcile bank deposits and bank withdrawal. The depositor records the transactions affecting the checking account using the account Cash in Bank, while the bank maintains a record for the depositor’s account. The bank treats the depositor’s account as a liability. Thus, the Cash in Bank account maintained by the bank as a liability are reciprocal accounts.

What’s New True or False. Directions: Write the letter “T” if the statement is correct and “F” if it is incorrect. Write the answer in the space provided before each number. _________1. Bank reconciliation statements are prepared to reconcile the difference between cash book and bank balance. _________2. Bank reconciliation statement is prepared by the account holder. _________3. Bank reconciliation statement keeps the record of transactions between the bank and current account holder. _________4. A business receives a bank statement and updates its cask book. _________5. Notes collected from the clients on the company’s behalf in a bank statement would cause the balance of the bank more than the balance of the book. _________6. A bank reconciliation statement is a statement showing the causes of difference between the cash book and the passbook balance. _________7. Bank reconciliation statement detects errors which have been committed. ________8. Bills that are collected by the bank on behalf of the customer is one of the reasons why differences arise between reciprocal accounts. 1

________9. Checks paid to the suppliers but not yet presented to the bank is one of the reasons why differences arise on reciprocal accounts. ________10. Reciprocal accounts should always be equal.

What Is It A bank statement is a monthly report provided by the bank to the depositor which shows the following information: beginning-of-month cash balance, total deposits made by the depositor and other bank credits during the month, total checks paid by the bank and other bank charges during the month, and end-of-month cash balance. 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. Example: A bank statement that ends January 30, 2015 and then the company was able to collect cash of P20,000 at 5:00 PM. Bank usually closes at 3:00 PM because of this, the cash collected will not be reflected in the bank as deposit but it is however recorded in accounting records of the company. 2. Errors by either party in recording transactions Example: A check was issued to Meralco by the company amounting to P1000. The company recorded this as P100. When the check was presented, the bank paid Meralco P1,000. In the records of the company it was P100 while in the records of the bank it’s P1,000. There is in this case an error that will cause the difference between the company’s records and the bank records. The importance of Bank Reconciliations are as follows: ▪ 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. 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. 2

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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.

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. In this lesson, you will be using adjusted method. The two remaining methods will be discussed in higher accounting subjects in case you 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: JUAN COMPANY BANK RECONCILIATION STATEMENT APRIL 30, 20XX

Unadjusted Book Balance

xx x

Bank Debit Memo NSF Check Printing Charge Bank Credit Memo Collection Errors Adjusted Book Balance

Unadjusted Bank Balance

Outstanding Checks

xx x xx x

Adjusted Book Balance

xx x

Deposit in Transit xx x xx x xx x xx x xx x

xx x

The key terms to be aware of when dealing with a bank reconciliation are:

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Deposits in transit are amounts already received and recorded by the company, but are not yet recorded by the bank. For example, a retail store deposits its cash receipts on August 31 into the bank's night depository at 10:00 p.m. on August 31. The bank will process this deposit on the morning of September 1. As of August 31 (the bank statement date) this is a deposit in transit. 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 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.

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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. o Checks written during the last few days of the month plus a few older checks are likely to be among the outstanding checks. o 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. o Illustration of an Outstanding Check: On January 29, 2015, Juan issued a check to Maria amounting to P2,000. The checks were then recorded by Juan in his books as a deduction to his cash. It so happens that the bank was closed on that day and Maria was able to visit the bank and have it encashed on February 1, 2015 only. In the bank statement received by Juan from his bank ending January30,2015, the P2,000 check was not deducted however it was already deducted in the books of Juan on January 29, 2015. The P2,000 check is called an outstanding check.

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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. o 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.

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Bank service charges are fees deducted from the bank statement for the bank's processing of the checking account activity o Examples: ▪ accepting deposits

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o o o

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. The bank might deduct these charges or fees on the bank statement without notifying the company. When that occurs, the company usually learns of the amounts only after receiving its 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.

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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. o NSF is the acronym for not sufficient funds. When the NSF check comes back to the bank in which it was deposited, the bank will decrease the checking account of the company that had deposited the check. The amount charged will be the amount of the check plus a bank fee. o 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 book to reconcile.

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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. o 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.

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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 5

interest earned will increase the balance in the company's Cash account on its books. ▪

Notes Receivable are assets of a company. When notes come due, the company might ask its bank to collect the notes receivable. For this service the bank will charge a fee. The bank will increase the company's checking account for the amount it collected (principal and interest) and will decrease the account by the collection fee it charges. Since these amounts are already on the bank statement, the company must be certain that the amounts appear on the company's books in its Cash account.

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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 steps are listed in the following schedule:

Balance per Bank Statement on August 31, 20xx Adjustments: Add: Deposit in transit Deduct: Outstanding check Add or deduct: bank errors Adjusted/Corrected balance per Bank

Step 2. Adjusting the Balance per Books 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: Balance per Books on August 31, 20xx Adjustments: Deduct: Bank service charges Deduct: NSF checks & fees Deduct: Check printing charges Add: Notes Receivables collected by bank 6

Add or deduct: Errors in company's Cash Account Adjusted/Corrected balance per Books 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) Illustrative Sample Problem The following unadjusted cash balances are available for Pilar Company for the month ended September 30, 2019. Cash balance per bank statement, September 30, 2019 Cash balance per company records, September 30, 2019

P124,611.50 P124,379.40

The bank statement disclosed the following information: 1. Charges by bank included a returned customer’s check for P1,381.40 because of insufficient funds (NSF) and service charge for September of P150. 2. Credits by the bank included a customer’s note for P12,000 plus interest of P120 that was collected on September 29, 2019. A review of the company records disclosed the following information: 1. A deposit for P11,428.70 made on September 29, 2019 did not appear on the statement. 2. Customers’ checks totaling P3,274.00 were still on hand at September 30, 2019 awaiting deposit.

3. The following company checks were still outstanding as of September 30, 2019: Check #0157823 Check #0157827 Check #0157830

P 961.90 1,471.80 2,632.50

4. Check #0157805 for P912.00 in payment of a creditor account and included with the canceled checks in the bank statement has been erroneously recorded in the company records as P192.00. REQUIRED: 7

Prepare a bank reconciliation for Pilar Company as of September 30, 2019. Bank and Book Balances Reconciled to Correct Cash Balance. Pilar Company Bank Reconciliation September 30, 2019 Balance per bank statement Add: Deposit in Transit Receipts not yet deposited Total Deduct: Outstanding checks Check # 0157823 Check # 0157837 Check # 0157830 Adjusted ca...