Chapter 2

CHAPTER 2 BANK RECONCILIATION Bank Deposits There are three kinds of bank deposits: Demand deposit The demand deposit 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. A demand deposit is non-interest 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. A saving deposit is interest bearing. Time deposit 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. Time deposit may be preterminated or withdrawn on demand or after a certain period of time agreed upon. Bank Reconciliation A bank reconciliation is a statement which brings into agreement the cash balance per book and cash balance from bank. 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 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. Debit memos Debit memos refer to items not representing checks paid by the bank which are charged or debited by the bank to the account of the depositor but not yet recorded by the depositor as cash disbursement. The debit memos have the effect of decreasing the bank balance. Deposit in transit Deposit in transit are collections already recorded by the depositor Outstanding checks Outstanding checks are checks already recorded by the depositor as cash disbursement but not yet reflected in the bank statement. Forms of bank reconciliation 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 bank 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 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 Add: Credit memo

xx xx

Total Less: Debit memos

xx xx

Adjusted book balance

xx

Bank balance Add: Deposit in transit

xx xx

Total Less: Outstanding checks

xx xx

Adjusted bank balance

xx

Errors will have to be analyzed for proper treatment. Errors are reconciling items of the party which committed them. The adjusted balance method means that the book balance and the bank balance are adjusted to equal the correct cash balance. Book to bank method Book balance Add: Credit memos Outstanding Checks Total Less: Debit memos Deposit in transit Bank Balance

xx xx xx xx

xx xx xx xx xx

The book to bank method means that the book balance is adjusted to equal the bank balance. Bank to book method Bank balance Add: Deposit in transit Debit memos Total Less: Outstanding Checks Credit memos Book Balance

xx xx xx xx xx

xx xx xx xx

The bank to book method means that the bank balance is adjusted to equal the book balance. Illustration The cash records of Company X show the following for the month of January. CASH RECEIPTS CASH DISBURSEMENTS Jan. 5 60,000 Jan. 6 Check No. 721 13 20,000 7 Check No. 722 25 30,000 10 Check No. 723 31 40,000 14 Check No. 724 150,000 28 Check No. 725 31 Check No. 726

5,000 10,000 18,000 2,000 37,000 28,000 100,000

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

100,000

Bank statement The following is the bank statement for January received from the First Bank: In account with: No. 775 Company X Quezon, City Date Check No. Jan. 6 8 721 11 722 12 723 14 17 724 26 26 30 30 Code: CM – Credit memo DM – Debit memo

FIRST BANK Manila, Philippines Withdrawals 5,000 10,000 18,000

Deposits 60,000

14,000

2,000 5,000RT 1,000SC SC – Service charge RT – Returned check

30,000 15,000CM

Balance 60,000 55,000 45,000 27,000 47,000 45,000 75,000 90,000 85,000 84,000

The following data are gathered in connection with 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 favor of the company. b. The RT of P5,000 represents check of customer deposited previously but returned by the bank because of “no sufficient fund” or NSF. Adjusted balance method Balance per book Add: Noted collected by bank Total Less: NSF customer check Service charge Adjusted book balance Balance per bank Add: Deposit in transit Total Less: Outstanding checks: Check No. 725 Check No. 726 Adjusted bank balance

Preparation of adjusting entries

5,000 1,000

50,000 15,000 65,000 6,000 59,000 84,000 40,000

37,000 28,000

65,000 59,000

Only the book reconciling items require adjusting entries on the book of depositor. This is understandable. The adjustments are necessary to bring the cash in bank balance to its correct balance for statement presentations purposes. a. To record the note collected by bank: Cash in bank 15,000 Notes receivable

15,000

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

5,000

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

1,000

In the preparation of adjustments, an item added to the book balance is debited to cash and an item deducted from the book balance is credit to cash. Some errors and their correction 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 Pl,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 9,000 Accounts receivable

9,000

b. Understatement of checks drawn by depositor. For example, a cbeck in payment of account payable amounting to P20,000 is recorded in the book as P2,000. There is an understatement of cash diabursement 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

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.

Problems BANK RECONCILIATION Problem 1 In preparing the bank reconciliation for the month of August, Apex Company provided the following information: Balance per bank statement 1,805,000 Deposit in transit 325,000 Return of customer check for insufficient fund 60,000 Outstanding checks 275,000 Bank service charge for August 10,000 What is the adjusted cash in bank? a. 1,855,000 b. 1,795,000 c. 1,785,000 d. 1,755,000 Solution: A Balance per bank Deposit in transit Total Outstanding checks Adjusted bank balance

1,805,000 325,000 2,130,000 (275,000) 1,855,000

The customer check which is returned for insufficient fund and the bank service charge are ignored because these are book reconciling items. Problem 2 Core Company provided the following data for the purpose of reconciling the cash balance per book with the balance per bank statement on December 31: Balance per book 850,000 Balance per bank statement 2,000,000 Outstanding checks, including certified check of P100,000. 500,000 Deposit in transit 200,000 December NSF checks (of which P50,000 had been redposited and cleared on December 27) 150,000 Erroneous credit to Core's account, representing proceeds of loan granted to another company 300,000 Proceeds of note collected by bank for Core, net of service charge of P20,000. 750,000 What amount should be reported as cash in bank at year-end? a. 1,500,000 b. 1,400,000 c. 1,800,000 d. 1,450,000

Solution: A Balance per bank Deposit in transit Outstanding checks (500,000-100,000) Erroneous bank credit Adjusted bank balance

2,000,000 200,000 (400,000) (300,000) 1,500,000

The certified check of P100,000 is no longer outstanding for reconciliation purposes. Thus, the amount is deducted from the total outstanding checks. Balance per book NSF checks (150,000- 50,000) Proceeds of note collected Adjusted book balance

850,000 (100,000) 750,000 1,500,000

Note that NSF checks of P50,000 are already redeposited and cleared on December 27. Problem 3 Boracay Company keptall cash in a checking account. An examination of the bank statement for the month of December revealed a bank statement balance of P8,470,000. A deposit of P950,000 placed in the bank's night depositor December 29 does not appear on the bank statement. Checks outstanding on December 31 amount to P270,000 The bank statement showed that on December 25 the bank collected a note for Boracay Company and credited the proceeds ofP935,000 the entity's account which included P35,000 interest. Boracay Company discovered that a check written in December for P183,000 in payment of an account had been recorded as P138,000. Included with the December 31 bank statement was an NSF check for P250,000 that Boracay Company had received from a customer on December 20. The bank statement showed a P15,000 service charge for December. 1. What is the adjusted cash in bank on December 31? a. 9,150,000 b. 9,240,000 c. 9,195,000 d. 9,215,000 2. What is the unadjusted balance per book on December 31? a. 8,480,000 b. 8,525,000 c. 8,435,000 d. 8,510,000

3. What is the net adjustment to cash in bank on December 31? a. Net debit 935,000 b. Net credit 310,000 c. Net debit 625,000 d. Net credit 625,000 Question 1 Answer A Balance per bank Deposit in transit Checks outstanding Adjusted bank balance

8,470,000 950,000 (270,000) 9,150,000

Question 2 Answer B Balance per book (SQUEEZE) Note collected by bank for the depositor Book error in recording check (183,000-138,000) NSF check Service charge Adjusted book balance Ouestion 3 Answer C Cash in bank Service charge Note receivable Accounts payable Accounts receivable Service charge Cash in bank

8,525,000 935,000 (45,000) (250,000) (15,000) 9,150,000

935,000 15,000 950,000 45,000 250,000 15,000 310,000

The two entries can be compounded and the net effect is a debit to cash in bank of P625,000. Problem 4 Divine Company prepared the following bank reconciliation on December 31: Balance per bank statement Add: Deposit in transit Checkbook printing charge Error made by Divine in recording check issued in December NSF check 345,000 Total Less: Outstanding check

195,000 5,000 35,000

2,800,000

110,000 3,145,000 100,000

Note collected by bank including 315,000 P15,000 interest Balance per book

215,000 2,830,000

The entity had cash on hand P500,000 and petty cash fund P50,000 on December 31. 1.What amount should be reported as cash in bank at year-end? Balance per book a. 2,930,000 b. 3,095,000 c. 2,895,000 d. 3,130,000 2.What total amount of cash should be reported at year-end? a. 3,395,000 b. 3,350,000 c. 3,445,000 d. 3,380,000 Question 1 Answer c Balance per bank Deposit in transit Outstanding check Adjusted cash in bank

2,800,000 195,000 (100,000) 2,895,000

Balance per book Note collected by bank NSF check Book error Checkbook printing charge Adjusted cash in bank

2,830,000 215,000 (110,000) (35,000) (5,000) 2,895,000

Question 2 Answer c Adjusted cash in bank Cash on hand Petty cash fund Total cash

2,895,000 500,000 50,000 3,445,000

Problem 5 Susan Company showed the following information on August 31: Balance of cash in bank account 1,300,000

Balance of bank statement Outstanding checks, August 31: Number 555 10,000 761 55,000 762 40,000 763 25,000 764 65,000 765 70,000 Receipts of August 31, deposited September Service charge for August NSF check received from a customer

1 ,200,000

275,000 5,000 85,000

The cashier-bookkeeper had misappropriated P30,000 and an additional P10,000 by charging sales discounts and crediting accounts receivable. The stub for check number 765 and the invoice relating thereto showed that it was for P50,000. It was recorded incorrectly in the cash disbursements journal as P70,000. This check was drawn in payment of an account payable. Payment has been stopped on check number 555 which was drawn in payment of an account payable. The payee cannot be located. 1.What is the adjusted cash in bank on August 31? a: 1,240,000 b. 1,230,000 c. 1,210,000 d. 1,200,000 Solution Answer a Balance per book 1,300,000 Add: Overstatement of check number 765 20,000 Check number 555 stopped for payment10,000 30,000 Total 1330,000 Less: Service charge 5,000 NSF check 85,000 90,000 Adjusted book balance 1,240,000 Balance per bank Add: Undeposited collections Total Less: Outstanding checks: Number 761 762 763 764

1,200,000 275,000 1,475,000 55,000 40,000 25,000 65,000

765 Adjusted bank balance

50,000

235,000 1,240,000