Bank Reconciliation Lesson

by Donnalyn Samonte

Bank Reconciliation Lesson

​BANK RECONCILIATION

​A bank reconciliation is the process of matching the balances in an entity’s accounting record for a cash account to the corresponding information on a bank statement.

​The goal of this process is to ascertain the differences between the two, and to book changes to the accounting records as appropriate.

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The information on the bank statement is the bank's record of all transactions impacting the entity's bank account during the past month.

​BANK RECONCILIATION

​Importance of Bank Reconciliation

​1.It highlights the causes of difference between the bank balance as per cash book and the bank balance as per passbook. Necessary adjustments or corrections can therefore be carried out at the earliest.

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2.It reduces the chances of fraud by the cash staff. It may be possible that the cashier may not deposit the money in the bank in time though he might have passed the entry in the bank column of the cash book. The Reconciliation Statement will point out such discrepancies.

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3.There is a moral check at staff of the organization to keep the cash records always up to date.

​TERMS: Bank Reconciling Items

​Deposit in Transit (DIT)

Cash and/or checks that have been received and recorded by an entity, but which have not yet been recorded in the records of the bank where the entity deposits the funds.

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If this occurs at month-end, the deposit will not appear in the bank statement, and so becomes a reconciling item in the bank reconciliation.

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A deposit in transit occurs when a deposit arrives at the bank too late for it to be recorded that day, or if the entity mails the deposit to the bank (in which case a mail float of several days can cause a delay), or the entity has not yet sent the deposit to the bank at all.

​- Collections from customers

​- Cash sales today

​( Recorded in the cash book INCREASE and deposited in the bank)

END OF THE MONTH

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(DEPOSIT IN TRANSIT)

​- Collections from customers

​- Cash sales today

​( Received by the bank today but cleared by the next day which is next month date)

RECORDED ALREADY

​(INCREASE CASH)

END OF THE MONTH

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(DEPOSIT IN TRANSIT)

NOT YET SHOWN IN BANK STATEMENT

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Cash in the bankstatement for the month will be understated (LESS)

​(So we need to add it as bank recon item)

​Outstanding Cheques (OC)

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A check payment that has been recorded by the issuing entity, but which has not yet cleared its bank account as a deduction from cash.

If it has not yet cleared the bank by the end of the month, it does not appear on the month-end bank statement, and so is a reconciling item in the month-end bank reconciliation.

​TERMS: Bank Reconciling Items

-Payments Suppliers, Other Expenses & Purchases via cheque

​( Recorded in the cash book DECREASE, and issue cheques)

END OF THE MONTH

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(OUTSTANDING CHEQUES)

-Payments Suppliers, Other Expenses & Purchases via cheque

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​( Suppliers etc. deposited the cheques later so it will only be deducted dated next month) Bank Statement (Cash) will be overstated (MORE)

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​Need to decrease(less) as bank recon item

NSF (Not Sufficient Funds)

A check that was not honored by the bank of the entity issuing the check, on the grounds that the entity's bank account does not contain sufficient funds.

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The entity attempting to cash an NSF check may be charged a processing fee by its bank. The entity issuing an NSF check will certainly be charged a fee by its bank.

​TERMS: Bank Reconciling Items

Credit Memo A bank credit memo is an item on a company's bank account statement that increases a company's checking account balance. Which is not yet shown in company’s cash book.

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​TERMS: Book Reconciling Items

SHOWN IN BANK STATEMENT (INCREASE)

END OF THE MONTH

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(CREDIT MEMO)

NOT YET RECORDED IN CASH BOOK

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​(So we need to add it as book recon item)

Debit Memo

A bank debit memo is an item on a company's bank account statement that reduces the company's checking account balance.

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​TERMS: Book Reconciling Items

SHOWN IN BANK STATEMENT (DECREASE)

END OF THE MONTH

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(DEBIT MEMO)

NOT YET RECORDED IN CASH BOOK

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​(So we need to LESS it as book recon item)

ERRORS: Bank & Book Reconciling Items

There may be errors in the account maintained by the company as well as the Bank.

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A wrong credit or debit may be given by the customer or the Bank. The two balances, therefore, may not tally.

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Multiple Choice

The cash balance in the company's book and bank statement are always equal.

• True

• False

Multiple Choice

For November 30, 2021 we have a sales amounting to 20,000. But we deposited it the next day December 1, 2021. What will happen to our bank statement for November 2021, which of the following is true?

• the 20,000 will appear on the December bank statement not on November.

• The 20,000 will appear on our November bank statement.

• It is not yet recorded in the books by November.

• Our cash inbank will be overstated (MORE)

Multiple Choice

A ________ is the process of matching the balances in an entity’s accounting record for a cash account to the corresponding information on a bank statement.

• Deposit in Transit

• Outstanding Cheques

• Bank Reconciliation

• Credit Memo

Multiple Choice

Cash and/or checks that have been received and recorded by an entity, but which have not yet been recorded in the records of the bank where the entity deposits the funds.

• Deposit in Transit

• Oustanding Cheques

• Credit Memo

• Debit Memo

Multiple Choice

A bank ____ is an item on a company's bank account statement that reduces the company's checking account balance.

• Deposit in Transit

• Outsanding Cheques

• Credit Memo

• Debit Memo

Multiple Choice

A check payment that has been recorded by the issuing entity, but which has not yet cleared its bank account as a deduction from cash

• Deposit in Transit

• Outstanding Cheques

• Credit Memo

• Debit Memo

Multiple Choice

A bank _____ is an item on a company's bank account statement that increases a company's checking account balance. Which is not yet shown in company’s cash book.

• Deposit in Transit

• Outsnading Cheques

• Credit Memo

• Debit Memo

Multiple Choice

The bank deposited an erroneous amount of 5,000 in our account after we check our bank statement. We notify the bank about it. Which statement is correct?

• The 5,000 is an Outstanding Cheques that should be deducted.

• The 5,000 is a bank error and should be deducted.

• The 5,000 is a bank error and should be added.

• The 5,000 is an Outstanding Cheques that should be added.

Multiple Choice

We issue a cheque to our supplier amounting to 6,850. But we recorded it in cash book as 8,650. Which of the following is correct?

• The bank statement will show a deduction of 6,850.

• Our cash book is overstated.

• Our cash book is recorded properly.

• The bank statement will show a deduction of 8,650.

Open Ended

Why bank reconciliation is important? Write your own words based on your understanding below,