INTERMEDIATE ACCOUNTING 1

CHAPTER 2: BANK RECONCILIATION

Concepts

✓ Accounting for the sources or reasons for the difference between the cash in bank per books and cash in bank per bank.
In practice, bank reconciliations are made on a per bank account basis and normally made at the end of each month.
✓ The aforementioned sources or reasons of the difference are classified into “book-reconciling” items and “bank-
reconciling” items. Book-reconciling items are those which will bring the unadjusted cash in bank per books to correct
(i.e., adjusted) amount of cash in bank. Bank-reconciling items are those who will bring the unadjusted cash in bank per
bank to correct (i.e., adjusted) amount of cash in bank.
✓ Bank reconciliation format to get the adjusted cash in bank balance starting with unadjusted cash in bank balance per
books (or “balance per ledger”, “balance per ledger”, etc.

Three kinds of Bank Deposits

✓ Demand Deposit
o For transaction purposes and it is noninterest bearing
✓ Saving Deposit
o For saving purposes and depositor is given a passbook and its is interest bearing but the interest is very
small.
✓ Time Deposit
o A deposit in a bank account that cannot be withdrawn before a set date or for which notice of withdrawal is
required. After that given period, bank will provide an interest that according to their agreement.
o It is interest bearing and time deposits and consists of formal agreement that what we called certificate of
deposit.

BANK RECONCILIATION PER BOOK

Unadjusted cash in bank balance per book Pxx

Additions:
Credit Memos:
Net proceeds from accounts/notes receivable collected by the bank on behalf of the entity xx
Bank loan proceeds directly credited to the entity’s bank account xx
Proceeds of matured investments managed by the bank on behalf of the entity that were directly credited to the
entity’s bank account xx
Direct wire transfers from another bank xx

Errors:
Non-recording of cash receipts xx
Understatement in the recording of cash receipts xx
Overstatement in the recording of check made xx

Deductions:
Debit Memos
No-sufficient fund (NSF) check xx
Bank service charge xx
Matured loan payable to the bank directly charged to bank account xx
Other expenses directly debited by the bank from the entity’s account (i.e., auto-debit arrangements) xx

Errors:
Non-recording of check made xx
Overstatement in the recording of cash receipts xx
Understatement in the recording of check made xx
Adjusted Cash in Bank Balance xx

ADDITIONAL INFORMATION: (BOOK)

• 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. The credit memos have the effect of increasing the bank balance.
Typical example of credit memos are:
a. Notes receivable collected by the bank in favor of the depositor and credited to the account of the depositor.
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 – refer to 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.
a. NSF or No Sufficient Fund Checks – These are checks deposited but returned by the bank because of
insufficiency of fund. The other name for NSF is DAIF or “drawn against insufficient fund”
b. Technically Defective Checks – These are checks deposited but returned by the bank because of
technical defects such as absence of signature or countersignature, erasures not countersigned, mutilated
checks, conflict between amount in words and amount in figures.
c. Bank Service Charge – These include bank charges for interest, collection, checkbook and penalty.
d. Reduction of Loan – This pertains to amount deducted from the current account of the depositor in
payment for loan which the depositor in payment for loan which the depositor owes to the bank and which
has already matured.
• Errors
a. Overstatement of receipt – minus adjustment
b. Understatement of disbursement – minus adjustment
c. Overstatement of disbursement – plus adjustment
d. Understatement of receipt – plus adjustment

BANK RECONCILIATION PER BANK

Unadjusted cash in bank balance per bank Pxx

Additions: xx
Deposit in Transit

Errors:
Non-recording of cash deposit of the depositor xx
Recording of check made by the another depositor xx
Understatement in the recording of cash deposit of the depositor xx
Overstatement in the recording of check made by the depositor xx

Deductions:
Outstanding checks xx
Errors:
Non-recording of check made by the depositor xx
Recording of cash deposit made by another depositor xx
Overstatement in the recording of cash deposit of the depositor xx
Understatement in the recording of check made by the depositor xx
Adjusted Cash in Bank Balance

ADDITIONAL INFORMATION: (BANK)

• Deposit in Transit – are collections already recorded by the depositor as cash receipts but not yet reflected on the
bank statements.
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.
• Outstanding Checks – are checks already recorded by the depositor as cash disbursement but not yet reflected on
the bank statement.
a. Checks drawn and already given to payees but not yet presented for payment.
b. Certified Checks – A certified check is one where the bank has stamped on its face the word “accepted”
or “certified” indicating sufficiency of fund. Therefore, you need to ignore this check number.
• Errors
a. erroneous (over) debit – plus adjustment
b. erroneous (over) credit – minus adjustment
c. unrecorded (under) debit – minus adjustment
d. unrecorded (under) credit – plus adjustment
 PRO FORMA RECONCILIATION

ADJUSTED BALANCE METHOD BOOK TO BANK METHOD BANK TO BOOK METHOD

Book Balance xx
Add: Credit Memos xx Book Balance xx Book Balance xx
Total xx Add: Credit Memos xx Add: Deposit in Transit xx
Less: Debit Memos xx Outstanding Checks xx xx Debit Memos xx xx
Adjusted Book Balance xx Total Total
Less: Debit Memos xx Less: Outstanding Checks xx
Bank Balance xx Deposit in Transit xx xx Credit Memos xx xx
Add: Deposit in Transit xx Bank Balance xx Bank Balance xx
Total xx
Less: Outstanding Checks xx NOTE: Book: Normal Treatment NOTE: Bank: Normal Treatment
Adjusted Bank Balance xx Bank: Reverse Book: Reverse

MULTIPLE CHOICE

1. A bank reconciliation is
a. A formal financial statement that lists all of the bank account balance of an entity.
b. A merger of two banks that previously were competitors.
c. A statement sent by the bank to depositor on a monthly basis.
d. A schedule that accounts for the difference between cash balance shown on the bank statement and the cash balance shown
on the general ledger.
2. 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 bank in favor of the depositor and credited to the account of the depositor
b. NSF customer check
c. Service charge
d. Erroneous bank debit
3. Which of the following would be added to the balance per bank statement to arrive at the correct cash balance?
a. Outstanding check
b. Bank service charge
c. Deposit in transit
d. A customer note collected by the bank on behalf of the depositor
4. Which of the following must be deducted from the bank statement balance in preparing a bank reconciliation which ends with
adjusted cash balance?
a. Deposit in transit
b. Outstanding check
c. Reduction of loan charge to the account of the depositor
d. Certified check
5. If the balance shown in the bank statement is less than the correct cash balance and neither the entity nor the bank has made
any errors, there must be
a. Deposits credited by the bank but not yet recorded by the depositor
b. Outstanding checks
c. Deposits in transit
d. Bank charges not yet recorded by the depositor
6. If the cash balance shown in the accounting records is less than the correct cash balance and neither the entity nor the bank
has made any errors, there must be
a. Deposits credited by the bank but not yet recorded by the depositor
b. Deposits in transit
c. Outstanding checks
d. Bank charges not yet recorded by the depositor
7. Bank reconciliations are normally prepared on a monthly basis to identify adjustments needed in the depositor’s records and to
identify bank errors. Adjustments on the part of depositor should be recorded for
a. Bank errors, outstanding checks and deposits in transit
b. All items except bank errors, outstanding checks and deposits in transit
c. Book errors, bank errors, deposits in transit and outstanding checks
d. Outstanding checks and deposits in transit
8. Bank statements provide information about all of the following except
a. Checks cleared during the period
b. NSF checks
c. Bank charge for the period
d. Errors made by the depositor
9. Which statement in relation to a certified check is not true?
a. A certified check is a liability of the bank certifying it.
b. A certified check will be accepted by many persons who would not otherwise accept a personal check.
c. A certified check is one drawn by a bank upon itself.
d. A certified check should not be included in the outstanding checks.
10. Which statement in relation to the bank reconciliation is true?
a. Bank service charge will cause the cash balance per ledger to be higher than that reported by the bank, all other things being
equal.
b. Credit memos will cause the cash balance per ledger to be higher than that reported by the bank, all other things being equal.
 c. Outstanding checks will cause the cash balance per ledger to be higher than that reported by the bank, all other things being
equal.
d. The cash amount reported in the statement of financial position must be the balance reported in the bank statement.

INTERMEDIATE ACCOUNTING 1
CHAPTER 3: PROOF OF CASH

Concept
✓ Proof of cash is a two-date bank reconciliation showing the total amounts of receipts and disbursements during
a particular period. The two dates in proof of cash include the beginning cash in bank balance and the ending cash in
bank balance.

Proof of cash general format when using the unadjusted book balances:
PRIOR CURRENT
RECEIPTS DISBURSEMENTS
MONTH MONTH
Unadjusted book balances Pxx Pxx Pxx Pxx

Add:
Credit Memos – Prior Month xx (xx)
Credit Memos – Current Month xx xx

Less:
Debit Memos – Prior Month (xx) (xx)
Debit Memos – Current Month xx (xx)

ERRORS:
Under Receipt – Prior Month xx (xx)
Under Receipt – Current Month xx Xx

Over Receipt – Prior Month (xx) (xx)

Over Receipt – Current Month (xx) (xx)

Under Disbursement – Prior Month (xx) (xx)

Under Disbursement – Current Month xx (xx)

Over Disbursement – Prior Month xx (xx)

Over Disbursement – Current Month (xx) xx
ADJUSTED BALANCES xx xx xx xx

Proof of cash general format when using unadjusted bank balances:

PRIOR CURRENT
RECEIPTS DISBURSEMENTS
MONTH MONTH
Unadjusted book balances Pxx Pxx Pxx Pxx

Add:
Deposit in Transit – Prior Month xx (xx)
Deposit in Transit – Current Month xx xx

Less:
Outstanding Checks – Prior Month (xx) (xx)
Outstanding Checks – Current Month xx (xx)

ERRORS:
Under Receipt – Prior Month xx (xx)
Under Receipt – Current Month xx xx

Over Receipt – Prior Month (xx) (xx)

Over Receipt – Current Month (xx) (xx)

Under Disbursement – Prior Month (xx) (xx)

Under Disbursement – Current Month xx (xx)

Over Disbursement – Prior Month xx (xx)

Over Disbursement – Current Month (xx) xx
ADJUSTED BALANCES xx xx xx xx
The effects of the errors shall be assessed in a case-by-case basis.

The amount of deposits in transit and outstanding checks at the end of each period can be computed as:
Deposits in Transit, beginning Pxx Outstanding checks, beginning Pxx
Add: Deposits made by the depositor xx Add: Checks made by the depositor xx
Total deposits to be acknowledged by the bank xx Total checks to be paid by the bank xx
Less: Deposits recorded by the bank xx Less: Checks paid by the bank xx
Deposits in Transit, ending xx Outstanding Checks, Ending xx

Computation of the deposits made by the company and the deposits acknowledge by the bank

Book Receipts (Debits) XX Bank Receipts (CREDITS) XX

Less: Credit Memo – PM XX Less: Credit Memo – CM XX
Book errors last month corrected this month Bank errors last month corrected this month:
Understatement of CR – PM XX Understatement of CR – PM XX
Overstatement of CD – PM XX Overstatement of CD – PM XX
Book errors this month: Book errors this month:
Overstatement of CR – CM XX Overstatement of CR – CM XX
Add: Understatement of CR – CM XX Add: Understatement of CR – CM XX
DEPOSITS MADE BY THE COMPANY XX DEPOSITS ACKNOWLEDGE BY THE BANK XX

Computation of the checks issued by the company and the checks paid by the bank

Book Disbursement (Credits) XX Book Disbursement (Debits) XX

Less: Debit Memos – PM XX Less: Debit Memos – CM XX
Book errors last month corrected this month Bank errors last month corrected this month
Overstatement of CR – PM XX Overstatement of CR – PM XX
Understatement of CD – PM XX Understatement of CD – PM XX
Book errors this month Bank errors this month
Overstatement of CD – CM XX Overstatement of CD – CM XX
Add: Understatement of CD – CM XX Add: Understatement of CD – CM XX
CHECKS ISSUED BY THE BANK XX CHECKS PAID BY THE BANK XX