94 Chapter 3 Chapter 3 Bank Reconciliation Learning Objectives 1. Prepare a bank reconciliation. 2. Prepare a proof of cash. Bank Reconciliation Statement ‘A bank reconciliation statement is a report that is prepared for the purpose of bringing the balances of cash (a) per records and (b) per bank statement into agreement. More specifically, bank reconciliations are prepared to: a. explain the difference between the cash balance in the accounting records and the cash balance reported on the bank statement; b. arrive at the adjusted (correct) cash balance to be shown in the financial statements; and c. provide information for reconciling journal entries. Bank reconciliation is prepared monthly, immediately upon receipt of the monthly bank statement from the bank. ‘A bank statement is a report issued by a bank that shows the deposits and withdrawals during the period and the cumulative balance of a depositor’s bank account. When a business has more than one bank account, separate bank reconciliations are made for each of those accounts. Bank reconciliations are normally required only for checking accounts. Theoretically, bank reconciliation is not required for savings accounts because no checks can be drawn from them. Withdrawals are updated immediately on both cash records and bank passbook. Reconciling items for savings accounts are usually limited to interest income earned. iBank Reconciliation oa ELI) STARR ALP Fo LE Ce In practice though, there are cases when the balance per passbook and the balance of per records do not tally. In such cases, bank reconciliation is required for a savings account in order to explain the difference, These differences are most often times caused by unrecorded withdrawals. For the auditor, these may be treated as red flags for fraud or weakness in internal control. For the succeeding discussions and illustrations, it is presumed that differences between records and bank statements are not caused by fraud. £ Pro forma bank reconciliation statement A bank reconciliation statement has the following format: ABC Co. Bank Reconciliation For the month ended August 31, 20x1 Balance per books, end. xx _ Bal. per bank statement, end. Pxx Add: Credit memos (CM) xx Add: Deposits in transit (DIT) xx Less: Debit memos (DM) (xx) _Less: Outstanding checks (OC) (xx) Add/Less: Book errors _xx__ Add/Less: Bank errors x Adjusted balance xx Adjusted balance Px © Balance per books, end. ~ the cash balance in the accounting records as of the end of the current month. In the pro forma statement above, “Balance per books, end.” is the cash balance in the accounting records as of August 31, 20x1. © Balance per bank statement, end. ~ the ending cash balance in the bank statement of the current month. In the pro forma statement above, “Balance per bank statement, end.” is the cash balance on the bank statement as of August 31, 20x1.96 Chapter 3 Oe Wa tre ee © Credit memos — are additions (bank credits) made by the bank to the depositor’s bank account but not yet recorded by the depositor. , | Examples of credit memos include: | i, Collections made by the bank on behalf of the depositor. ii, Interest income earned by the deposit. iii, Proceeds from loan directly credited or added by the bank to the depositor’s account. . . Unrolled-over matured time deposits transferred by the bank to the entity’s account. : z Debit memos - are deductions (bank debits) made by the bank to the depositor’s bank account but not yet recorded by the depositor. Examples of debit memos include: i. Bank service charges representing bank charges for fees, interest, penalties, and surcharges. ii, No sufficient funds checks (NSF) or Drawn against insufficient funds checks (DAIF) — These are checks deposited and already recorded by the bank but subsequently retumed to the depositor because the drawer's fund is insufficient to pay for the check. iii. Automatic debits, such as when the depositor and the bank agree that the bank will make automatic payments of bills on behalf of the depositor. iv. Payment of loans which the entity (depositor) agreed to be made out directly from its bank account. * Book errors - errors committed by the depositor (e.g, erroneous recording in the books of accounts). © Deposits in transit — are deposits made but not yet credited by the bank to the depositor’s bank account. Deposits in transit often occur when deposits are mailed to the bank, placed in anBank Reconciliation 97 overnight depository, made through check and the check has not yet cleared, or made after the bank's cut-off. © Outstanding checks - are checks drawn and released to payees but are not yet encashed with the bank. one checks exclude the following: > Certified checks ~ The bank, when certifying checks, automatically debits (reduces) the depositor’s account and assumes direct liability on paying the certified checks to the payee. Certified checks are already deducted from the account, thus, they are no longer outstanding. > Stale checks (checks that remain outstanding for a relatively long period of time) are reverted back to cash, meaning they are added back to the cash balance per books, and are excluded from outstanding checks. © Bank errors - errors committed by the bank. + Credit memos, debit memos, and book errors are referred to as book reconciling items, The depositor should make reconciling entries for these items. “ Deposits in transit, outstanding checks, and bank errors are referred to as bank reconciling items. The depositor does not _make reconciling entries for these items. Illustration 1: Reconciling items To illustrate how the causes of differences listed above arise, let us analyze how the depositor (entity) and the bank record the transactions below. 1. Anentity opens a checking account on December 27, 20x1. The entries in the respective accounting records of the entity (depositor) and the bank are as follows: ——$—_ lla98 Chapter 3 Entity (depositor) Bank Cash in bank 1,000 Cash on hand 1,000 Cashonhand 1,000 | Deposit liability - depositor 1,000 As of this date, the cash balances per books and per bank statement are equal (Cash in bank, P1,000 = Deposit liability, P1,000).. These two accounts, ‘Cash in bank’ and ‘Deposit liability’, are the accounts being reconciled by the entity’s accountant. These are counterpart accounts, meaning their balances should tally at any. given point of time. Deposit in transit 2. The entity collects P200 from customers and deposits it in an overnight depository on December 31, 20x1. Entity (depositor) Bank Cash on hand 200 Accounis receivable 200 Cash in bank 200 No entry yet. Deposit will be Cash on hand 200 received in January 20%2. As of December 31, 20x1, the cash balances per books and per bank statement are not equal (there is a debit to cash in bank without a corresponding credit to deposit liability). The P200 difference is a deposit in transit. The bank will update the entity’s account when it receives the deposit on January 2, 20x2, The cash balances will be equal on this date. Credit memo 3. The bank collects a P500 receivable on behalf of the entity in January 20x2, Entity (depositor) Bank No entry. The entity is not yet | Cash on hand 500 aware of the collection. It will | Deposit liability - depositor 500 ilBank Reconciliation 99) record the collection when it receives the January bank statement on the first week of February. On January 31, 20x2, the cash balances per books and per bank statement are again not equal (there is a credit to deposit liability without a corresponding debit to cash in bank). The P500 difference is a credit memo. The entity will be notified of the P500 collection when it receives the January bank statement on the first week of February. After making the necessary reconciling entry, the cash balances will be equal. Book error 4, The entity makes payment of P1,000 but erroneously records it as P100 in February 20x2. The check cleared the bank at the correct amount of P1,000. Entity (depositor) Bank Accounts payable 100 Deposit liability - depositor 1,000. Cash in bank 100 Cash on hand 4,000 On February 28, 20x2, the cash balances per books and per bank statement are again not equal (the credit to cash in bank is P100 but the corresponding debit to deposit liability is P1,000). The 900 difference is a book error (error committed by the entity) @ This error overstates the cash balance'per books. The entity will discover the error when it prepares the February bank reconciliation on the first week of March, immediately after the receipt of the February bank statement. After making the necessary reconciling entry, the cash balances will be equal.—— = 100 Chapter3 Outstanding checks t 5. In March 20x2, the entity wrote checks ‘totaling 400, However, only P100 of those checks were encashed during the month, Entity (depositor) Bank ‘Accounts payable 400 Deposit liability - depositor 100 Cash in bank 400 Cash on hand 100 On March 31, 20x2, the cash balances per books and per _ bank statement are again not equal (the credit to cash in bank is 'P400 but the corresponding debit to deposit liability is only P100). The P300 difference is due to outstanding checks. : Scenarios similar to those illustrated above would give rise to differences due to debit memos and bank errors. Illustration 2: Use of formula ABC Co. receives its July 20x1 bank statement and immediately prepares its July 20x1 bank reconciliation. Relevant information follows: : Cash balance per books ~ 300,000 Cash balance shown on the bank statement — 430,000 Credit memo - 190,000 |. Debit memo ~ P30,000 Deposits in transit ~ 950,000 Outstanding checks - 25,000 (including certified checks of P5,000) me po ge Requirement: Prepare the bank reconciliation. Solution:Bank Reconciliation 101 ABC Co. Bank Reconciliation - Landbank (Checking account # 10009087) July 31, 20x1 Bal. per books, end. 300,000 Bal. per bank,end. 430,000 Add: CM 190,000 Add: DIT 50,000 Less: DM (30,000) Less: OC (20,000) Add/Less: Book errors = Add/Less: Bank errors : Adjusted balance 460,000 Adjusted balance 460,000 Prepared by: Ms. Accounting Staf (signed) Approved by: Mr. Manager (signed) Date:_82ix1 Date: _8i3/x1 Illustration 3: Transaction analysis You received your August 20x1 bank statement. The August 31, 20x1 cash balance in your accounting books is 520,000 while the cash balance shown on the bank statement is 410,000. You determined the following information: a. Check No. 2345 for 45,000, issued to a supplier, is not yet presented to the bank for payment. b. A 205,000 check deposit, with deposit slip no. 0989, is not yet credited to your account. c. A customer deposited 60,000 to your bank account. You have not yet recorded this collection of account receivable in your accounting books. d. The bank paid P10,000 monthly mobile phone charges directly out of your account. Requirements: a. Prepare the bank reconciliation. b. Prepare the adjusting (reconciling) entries. Solutions: Analyses: a.. The 45,000 check issued to the supplier but not yet encashed is an outstanding check.102 ! Chapter 3 b. The 205,000 amount deposited but not yet credited. to your account is a deposit in transit. c. The P60,000 deposit to your account but not yet recorded in the accounting books is a credit memo. d. The 10,000 deduction from your account but not yet recorded in the accounting books is a debit memo. Requirement (a): Bank reconciliation Bal. per books,end. 520,000 _Bal. per bank, end. 410,000 ‘Add: CM 60,000 Add: DIT 205,000 Less: DM (10,000) Less: OC (45,000) Add/Less: Book errors Add/Less: Bank errors Adjusted balance 570,000 Adjusted balance 570,000 Lite de et Satay ee te he Requirement (b): Adjusting (Reconciling) entries Adjusting (reconciling) entries are made only for book reconciling items credit memo, debit memo, and book errors). No adjusting (reconciling) entries are needed for bank reconciling items in the entity’s books. Analyses: Only items (c) and (d) above will be adjusted in the books of accounts. The adjusting (reconciling) entries are as follows: [ Ale | Cash 60,000 @ Accounts receivable 60,000 40 record the collection of accounts recvivabe AJE | Communication expense 10,000 (d) Cash 10,000 to record the mobile phone charges for the monthBank Reconciliation 103 After posting the entries above, the balance of cash is brought equal to its adjusted balance. Analyze the T-account below: Cash Aug. 31 (unadjusted balance) 520,000 AIE (c) 60,000 10,000_ AJE (d) Adjusted balance 570,000 Illustration 4: Actual Procedures You are the atcountant of Blue Sky Co. You, obtained the following information for the purpose of preparing the bank reconciliation for the month of May 20x1. *r accounting records: SUBSIDIARY LEDGER Cash in bank CASHIN BANK - BPI CURRENT ACCOUNT Date | Description Debit | _Credit_| Balance 5/1 | Bal. forwarded | | 560,000 5/10 | Deposit 350,000 | 910,000 5/11 | Check #1109 | 109,000 | 801,000 5/1 Deposit 480,000 | 1,281,000 5/18 | Check #1110 | 200,000 | 1,081,000 5/21 | Check #1111 | | 80,000, | 1,001,000 5/27 | Check #1112 | | 280,000 721,000 160,000_| 881,000 Deposit104 Chapters Cash in bank per bank statement: BANK OF THE WS PHILIPPINE ISLANDS ‘Account Number a121-0008-88, Account Type 1 BPI Checking decount Branch 2 Piggy BRANCH Patiod Covered + sfsfzoxa-5/st/20x4 Date Desrpton Raf ___—Detals——Debt_—Credt_—_—Blance GINNING BALANCE 6000000 sfsofroxr casHoePosT = 023. _PagyCty 35090000 s1060000 spiro. caswoerost =" 090 eCity 4ana00.00 39900000 sfizron parwent oor 31,905.00 1.358095.00 SI1S/20XLCHECKENCASHMENT "040 cK#1109. 10800000 1249 095.00 S/M8/20X1 CHECKENCASHMENT ” 099 C1110 200,000.00, 1,049,095.00 Sy2s/moxi cHECKOEPOST "057 ‘Fig Ciy spon. 113903500 CHECKENCASHMENT "07 cKanI2 5909500 Requirement: Prepare the bank reconciliation. Solution: We will determine the reconciling items.simply by comparing the amounts in the ledger and the bank statement. > Amounts that are in the ledger but not in the bank statement are bank reconciling items. > Amounts that are in the bank statement but not in the ledger are book reconciling items. For this purpose we simply cross-out items that appear in both the ledger and the bank statement. Items not ‘crossed-out are the reconciling items.‘Bank Reconciliation ‘ng ‘SUBSIDIARY LEDGER ‘CASH IN BANK - BPI CURRENT ACCOUNT ‘Dete| Description | Debit | Credit_| Bolonce i | Bal forwarded] si0 | Deposit 3 aN | Sut | Chest» | neten si | Depo | eee gis | Checeiio | uate sai) Great — | ater sa7| Crest? | ma 520 | Deposit | 160,00 BANK OF THE W PHILIPPINE ISLANDS ‘Account Type : PI chee nt franeh : racy’ Period Covered : spon Beene sae 'S/10/20x1 CASH DEPOSIT 023 PiesyCity '5/11/20K1 CASH DEPOSIT "990 Prasy city ‘5/12/20 PAYMENT "on S/15/20K1 CHECK ENCASHMENT ” . 040 CK# 1109 S/AW/20K4 CHECK ENCASHMENT 099 CK 1310 Sratins cwexerost 067 Per chy 5/28/20x1CHECKENCASHMENT "077 cx AII2 The reconciling items are: Bank reconciling items: a. Outstanding check of P80,000 (from ledger, dated 5/21, ‘Check nr’) b. Deposit in transit of 160,000 (from ledger, dated 5/30, “Deposit’) Book reconciling items: a. Debit memo of P31,905 (from bank statement, dated 5/12/20X1, described as ‘PAYMENT’) , b. Credit memo of P90,000 (from bank statement, dated 5/26/20X1, described as ‘CHECK DEPOSIT’)106 Chapter 3 Meee Blue Sky Co. Bank Reconciliation May 31, 20x1 Bal. per books, end. 881,000 Bal. per bank,end. —_—P859,095 ‘Add: CM 90,000 Add: DIT 160,000 Less: DM (31,905) Less: OC (80,000) Add/Less: Book errors __-_Add/Less: Bank errors : Adjusted balance P939,095 Adjusted balance P939,095 Illustration 5: Errors ABC Co. is preparing its September 30, 20x1 bank reconciliation. The following information was determined: a. Balance per bank statement, September 30, 20x1 - P180,000. b. Deposit in transit, September 30, 20x1 - 32,000. c. Return of customer's check for insufficiency of funds (NSF check), September 30,20x1 — 60,000. d. Balance per books, September 30, 20x1 - P143,000. e. Outstanding checks, September 30, 20x1 — 27,000. f. A collection of 320,000 was recorded in the books as 230,000. The bank. statement shows the correct amount of 320,000. 8. The bank erroneously credited a 12,000 deposit of Eye Busy Co, to ABC’s account, Requirement: Prepare the bank reconciliation. Solution:Bank Reconciliation 107 Bal. per books, end. ' 143,000 Bal. per bank, end. 180,000 Add: CM Add: DIT 32,000 Less: DM (NSF check) (60,000) Less: OC (27,000) Add/Less: Book errors: Add/Less: Bank errors: Understatement 90,000 Overstatement (12,000) Adjusted balance 173,000 Adjusted balance 173,000, Notes: ®& Book error: The collection of 320,000 that was erroneously recorded as 230,000 caused the cash balance per books to be understated. Thus, the correction is an addition of P90,000 (320,000 - 230,000) to the cash balance per books. Analyze the T-accounts below: ‘Should be"(SBE) Cash. Bal. 230,000 Bal. 320,000 ‘Correction’ Entry made Correction - addition Bal. 320,000 @ Bank error:108 Chapter 3 The 12,000 erroneous credit to ABC’s bank account causeq the cash balance per bank to be overstated. Thus, the correction is a deduction of 12,000. Analyze the T-accounts below: ‘Entry made'(EM) ‘Should be"(SBE) it liability - ABC Co. Deposit liability - ABC Co. (8) 12,000 Bal. Overstated by 12,000 (0 SBE vs. 12,000 EM). Correction - deductionBank Reconciliation 109 Illustration 6: Errors ‘ABC Co. is preparing its October 31, 20x1 bank reconciliation. The following information was determined: a. The cash balance per books is 560,000 while the cash balance per bank statement is 640,000. b. Credit memo — 40,000 c. Debit memo - P30,000 d. Deposits in transit - P'150,000 e. Outstanding checks - 50,000 £, The disbursements per books are overstated by P90,000. g. The bank debits are understated by 80,000. Requirement: Prepare the bank reconciliation. Solution: Bal. per books, end. 560,000 _Bal. per bank, end. 640,000 Add:CM 40,000 Add: DIT 150,000 Less: DM (30,000) Less: OC (50,000) Add/Less: Book errors: Add/Less: Bank errors: Understatement 90,000 Overstatement (80,000) Adjusted balance 660,000 Adjusted balance 660,000 Notes: ® Book error: The overstatement in the book disbursements caused the ending balance of cash to be understated. Analyze the T-accounts below:110 Chapter 3 ‘Assumed — amount ® 560,000 ( Assumed amount 560,000 Bal. 470,000 Bal. 560,000 Disbursements are recorded as credits to the cash account. The disbursements are overstated by P90,000. © “Assumed amount”: We will assume these/amounts in order to show more clearly the effect of the error on/the ending balance of cash: ‘Correction’ Cash _Dr. 560,000 Assumed amount “ 90,000 Entry made Correction 90,000 Bal. 560,000 Inverse relationship 2 Remember the following: > To correct an overstated credit, you need to make a debit. >» To correct an overstated debit, you need to make a credit. > To correct an understated credit, you need to make a. credit. \ » To correct an understated debit, you need to make a debit. ‘| Direct relationshipBank Reconciliation aia & Bank error: The understatement in the bank debits caused the ending balance of cash to be overstated. Analyze the T-accounts below: “Entry made’ “Should be’ Deposit liability Deposit liability - - ABC Co. ABC Co. Dr. Cr. K Assumed Assumed 640,000 amount 640,000 amount Assumed (g) 100,000 amount _ 180,000 aS 540,000 Bal. "460,009 Bal. ‘Understated by 80,000. (180,000 SBE vs. 100,000 EM) The understatement in the bank debit caused the ending balance to be understated also by the same amount. (460,000 SBE vs. 540,000 EM = 80,000 under) ‘Correction’ % Deposit liability - ABC Co. Dr. fe 640,000 Assumed ambunt Entry made CorrectionChapter 3 112 SE Si a NO a a. Understatement in book debit. BOOK ERRORS Nature of error Effect on ending Correction balance of cash @ Understatement. Debit (Addition on the pro forma reconciliation). b. Understatement in book credit. ® Overstatement. Credit (Deduction on the pro forma reconciliation). c. Overstatement in book debit. “Overstatement. Credit (Deduction on the pro forma reconciliation). d. Overstatement in @ Understatement. Debit (Addition book credit. on the pro forma reconciliation). BANK ERRORS: Nature of error Effect on ending - Correction balance of cash e. Understatement in bank credit. ® Understatement. Credit (Addition on the pro forma reconciliation). f. Understatement in bank debit. ‘@ Overstatement. Debit (Deduction on the pro forma reconciliation). g- Overstatement in bank credit. = Overstatement. Debit (Deduction on the pro forma reconciliation). h. Overstatement in bank debit. % Understatement. Credit (Addition on the pro forma reconciliation)..Bank Reconciliation 113 Illustration 7: Errors ABC Co. is preparing its November 30, 20x1 bank reconciliation. The following information was determined: a. The cash balance per books is 500,000 while the cash balance per bank statement is 530,000. b. The bank collected 640,000 from a customer, representing 600,000 principal of note receivable and 40,000 interest. c. NSF check of 150,000 returned by the bank to ABC. ABC has not yet recorded the return of the check. d. Collections amounting to 310,000 were deposited by month- end but were not reflected on the bank statement. e. Checks issued totaling 60,000 are not yet presented to the bank for payment. f. Abook error caused the debits to be overstated by 120,000. g- Abank error caused the debits to be overstated by 90,000. Requirement: Prepare the bank reconciliation. Solution: Bal. per books, end. P500,000 Bal. perbank, end. 530,000 Add: CM 640,000 Add: DIT 310,000 Less: DM (NSE) (150,000) Less: OC (60,000) Add/Less: Book errors: ‘Add/Less: Bank errors: Overstatement (120,000). Understatement Adjusted balance Adjusted balance 90,000 870,000ie se Mtge Mbsteiegs eg 9 SP ANE chapter | Illustration 8: Book to Bank/Bank to Book The following information pertains to ABC Co.'s cash on December 31, 20x1: a. Balance per bank statement - 8,000 Credit memo - P5,000 Debit memo - 2,000 |. Deposits in transit — P 4,000” Outstanding checks - 3,000 Pao Requirement: How much is the unadjusted balance of cash per books? Solution: Step 1: Place all the given information on the pro forma bank reconciliation. Per books, end. 22? Perbank, end. 8,000 Add: CM 5,000 \ Add: DIT 4,000 Less: DM (2,000) Less: OC (3,000) ! +/-:Book errors: - +/-Bankerrors: _- | Adjusted balance Adjusted balance Step 2: Squeeze the missing. (required) information. my Per books, end. 6,000 Squeeze Perbank, end. 8,000 start ‘Add: CM 5,000 Add: DIT 4,000 Less: DM (2,000) Less: OC (3,000) 4/Book errors: = +/ When the CM last month (i.e, October) is recorded in the books this month (je., November), the book debits are increased. However, the increase does not represent a “deposit made during current month.” Accordingly, it is deducted from the book debits in the DIT T-account above. > When the CM this month is recorded by the bank this month, the bank credits are increased. However, the increase does not represent a “deposit credited by bank during current month.” Accordingly, it is deducted from the bank credits in the DIT T- account above. Debit memos > The accounting treatments for DMs on the OC T-account parallel those of the CMs in the DIT T-account, Notice that all CMs and DMs are deductions in the T-accounts. CMs and DMs are direct credits and debits to the entity's bank account. Accordingly, they could not give rise to DIT and OC. Book errors Check received from a customer amounting to P200 was recorded in the books in October as MS120 Chapter 3 Analysis: > What happened? - Book debits last month are overstated by 1,800. > What was the correction made this month? - A book credit was made to reverse the overstated book debit. > Effect of correction: Book credits are increased but the increase does not represent a “check drawn during current month.” > Where cant I find book credits? — Outstanding checks T-account > What should I do? — deduct 1,800 from book credits in the OC T-account “Check issued to a supplier amounting to P10 was recorded in the books in November as 1 oe only: What happened? — Book credits this month are overstated by 9900. > What was the correction made this month? — None yet. The correction will be made next month (i.e., December). ; Effect of error: Book credits are overstated. Where can I find book credits? — Outstanding checks T-account What should I do? ~ deduct 900 from book credits in the OC T- account vvv shoe ei acer nc eto al | Collections in November for P1,300 was recorded as Analysis: > What happened? - Book debits this month are understated by 1,000. > What was the correction made this month? - None yet. The correction will be made next month (i.e., December). > Effect of error: Book debits are understated. > Where can I find book debits? — Deposits in transit T-accountBank Reconciliation 121 > What should I do? — add 1,000 to book debits in the DIT T- account Bank errors Checks properly drawn for P1,900 was recorded by . the bank in October as 190 Analysis: > What happened? - Bank debits last month are understated by 1,710. > What was the correction made this month? — A bank debit was made to supplement the deficiency.” > Effect of correction: Bank debits are increased buit the increase does not represent a “check encashment.” > Where can I find bank debits? ~ Outstanding checks T-account > What should I do? - deduct 1,710 from bank debits in the OC T-account Deposit amounting to P1,500 was recorded by _thebankinNovemberas 150 Analysis: > What happened? ~ Bank credits this month are understated by 1,350. What was the correction made this month? — None yet. The correction will be made next month (i.e, December). Effect of error: Bank credits are understated. Where can L find bank credits: Deposits in transit T-account What should I do? — add 1,350 to bank credits in the DIT T- account v vv122 Chapter3 ter [BGuldeon Homtieh ye DEES Sees Gl Gna ay % Errors last month are presumed. to have been corrected. this month Accordingly: An overstated debit last month is corrected this month by a credit, sy its effect is on this month’s credits. An overstated credit last ‘month would have an opposite effect. ¥ An understated debit last month is corrected this month by a debit, so its effect is on this month’s debits. An understated credit last month ‘would have an opposite effect. * Errors this month are’ presumed to be corrected next month Accordingly, an error this month is corrected on the T-accounts using the error’s direct effect on this month's debits and credits rather than the effect of its correction. ‘Errors can only be considered once in the computation of either DIT or OC. For example, if the error affects DIT, it will not affect OC (and vice- versa). Requirement (b): Bank reconciliation Bal. per books, Nov. 301,600 | Bal. per bank statement, Nov. 30 P3,800 ‘Add: Credit memos : Add: Deposits in transit 1,850 Proceeds from loan 300 | Less: Outstanding checks (3,400) Less: Debit memos: Add/Less: Bank errors: NSF check (200) | Understatement of deposit 1,350 Add/Less: Book errors: Overstatement of payments 200 Understated collections 1,000 ‘Adjusted balance 3,600, Adjusted balance 3,600, Ilustration 2: Reconstruction of information ABC Co. had the following bank reconciliation on May 31, 20x1: Balance per bank statement — May 31 Add: Deposits in transit - May Less: Outstanding checks - May Adjusted balance (equal to cash bal. per books) ~ May 31 The bank statement for the month of June 20x1 shows the following: iBink Resin, ao OS i Lt Deposits 120,000 Disbursements 90,000 All reconciling items in May cleared the bank in June. There are no reconciling items on June 30 other than for a deposit in transit of 30,000. Requirements: a. How much is the cash receipts per books in June 20x1? b. How much is the cash balance per books on June 30, 20x1? Solutions: Requirement (a): Deposits per bank - June 120,000 Less: DIT in May that cleared in June (64,000) ‘Add: DIT as of June 30 30,000 Cash receipts per books - June 86,000 Requirement (b): The cash disbursements per books in June is computed as follows: Disbursements per bank - June 90,000 (12,000) Less: OC in May that cleared in June Add: OC as of June 30 Disbursements per books — June The cash balance per books on June 30 is computed as follows: Cash in bank beg, bal. - May 31 (given) 152,000 Receipts in June 36,000 | _78,000_ Disbursements in June 160,000_ end. bal. - June 30124 Chapter 3. Se Proof of cash 3 / A proof of cash is an expanded bank reconciliation that includes proof of cash receipts and cash disbursements. Proof of cash is useful in discovering discrepancies in the handling cash over a certain period of time. Unlike the bank reconciliation which is prepared monthly, proof of cash is prepared only when needed — usually in fraud investigations involving cash. Illustration: Proof of cash The following information was taken from the records of ABC Co.: . November 30 December 31 Book balance 5,600 2 Book debits 31,900 Book,credits | 28,200 Bank balance 15,000 20,400 Bank debits 2 Bank credits 27,300 Notes collected by bank 2,250 3,000 Bank service charge 20 100 NSF checks 880 ¢ 1,400 Overstatement of check in payment of salaries 1,900 1,200 Deposit in transit 6,000 11,250 Outstanding checks 9,750 17,850 Deposit of 123 Corp. erroneously credited to ABC Co.'s account 2,400 1,800 Requirements: Compute for the following by preparing a proof of cash. a. Unadjusted book balance as of December 31. b. Unadjusted bank disbursements in December. ©. Adjusted cash balance as of November 30. d. ‘Adjusted cash receipts in December. €: Adjusted cash disbursements in December.Bank Reconciliation 125 f. Adjusted cash balance as of December 31. Solutions: We will prepare the proof of cash “per books” first, then the proof of cash “per bank” - similar to the preparation of bank reconciliation. , Per books Step 1: Unadjusted balances L Nov. 30 | Rec Balance per books| 5,600 | "31900 is_| Disbursements | Dec. 31 8200) |? 2 The proof of cash is similar toa T-account. The sum of the amounts in the first two columns (Nov. 30 and Receipts) is equal to the sum of the amounts in the last two columns (Disbursements and Dec. 31). Accordingly, we can squeeze for the missing value as follows: 5,600 + 31,900 - 28,200 Nov. 30 | Receipts | Disbursements |iPec. 31_| Balance per books, 5,600 31,900 The computation above is depicted in a T-account as follows: Cash in bank Nov. 30 ~~ 5,600 4 Receipts _31,900_| 28,200 _ Disbursements 9,300 _ Dec.31 Step 2: Credit memos The proof of cash that we are preparing in this illustration is called a“two date” bank reconciliation. The Nov. 30 and Dec. 31 columns are simply bank reconciliations for the months of November and December, respectively. These are prepared using the same126 Chapter 3 procedures as those we have performed earlier. Accordingly, we simply place the CMs as additions in these columns. CMs in Nov. and Dec, respectivel Nov. 30 | Rece Balance per books| 5,600 3 Note collected by bank: YZ Dec, 31 | 9,300 ip 00 November | 2,250 Dee ob The proof of cash above is also called a “four-column” bank reconciliation. The Receipts and Disbursements columns pertain to the current month of December. Thus, items pertaining to November's (last month) receipts or disbursements that were only recorded in December are excluded (deducted) from these columns. é : On: the other hand, those that represent receipts and disbursements during December that are not yet recorded are included (added) in these columns. The credit memos are placed in the Receipts and Disbursements columns as follows: Nov. 30 | Receipts _| Disbursements | Dec. 31 Balance per books|_5,600_| 31,900 28,200 9,300 Note collected by bank: oe ee November 2,250 | 2250) | [i Dessaber Ae nnd RAM LAs a BOM > The 2,250 November CM was only recorded in December. This has increased the December book debits (receipts) but this does not represent a December receipt but rather 4 November receipt that was only recorded in December: Accordingly, it is deducted from the December receipts.Bank Reconciliation < 127, > The 3,000 CM this month represents a December receipt that is already recorded by the bank but not yet in the books. It will only be recorded in the books next month (ie., January). ‘Accordingly, it is added to the December receipts. > Observe that the proof of cash remains balanced. Disbursements 28,200 Balance per books| Note collected by bank: November 2,250 [December ; , 3 03,000 = 0 +3,000 Step 3: Debit memos Nov. 30 | Receipts | Disbursements | Dec. 31 Balance per books| 5,600 | 31,900 | 28,200 | 9,300 Note collected by bank: } 3 November DP IBONSSCRNO) [ie a RSPR December 3,000 fs 3,000_| 20) | Ce 100 (100) November (680) | (680) __ December Ta ns ARAL RAO RON > The November DMs are deducted from the December Disbursements (book credits) because these are last month’s disbursements that were only recorded in the current month. MM128 Chapter 3 Or oon > The December DMs are added to the December Disbursements (book credits) because these are December disbursements but were not yet recorded. > Observe that the proof of cash remains balanced. Step 4: Book errors % ~November error November 30) Overstatement of check in PO EN i Ha ek AO ae a Arig: What happened? ~ Book credits last month are overstated by 1,900. > What was the correction made this month? — A book debit was made to reverse the overstated book credit, > Effect of error: Book debits are increased but the increase does not represent a “December receipt.” > What should I do? ~ deduct 91,900 from book debits (Receipt column), Nov. 30 | Receipts | Disbursements | Dec. 31 | Balance per books|_5,600 | 31,900 | 28,200 | 9,300 | “Note collected by bank: [es 2,250 | (2,250) _ 3,000 | Bank service charges: November (20) “December | NSF checks: | November | (880) |__December Book errors: ths [November | 1.900. _| 1,900) Err rele nal Bue Sets oN eeBank Reconciliation 129 “December error (Overstatement of check in payment of salaries Analysis: > What happened? - Book credits this month are overstated by > 91,200. > What was the correction made this month? - None yet. The correction will be made next month (ie,, January). > Effect of error: Book credits are overstated. > What should I do? - deduct 1,200 from book credits (Disbursements column). The completed proof of cash is as follows: Per books: | Nov. 30 | Receipts | Disbursements | Dec. 31 Balance per books) 5,600 200, 9,300 _| Note collected by bank: November 2,250, December | __ Bank service charges: - media bs November (20) é | December itis a) NSE checks: hae E oaks Noyember (880) _| (880) B 1,400 (1,900) pia 2h] | (1,200) 1,200 [Aaiusted balances 8850 _| 30,750 27,600 12,000 pare Lan mere ae Pee > Observe that the equilibrium of the proof of cash is maintained all thoughout its preparation.— ag 130 Chapter 3 % Per bank Using similar procedures, the proof of cash per bank is prepared as follows: Per bank: Nov. 30 | Receipts | Disbursements] Dec. 31 Balance per bank | 15,000 | _ 27,300 21,900 | 20,400 Deposits in transit: UN x I November 6,000 | (6,00) {| December 14,250 | Outstanding checks: |__ November (9,750) | (9,750) | December 17,850 Bank errors: | [ |__November (2,400) | ___ 2,400) | December (1,800) (1,800) Adjusted balances| 8,850 _| 30,750 27,600 | 12,000 > Observe that the adjusted balances per books and per bank are equal. | > A proof of cash that covers more than two months can also be Prepared, for example, a proof-of cash that covers the months of October, November and December. Such a proof of cash is called a “three date bank reconciliation” and a “‘seven- column” bank reconciliation. It is also possible to prepare a one-hundred date bank reconciliation. You might want to give this a try. 6© Answers to requirements: (amounts taken from the proof of cash) a, Unadjusted book balance as of December 31. 300 b. Unadjusted bank disbursements in December. ¢. Adjusted cash balance as of November 30. d. Adjusted cash receipts in December... e. £1 Adjusted cash disbursements in December. Adjusted cash balance as of December 31....Bank Reconciliation 131 Chapter 3 Summary: A bank reconciliation statement is a report that is prepared for the purpose of bringing the balances of cash (a) per records and (b) per bank statement into agreement. Pro forma bank reconciliation: Bal. per books,end. xx __Bal. per bank, end. xx Add; CM xx Add: DIT xx Less: DM (xx) Less: OC (9) +/-: Book errors: xx__ +/+: Bank errors: x Adjusted balance xx Adjusted balance xx Credit memos (CM) ~ are additions (bank credits) made by the bank to the depositor’s bank account but not yet recorded by the depositor, eg,, collections made by the bank on behalf of the depositor. Debit inemos (DM) ~ are deductions (bank debits) made by the bank to the depositor’s bank account but not yet recorded by: the depositor, e.g., NSF checks, bank service charges. Deposits in transit (DIT) — are deposits made but not yet credited by the bank to the depositor’s bank account. Outstanding checks (OC) - are checks drawn and released to payees but are not yet encashed with the bank. PROBLEMS PROBLEM 1: TRUE OR FALSE 1 The bank statement shows a balance of P100. Deposits in transit are P20 while outstanding checks are P10. The adjusted cash balance is P115. The cash in bank ledger balance is P50. Credit memos are P20 while debit memos are P10. The adjusted cash balance is P80. ‘The\bank statement shows a balance of P100. Credit memos are P20 while debit memos are P10. Deposits in transit are P50 \ \ \ ee