BANK RECONCILIATION & PROOF OF CASH

1. Demand Deposit (Checking Account/Current Account) 

2. Saving Deposit 

3. Time Deposit 

THREE KINDS OF BANK DEPOSITS 

Demand Deposit (Checking Account/Current Account) 

• Deposits covered by deposit slips 

• Funds withdrawable on demand by drawing checks 

• Usually noninterest bearing (but some banks allow interest-bearing) 

• Bank reconciliation is necessary ONLY for demand deposit accounts

 Saving Deposit 

• Depositor given a passbook upon initial deposit 

• Passbook required for deposits and withdrawals 

• Withdrawals anytime but bank may require notice 

• Interest bearing

Time Deposit 

• Interest bearing like saving deposit 

• Evidenced by Certificate of Deposit 

• Can be preterminated or withdrawn on demand or after agreed period

Key Point: When bank credits depositor's account, bank recognizes a liability to the depositor (debtor-creditor relationship).

When Depositor Makes a Deposit: 

Books of Depositor	Books of Bank
Debit: Cash in Bank	Debit: Cash
Credit: Accounts Receivable	Credit: Company X Account

Key Point: When depositor's account is decreased, the bank debits it.

When Depositor Issues a Check: 

Books of Depositor	Books of Bank
Debit: Accounts Payable	Debit: Company X Account
Credit: Cash in Bank	Credit: Cash

 BANK RECONCILIATION

Definition 

A schedule that accounts for the differences between: 

1. Cash balance shown on the bank statement 

2. Cash balance shown on the general ledger (books) 

Why is it Needed? 

Frequently, there are items on the depositor's books that do not appear on bank records, and vice versa. 

A. CREDIT MEMOS 

B. DEBIT MEMOS 

C. ERRORS

BOOK RECONCILING ITEMS 

(Items on bank statement not yet recorded by depositor) 

BANK RECONCILING ITEMS 

(Items on depositor's books not yet on bank statement) 

A. DEPOSITS IN TRANSIT 

B. OUTSTANDING CHECKS 

 C. ERRORS

 

CREDIT MEMOS 

Items NOT represent deposits but credited by bank to depositor's account, not yet recorded by depositor. 

Effect: Increase bank balance; book balance is UNDERSTATED 

Examples of credit memo

1. Note receivable collected by bank in favor of depositor 

2. Proceeds of bank loan credited to depositor's account 

3. Matured time deposits transferred to current account 

 DEBIT MEMOS 

Items NOT representing checks paid but charged/debited by bank to depositor's account, not yet recorded by depositor. 

Effect: Decrease bank balance; book balance is OVERSTATED 

Examples of DEBIT MEMOS

1. NSF checks (No Sufficient Fund) - also called DAIF (Drawn Against Insufficient Fund) 

2. Technically defective checks - no signature, erasures, mutilated, conflict in amounts 

3. Bank service charges - interest, collection, checkbook, penalty 

4. Reduction of loan deducted from current account for matured loan

DEPOSITS IN TRANSIT 

Collections already recorded by depositor but NOT yet reflected on bank statement. 

Effect: Book balance increased; bank balance is UNDERSTATED 

Types: 

1. Collections forwarded to bank but too late to appear in statement 

1. Undeposited collections - still in hands of depositor

types of DEPOSITS IN TRANSIT

1. Checks drawn and given to payees but not yet presented 

2. Certified checks - NOT outstanding (bank has already debited account) 

Types of OUTSTANDING CHECKS : 

CERTIFIED CHECKS 

A check where the bank has stamped "accepted" or "certified" indicating sufficiency of fund. 

Key Points: 

• When bank certifies a check, depositor's account is immediately debited 

• Certified checks are NO LONGER outstanding for reconciliation purposes 

• It becomes a liability of the bank certifying it 

• Accepted by many persons who would not accept a personal check 

1. Adjusted Balance Method (PREFERRED) 

2. Book to Bank Method 

3. Bank to Book Method 

FORMS OF BANK RECONCILIATION 

 Adjusted Balance Method (PREFERRED) 

Book balance and bank balance are brought to a correct cash balance (both adjusted).

Book to Bank Method 

Book balance is adjusted to equal the bank balance. 

 Bank to Book Method 

Bank balance is adjusted to equal the book balance.

TWO-DATE BANK RECONCILIATION? 

expanded reconciliation that covers two points in time - the beginning and ending of a period. Unlike a regular bank reconciliation which only reconciles balances at a single date, the two-date reconciliation also analyzes the receipts and disbursements that occurred during the period between those two dates.

Book debits

represent all increases to the cash in bank account as recorded in the depositor's books. These are cash receipts and other credits to the cash account. Examples include collections from customers, proceeds of loans, and notes collected.

Book credits

represent all decreases to the cash in bank account as recorded in the depositor's books. These are cash disbursements and other debits to the cash account. Examples include checks issued, payments made, and NSF checks recorded. 

Bank credits

represent all increases to the depositor's account as recorded by the bank. These include deposits acknowledged by the bank and credit memos such as notes collected by the bank, proceeds of bank loans, and matured time deposits transferred to the current account. 

Bank debits

represent all decreases to the depositor's account as recorded by the bank. These include checks paid by the bank and debit memos such as NSF checks, service charges, loan reductions, and technically defective checks. 

proof of cash

is an expanded reconciliation that includes proof of receipts and disbursements. This approach may be useful in discovering possible discrepancies in handling cash particularly when cash receipts have been recorded but have not been deposited, or when cash disbursements have been recorded but checks have not been issued. 

The is essentially a reconciliation of the receipts and disbursements for the current period, in addition to the reconciliation of the beginning and ending balances.