W2 FABM2 Bankreconciliation 1 PDF

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Points to RememberNature of Bank Deposit TransactionWhen a depositor open an account with a bank, the relationship existing between the parties is a lender (the depositor), and a borrower (the bank) relationship. This is the reason why the depositor will keep an asset, and the bank will keep a liabi...

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Name: _______________________________________ Grade/ Section: ______________ QUARTER 2 | WEEK 2 | ACTIVITY 1 Fundamentals of Accountancy, Business and Management 2 | Grade 12 1. Describe the nature of a bank reconciliation statement (ABM_FABM12-IId-10) 2. Analyze the effects of the identified reconciling items (ABM_FABM12-IId-12) 3. Prepare a bank reconciliation statement (ABM_FABM12-IId-13) Basic Documents and Transactions Related to Bank Deposits

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Points to Remember Nature of Bank Deposit Transaction When a depositor open an account with a bank, the relationship existing between the parties is a lender (the depositor), and a borrower (the bank) relationship. This is the reason why the depositor will keep an asset, and the bank will keep a liability account. These two accounts are reciprocal accounts. BOOK RECORD (DEPOSITOR) Asset Account

BANK RECORD Liability Account

Cash in Bank Deposit

Pxx

Withdrawal

Company X Pxx

Withdrawal of X Pxx

Demand Deposit Pxx

The depositor will record bank transactions in a Cash in Bank Account. This account shows the cash balance at the beginning of the month, cash receipts and deposits (debits), cash payments and withdrawals (credits), and the new balance at the end of the month. The bank on the other hand keeps record of the depositor’s transactions in a Current Account. This account shows the balance at the beginning of the month, the deposits and other additions (credits), the checks paid and other deductions (debits) during the month, and the ending balance

Assuming no errors are committed in recording, and the same information has been recorded by both accounts, the two should have equal balances. The reason for this is that the two accounts cover or reflect the same items and transactions. However, in reality, because of timing differences and errors done by either the depositor or the bank, there can be differences in the Cash in Bank and the Current Account. The bank reconciliation is a schedule explaining the differences between the two accounts. Bank Reconciliation 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. Page 79 of 10

Points to Remember Example: A bank statement that ends January 30, 2015 and then the company were 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.

Importance of Bank Reconciliation a. Preparation of bank reconciliation helps in the identification of errors in the accounting records of the company or the bank. b. 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 c. 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. d. Monthly preparation of bank reconciliation assists in the regular monitoring of cash flows of a business. Reconciling Items BOOK RECONCILING ITEMS 1.

2.

3.

Debit Memos refers to items not representing checks paid by bank which are charged against the account of the depositor but not yet recorded by the depositor as a cash disbursement. a. NSF Check b. Technical or Defective Checks c. Bank Service Charges d. Reduction of Loan 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. a. Notes receivable collected by bank b. Proceeds of loan credited by bank c. Interest earned Book Error 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.

BANK RECONCILING ITEMS

1. Deposits in transit are amounts already received and recorded by the company, but are not yet recorded by the bank. 2. 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. 3. 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.

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Points to Remember Bank Reconciliation Methods (Forms) The following formats may be used in reconciling the book balance and the bank balance. 1. Adjusted Balance Method. Under this method, the book and bank balances are brought to a correct balance that must appear in the balance sheet. 2. Book to Bank Method. Under this method, the book balance is reconciled with the bank balance or the book balance is adjusted to equal to bank balance. 3. 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. Proforma Reconciliation Adjusted Balance Method Book Balance xxxxx Add: CM xxxxx Total xxxxx Less: DM xxxxx ± Error xxxxx Adjusted Book Balance xxxxx

Bank Balance xxxxx Add: DIT xxxxx Total xxxxx Less: OC xxxxx ± Error xxxxx Adjusted Bank Balance xxxxx

Book to Bank Method

Book Balance Add: CM OC Total Less: DM DIT ± Error Book Balance

xxxx xxx xxx xxx xxx

xxxx xxxx xxxx xxxx xxxx

Bank to Book Method

Bank Balance Add: DM DIT Total Less: CM OC ± Error Book Balance

xxxx xxx xxx xxx xxx

xxxx xxxx xxxx xxxx xxxx

General Procedures in Preparing the Reconciliation 1. Determine the balance per book and the balance per bank. Balance per book appears on the cash in bank ledger of the company while balance per bank appears on the bank statement issued by the bank. 2. Trace the cash receipts to the bank statement to ascertain whether there are deposits not yet acknowledge by the bank. 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. These are Outstanding Checks 4. The bank statement should be examines to determine whether there are bank credits or bank debits not yet recorded by the depositor.

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Points to Remember 4. Watch out for errors. Remember, errors are reconciling items of the party which committed them. After identifying all the reconciling items, a formal reconciliation may be prepared. Adjusting Entries on Bank Reconciliation Remember, only the book reconciling items require adjusting entries on the book of the depositor. This adjustments are necessary to bring the cash in bank balance to its correct balance for statement presentation purposes. 1. To adjust Credit Memos Cash in Bank Appropriate Account*

Pxxxx Pxxxx

*Example is Note receivable/ Interest Income/ Liability account depending on the nature of the credit.

2. To adjust Debit Memos Appropriate Account** Cash in Bank

Pxxxx Pxxxx

**Example is Accounts receivable, Expense account, Liability account depending on the nature of the debit.

3. To adjust Book Errors If error requires an addition to cash in bank: Cash in Bank Appropriate Account***

Pxxxx Pxxxx

If error requires a deduction to cash in bank Appropriate Account*** Cash in Bank

Pxxxx Pxxxx

***Account that is affected by the error from the original entry .

Activity 1A. Identification. Identify what is being asked in each statement. 1. It refers to items not representing checks paid by bank which are charged against the account of the depositor but not yet recorded by the depositor as a cash disbursement. 2. It is a report which compares the bank balance as per company's accounting records with the balance stated in the bank statement. 3. These are checks deposited returned by the bank because of insufficiency of fund. 4. These are amounts already received and recorded by the company, but are not yet recorded by the bank.

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5. These 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. 6. Under this method, the bank balance is reconciled with the book balance or the bank balance is adjusted to equal the book balance. 7. Under this method, the book balance is reconciled with the bank balance or the book balance is adjusted to equal to bank balance. 8. Under this method, the book and bank balances are brought to a correct balance that must appear in the balance sheet. 9. These are mistakes made by the bank in recording to the depositors account 10. It is an account debited in the adjusting entry of the company when the bank return a check because of insufficiency of fund. Activity 1B. Multiple Choice (Theory of Accounts). Select the correct answer among the choices. 1. Bank Reconciliation Statement is : a. A part of Pass Book b. A statement prepared by bank c. Cash book relating to cash column d. A statement prepared by all business 2. Bank reconciliation statement is prepared to. a. Ascertain the cash book balance b. Ascertain the bank balance c. Ascertain the overdraft balance d. Reconcile balance as shown by cash book with that shown by the pass book 3. Unfavourable bank balance means : a. Credit balance in Cash Book b. Credit balance in Pass Book c. Debit balance in Cash Book d. Favourable balance in Cash Book 4. A Bank Reconciliation Statement is prepared to know the causes for the difference between : a. The balance as per cash column of Cash Book and the Pass book b. The balance as per bank column of Cash Book and the Pass Book c. The balance as per bank column of Cash Book and balance as per cash column of Cash Book d. None of the above 5. Bank reconciliation statement is prepared by : a. The Commercial Bank b. Businessman

c. The Auditor d. None.

6. A bank reconciliation statement is a statement prepared to reconcile : a. Trial balance b. Profit as per books of account with the profit as per Income-tax returns c. Cash balance as per cash book with bank balance as per pass book d. Bank balance as per cash book with bank balance as per bank pass book 7. Debit balance in Bank Pass Book means : Page 83 of 10

a. Bank Overdraft b. Bank Balance 8. Credit balance in Bank Pass Book means : a. Bank Overdraft b. Bank Balance of Cash Book

c. Balance as per Cash Book d. Total of Bank A/c

c. Cash Balance as per Cash Book d. Total of Bank A/c

9. Which of these statements is true about a Bank Pass Book? a. Pass book is a copy of customer’s account in bank books b. Pass book contain a copy of customers current account in cash book c. Pass book contains a copy of cash column of customer of cash book d. Pass book contains a copy of bank column of the customer’s cash book 10. Entry in debit side of Bank Pass Book implies : a. Cheque payments b. Cheque deposited dishonoured

c. Cash withdrawn d. All of the above

11. Which of the following items must be added to the cash balance per ledger in preparing a bank reconciliation which ends with adjusted cash balance a. Note receivable collected by the bank in favor of the depositor and credited to the account of the depositor. b. NSF check c. Service Charge d. Erroneous bank credit 12. In preparing a bank reconciliation, interest paid by the bank on the account is: a. Added to the bank balance b. Subtracted from the bank balance c. Added to the book balance d. Subtracted from the book balance 13. In preparing a monthly bank reconciliation, which of the following items would be added to the balance per bank statement to arrive at the correct cash balance? a. Outstanding checks b. Bank service charge c. Deposit in transit d. A customer’s note collected by the bank on behalf of the depositor. 14. If the balance shown on an entity’s bank statement is less than the correct cash balance and neither the entity nor the bank has committed any error, there must be: a. Deposits credited by the bank but not yet recorded by the entity b. Outstanding checks c. Deposit in transit d. Bank charges not yet recorded by the entity 15. Which of the following will NOT require an adjusting entry on the depositor’s book? a. NSF check from customer b. Check payment of account payable amounting to P50,000 is recorded by the depositor as P5,000 c. Deposit of another entity is credited to the account of the depositor d. Bank service charge 16. Which of the following requires and adjustment on the part of the depositor? a. Bank errors, outstanding checks and deposit in transit b. All items except bank errors, outstanding checks and deposit in transit Page 84 of 10

c. Book errors, bank errors, deposit in transit and outstanding checks d. Outstanding checks and deposit in transit. 17. Bank statements provide information about all of the following except: a. Checks cleared during the period b. NSF checks c. Bank service charges for the period d. Errors made by the depositor 18. The reconciling item in a bank reconciliation that will result in an adjusting entry by the depositor is: a. outstanding checks c. a bank error b. deposit in transit d. bank service charges 19. Which one of these is not a cause of difference in balance as per pass book & as per cash book? a. Errors in cash book b. Errors in pass book c. Cheques deposited & cleared d. Cheques issued but not presented for payment 20. Which one of these is true about a bank reconciliation statement? a. It is a part of memorandum statement b. It is a part of cash book c. It is a part of ledger d. It is a part of bank document Activity 2B. Modified Identification. Provide what is being asked in each case. Case 1. For each item 1 through 12, place an “x” in the appropriate column to indicate whether the item should be added to or deducted from the book or bank balance, or whether it should not appear on the reconciliation. If the book balance is to be adjusted, place a Dr. or Cr. in the Adjust column to indicate whether the Cash balance should be debited or credited. Bank Balance Items

Add

Deduct

Book Balance Add

Deduct

Adjust

Not shown in the reconciliation

1. Bank service charge for September 2. Checks written and mailed to payees on October 2. 3. Checks written by another depositor but charged against this company’s account. 4. Principal and interest on a note receivable to this company is collected by the bank but not yet recorded by the company. 5. Special bank charge for collection of note in part 4 on this company’s behalf. 6. Check written against the company’s account and cleared by the bank; erroneously not recorded by the company’s recordkeeper. 7. Interest earned on the September cash balance in the bank

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8. Night deposit made on September 30 after the bank closed. 9. Checks outstanding on August 31 that cleared the bank in September. 10. NSF check from customer is returned on September 25 but not yet recorded by this company. 11. Checks written by the company and mailed to payees on September 30. 12. Deposit made on September 5 and processed by the bank on September 6.

Case 2. Identify whether the following independent transaction is a book or a bank reconciling. Put a ‘tik’ mark under book balance column it is a book reconciling item otherwise, put a ‘tok’ mark under bank balance column. In addition, determine the amount and state whether the amount will be added or deducted in the preparation of the bank reconciliation (use adjusted method). Provide the adjusting entry under the adjustment column to adjust the book balance Transactions

Book Balance

Bank Balance

+

-

Amount

Adjustment

1. Eagle Repairs received P1,500 from Jane. The bookkeeper recorded the amount as P500. 2. Nation Bank collected from the customer of Eagle the sum of P5,000 representing payment of the said customer to Eagle. No entry was made in the books of Eagle. 3. The bank teller deducted CK 123 for P3,500 from the account of Eagle. The said check was issued by Egles Company a different depositor of the bank. 4. The bookkeeper of Eagle recorded Check No. 345 in the Cash Disbursement Journal as P5,205. The correct amount of the check was P5,250. 5. The deposits of Eagle earned interest of P100 for the month. Eagle does not have knowledge of interest earned until it receives the bank statement.

Activity 3A. Preparation of Bank Reconciliation Statement. Provide what is being asked in each case. Case 1. Frederick Clinic deposits all cash receipts on the day when they are received and it makes all cash payments by check. At the close of business on June 30, 2011, its Cash account shows a P15,141 debit balance. Frederick Clinic’s June 30 bank statement shows P14,275 on deposit in the bank. Prepare a bank reconciliation for Frederick Clinic using the following information: a. Outstanding checks as of June 30 total P2,500. b. The June 30 bank statement included a P125 debit memorandum for bank services.

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c. Check No. 919, listed with the canceled checks, was correctly drawn for P645 in payment of a utility bill on June 15. Frederick Clinic mistakenly recorded it with a debit to Utilities Expense and a credit to Cash in the amount of P654. d. The June 30 cash receipts of P3,250 were placed in the bank’s night depository after banking hours and were not recorded on the June 30 bank statement. Required: (Use separate sheet of paper and attach upon submission) Prepare the adjusting journal entries that Frederick Clinic must record as a result of preparing the bank reconciliation Case 2. Core Compapny provided the following data for the purpose of reconciling the cash balance per book with the balance per bank statement on December 31, 2019:

Balance per bank statement OC (including cetified check P100000) DIT December NSF check (P50000 redeposited and cleared on December 2) Erroneous credit to Core's account, representing proceeds of loan granted to another company Proceeds of note collected by bank for Core, net of service charge of P200000

P2000000 P500000 P200000 P150000 P300000 P750000

Required: (Use separate sheet of paper and attach upon submission) Prepare the adjusting journal entries that Frederick Clinic must record as a result of preparing the bank reconciliation. Identify the cash in bank balance that must be presented in the SFP. Case 3. Aries Company keeps all its cash in checking account. An examinatio...