FABM2 Chapter5

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FUNDAMENTALS OF ACCOUNTANCY, BUSINESS, AND MANAGEMENT 2

CHAPTER 5: BANK DOCUMENTS AND BANK RECONCILIATION

Learning Competencies:
1. Identify the types of bank accounts normally maintained by a business. (ABM_FABM12-IIc-5)
2. Prepare bank deposit and withdrawal slips. (ABM_FABM12-IIc-7)
3. Identify and prepare checks. (ABM_FABM12-IIc-8)
4. Identify common reconciling items and describe each of them. (ABM_FABM12-IId-11)
5. Analyze the effects of the identified reconciling items. (ABM_FABM12-IId-12)

Cash, Nature, and Composition


Generally, the meaning of cash is coins and currency. But in accounting, cash is defined as “currency or
cash items on hand, such as cash items awaiting deposit and cash in the working funds, as well as peso or
foreign currency deposits in bank which are unrestricted and immediately available for use in the current
operation” (Frias and Kemie, 2010).
Cash items include
Working funds include
1. Coins;
1. Petty cash fund;
2. Current checks;
2. Change fund; and
3. Bank drafts; and
3. Revolving fund
4. Postal money orders
Bank accounts may be
1. Saving account;
2. Checking and current account; and
3. Time deposit

Savings account is one where a passbook is presented for cash deposits and cash withdrawals. The cash
withdrawals are supported by withdrawal slips.
Checking or current account is one where drawings are done by the writing of checks, signing the same,
and giving check to the payee for encashment or for deposit within a bank.
Combo account is a combination of savings and current account. Deposits and withdrawals are posted in
the passbook, and checks are issued for withdrawal from the account.

Terminologies and Concepts Relevant to Bank Reconciliation


1. Bank Reconciliation is a process of bringing into agreement the bank balance per bank and the bank
balance per record of the depositor.
2. Bank balance is the balance reported by the bank as of a specific date.
3. Book balance or check stub balance is the balance reported by the depositor as of a specific date.
4. Check is the bank instrument used to withdraw cash from a checking account.
5. Drawee bank is the bank against which a check withdrawal is addressed.
6. Drawer is the signor of a withdrawal check or the party giving the order to pay.
7. Payee is the person or entity to whom payment is to be made.
8. Endorsement is the process of transferring the right to withdraw cash in favor of an endorse signed by
the endorser. The endorsement is done by signing at the back of the check.
9. Bank signature card is a bank record showing the specimen signature of the bank depositor. The card is
a reference to prove authenticity of the signature of the bank client or bank depositor.
10. Bank statements are reports from the bank to the client, showing addition to and deduction from bank
balance for a period of time.
11. Cash book is the record of the bank depositor or bank client showing deposits and withdrawals and the
end of period balance for a certain period of time.
12. Check stub is a bank form attached to the b black checks for use of the depositor for immediate posting
of transactions with the bank. When the bank record and client record are reconciled, the check stub
postings become the same as cash book postings, as well as the ending balances per bank and per book.
13. Deposit in transit is bank deposits reflected in the record of the depositor, but is not yet reflected in the
record of the bank.
14. Outstanding checks are checks drawn by the depositor and posted as reduction in the depositor’s
records, but is not yet posted as reduction from the depository bank’s record.
FUNDAMENTALS OF ACCOUNTANCY, BUSINESS, AND MANAGEMENT 2

15. Automated teller machine is an offsite equipment that enables the bank client to deposit and withdraw
cash from their account.
16. ATM card is an ID sized card that is used to activated the automated teller machine.
17. Electronic Payment System (EPS) is one where, with the use of an ATM card, payments are made
without using coins, paper bills, nor checks.
18. Bank Debit Memo (DM) is a bank form and entry for bank balance deduction initiated by the bank
other than checks.
19. Bank Credit Memo (CM) is a bank form and entry for bank balance addition initiated by the bank other
than the deposits by the client.
20. Check Writer is a machine used to write information on disbursement checks.
21. Signature Plate is a metal gadget attached to an equipment to stamp the signature of the check signor
on a check.
22. Internal Control is a plan of organization and all the coordinate methods and measures that are
designed (a) to safeguard assets, (b) to check the accuracy and reliability of accounting data, (c) to
promote operational efficiency, and (d) to encourage adherence to prescribed managerial policies.
23. Imprest System is an internal control system where all cash collections are deposited with the bank and
all payments are made by checks except for small payments which are paid from the petty cash fund.
24. Petty Cash Fund is an amount in coins and currency held by the petty cash custodian for small cash
payments that cannot be conveniently paid by checks.

One ideal system of handling cash is to immediately deposit all cash receipts into the bank. The cash
collections are evidenced by the official receipts (OR). The official receipts are recorded in the cash receipts
book. Bank deposits are authenticated by the depository bank. The authentication is on bank deposit slips (for
current or checking account), or on bank passbooks (for savings account). Bank withdrawals are done by
drawing checks in the name of payees or by writing bank withdrawal slips for savings account. Checks are made
payable to payees, who may be suppliers, utility providers (like PLDT, Meralco, Maynilad), employees (for
salaries and wages), creditors for payments of loans, among others. These check payments are supported by
approved check disbursement vouchers. The checks and disbursement vouchers are recorded in the cash
disbursement book. Periodically (usually once a month), the summarized entries in the cash ledger cash account.
The general ledger cash balance at the end of the month is computed.
The bank keeps record of the client depositor. The record shows beginning balance. The bank record shows
increases (deposits) and decreases (checks issued or withdrawals). The bank may also record transactions that
may decrease the balance other than withdrawals like bank service charge.
The objective of bank reconciliation is to bring the balance per book and the balance per bank into
agreement. On the basis of the reconciling items, the book records or journalizes those recorded by the bank but
not yet recorded by the book. The reconciliation process may also reveal errors by the bank and/or by the book
that need to be adjusted by either the bank or the book.

Cash Balance Per Bank versus Per Book


Cash transactions are recorded as they occur. The depositor dates book entries when cash is received, as
evidenced by check voucher and check dates. The depository bank records deposits when cash or check deposits
are received from the depositors, and records check drawn when checks are presented for payment by the
payees. The timing difference leads to the bank balance that is different from the book balance.

Example
AA Depositor ABC Company receives cash and issues official receipt 076 for P9,000
on August 28, 20X5.
Depositor deposits the P9,000 cash collection on September 2, 20X5.
The August 31, 20X5 bank statement will not yet show as increase the P9,000 deposit.
BB Depositor ABC Company issued a check to supplier National Company for P12,000 on August
26, 20X5.
National Company encashed the P12,000 check on September 3, 20X5.
The August 31 bank statement will not yet show the P12,000 check deduction.

Other than AA and BB there may be other transactions on end-of-period already recorded by
one party, but not yet recorded by the other party.
FUNDAMENTALS OF ACCOUNTANCY, BUSINESS, AND MANAGEMENT 2

At the end of the reporting period, usually a calendar month, the bank issues a bank statement to the client
depositor. The bank statement shows the following:
1. Name of the bank
2. Reporting period
3. Name of client-depositor
4. Beginning peso balance
5. Deposits and other decreases
6. Withdrawals and other decreases
7. Ending balance

The client depositor prepares a bank reconciliation which starts with the comparison of entries of the
depositor’s cash records (book) and the bank statement (bank).
The objective of the bank reconciliation is to identify differences between the book and the bank to enable
the depositor to make entries for identified differences called reconciling items. This is also to bring to the
bank’s attention those reconciling items that need to be corrected or adjusted in the bank’s records.

Steps in Bank Reconciliation


Steps in reconciling general ledger cash in bank balance with bank statement balance are as follows:

1. Use the pro forma bank reconciliation:


Balance per ledger (Date – End of ledger) P XXX
Add: Deposit per bank statement not yet
In ledger XXX
Less: Withdrawals per bank statement not
Yet in the ledger (XXX)
Adjusted ledger balance P XXX
Ledger is also referred to as book
Balance per bank statement (Date – End of Statement) P XXX
Add: Deposits per ledger not yet in
The bank statement XXX
Less: Withdrawals in the ledger not yet
In the bank statement (XXX)
Adjusted bank statement balance P XXX

2. Trace deposits per bank statement to deposits per cash receipt book and to prior month bank
reconciliation. Tick or mark traceable items. Leave the untraceable items unmarked.
3. The untraceable deposit items are grouped into
a. Deposits per bank statement not in the ledger and
b. Deposits per ledger not in the bank statement.
4. Trace withdrawals per bank statement to withdrawals per ledger and to prior month bank reconciliation.
Tick or mark traceable items. Leave the untraceable items unmarked. The untraceable withdrawal items
are group into
a. Withdrawals per bank statement not in the ledger and
b. Withdrawals per ledger not in the bank statement.

5. For step 1, fill in the form. Write the ledger ending balance and the bank statement ending balance.
6. Also in step 1, fill in the untraceable deposits in step 3, and the untraceable withdrawals in step 4.
7. From the prior month bank reconciliation, copy and write in the current month bank reconciliation those
reconciling items for deposits and those reconciling items for withdrawals that remain untraceable or
that remain as open items.
8. Identify debit postings in the general ledger cash in bank account coming from the general journal.
Trace them to the prior month reconciling items and to the additions in the current month bank
FUNDAMENTALS OF ACCOUNTANCY, BUSINESS, AND MANAGEMENT 2

statement. Nontraceable debit posting are listed as additions in the ledger, but are not yet added in the
bank statement.
9. Identify credit posting in the general ledger cash in bank account coming from the general journal.
Trace transaction to the prior month, reconciling items and to the deduction in the current month bank
statement. Nontraceable credit postings are listed as deductions in the ledger that have yet to be
deducted from the bank statement.
10. Do the arithmetical processes as shown in the pro forma bank reconciliation in step 1.
11. At this point, the adjusted balance per ledger should equal the adjusted balance per balance statement.

Accounting for Transactions with Bank


To illustrate the transactions with MTR Bank, assume that the following information are available for the
cash transactions of Robbins Enterprise.

A. Cash Receipts Book

Cash in Bank Accounts


Date OR# Received From
MTR Bank Dr. Receivable Cr.
20X1
Mar. 3 230 Xcorp. P 40,000 P 40,000
7 242 Leni Ent. 36,000 36,000
9 248 AB Trading 30,000 30,000
12 252 Excel Trading 28,000 28,000
17 260 Cielo Grace 18,000 18,000
20 268 National Corp. 40,000 40,000
P 192,000 P 192,000

B. Cash Disbursements Book


Cash in Bank
Check Account
Date Payee Metrobank Amounts
Number Debits
Cr.
20X1
Mar. 8 2051 Rose Corporation P 25,600 Accounts Payable 25,600
16 2052 Megafund Corp. 56,600 Loan Payable 56,600
18 2053 Meralco 7,400 Light & Power 7,400
2054 Sunbeam Reality 28,200 Rent Expense 28,200
2055 PLDT 10,000 Communication 10,000
20 2056 Makati City 22,800 Tax Expense 22,800
2057 Luis Francisco 19,400 Advances 19,400
22 2058 Mobiline 7,800 Communication 7,800
P 177,800

C. General ledger Postings


Cash in Bank
MTR Bank
20X1 20X1
Mar. 28 CRB 192,000 Mar. 28 CDB 177,800
Mar. 28 Balance 14,200

D. MTR Bank – Bank Statement


FUNDAMENTALS OF ACCOUNTANCY, BUSINESS, AND MANAGEMENT 2

MTR Bank
Applied Branch
Account No. Period Ending
Page
S/A 1721-33 March 28, 20X1
Date Check No. Symbol Debit Amount Credit Amount Balance

20X1
Mar. 4 40,000 - 40,000 -
7 36,000 - 76,000 -
10 2051 25,600 - 50,400 -
10 30,000 - 80,400 -
12 28,000 - 108,400 -
17 2052 56,600 - 51,800 -
20 2054 22,800 - 29,000 -
23 2057 19,400 - 9,600 -
INT 4,000 - 13,600 -
SC 1,000 - 12,600 -
125,400 - 138,000 -
Robbins Enterprise
226 Ayala Avenue, Makati City

Reconciling Items
The comparison of ledger items, cash in bank MTR Bank, cash receipts book, and cash disbursements
(March 20X1) with the MTR Bank Statement dated March 20x1, yields the following findings:
Balance per ledger - end balance
Or Balance per book or end of period balance P 14,200
Balance per bank statement - ending balance
Or end of period balance 12,600
Deposit per bank statement not yet in ledger
Interest earned per bank Credit Memo AJE 1 4,000
Withdrawals per bank statement not yet in ledger
Bank service charge per bank debit memo AJE 2 1,000
Deposits per ledger not yet in bank statement
Deposit in transit or Underdeposited Collection (DT) 18,000
(Dt) 40,000
Withdrawal per ledger not yet in bank statement
Outstanding Checks (OC) 7,400
(OC) 28,000
(OC) 10,000
(OC) 7,800
AJE 1 Cash in Bank MTR Bank 4,000
Interest Income 4,000
Interest earned for March 20X1

AJE 2 Bank service charge 1,000


Cash in Bank MTR Bank 1,000
Bank service charge for March 20X1
FUNDAMENTALS OF ACCOUNTANCY, BUSINESS, AND MANAGEMENT 2

Bank Reconciliation Statement


The Bank Reconciliation Statement as of March 31, 20X1 is as follows:

Robbins Enterprise
Bank Reconciliation Statement
MTR Bank
March 31, 20X1
Balance per ledger of book P 14,200
Add: Interest earned per bank CM 4,000
P 18,200
Less: Bank service charge per bank DM 1,000
Adjusted ledger or book balance P 17,200

Balance per bank statement P 12,600


Add: Undeposited collections (DT) P 18,000
40,000P 58,000
70,600
Less: Outstanding Checks (OC)
Check # Payee Amount
2053 Meralco P 7,400
2054 Sunbean Realty 28,200
2055 PLDT 10,000
2058 Mobiline 7,800 53,400
Adjusted bank balance P 17,200

Cash Internal Controls

An internal control system includes all the policies and procedures adopted by the management of an entity
to assist in achieving the management’s objective of ensuring that the bank’s system runs smoothly and
practicably. These are the policies.
1. The orderly and efficient conduct of its business including adherence to management policies.
2. The safeguarding of assets
3. The prevention and detection of fraud and error
4. The accuracy and completeness of the accounting records
5. The timely preparation of reliable financial information

The asset more vulnerable to fraud is cash. Therefore, its handling should be subjected to a high degree of
internal control. Cash is the most tempting and desirable to misappropriate because it is easily transported,
easily hidden, acceptable at face value, and with immediate buying power. These are ways to safeguard and
control cash.

Cash Controls and Safeguards


1. Keep cash under lock and key.
2. The primary responsibility for cash should be vested on one person.
3. Cash payments should be adequately supported and approved.
4. There should be immediate recording of cash transactions.
FUNDAMENTALS OF ACCOUNTANCY, BUSINESS, AND MANAGEMENT 2

5. Cash collections should be deposited intact and deposits supported with authenticated bank deposit
slips or passbook entries.
6. There should be legal authority to open bank accounts.
7. There should be separation of cash handling function and recording function.
8. Pay with checks whenever possible.
9. Checks should be payable to specific payee; not to cash, bearer nor blank payee.
10. There should be monthly bank reconciliation that includes examination of supporting documents.

Cash received, whether in coins, peso bills, or checks are cash on hand. When these cash received are
deposited with the bank, they become cash in bank. Disbursement checks are paid out of cash in bank. For
better control, all cash received are to be deposited in the bank, and all payments are to be paid with bank
disbursement checks. However, there are certain payments that cannot be conveniently made with checks.
Among these payments are small amounts for transportation, food allowance, emergency supplies, for which
immediate disbursements are necessary. To take care of these payments, a petty cash fund is set up. The petty
cash fund is cash in coins and small peso bills that is in the custody of the petty cash custodian. When the petty
cash custodian pays out of the fund, he requires a petty cash voucher with supporting papers. When the fund is
low, all the vouchers are summarized and a replenishment check is requested and encashed with the bank, to
bring back the fund to a level that will conveniently met the entity’s need for small payments.

TOPIC QUESTIONS AND ACTIVITIES

A. Answer the following:


1. Why is there a need to maintain a good internal control system over cash, cash receipts, and cash
payments?
2. What possible problems may arise when only one person has control over the cash payment process?
3. Identify businesses that you are familiar with. What are the source documents or the proof of their cash
receipts; of their cash payments?
4. What is a bouncing check? Why would banks charge a large penalty for bouncing checks?
5. Compare savings account, checking account, and time deposits.
6. Describe an automated teller machine (ATM). What are the transactions with ATM? What are the
advantages of ATMs?

B. The cash collections are deposited in a bank. A bank deposit slip is prepared. Cash collections may be in
coins, peso bills, and checks. Fill out the official receipt given the following details.
1. The name of the issuer – ABC Company
2. The official receipt number – OR 478
3. Date when the cash is received – August 19, 2015
4. From whom received – Peter Fabro
5. Address of payor – 241 Sucat, Paranaque City
6. Amount in words and fgures – Five Thousand Pesos
(P5,000)
BPI Check No. 01276
5,000
7. Total payment for – Sales Invoice 723 dated June 21, 2015
8. Signed by collector or cashier – Paul Santos

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