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Topic Presentation - Cash and Cash Equivalents; Bank

Reconciliation
Intermediate Acctng 2/Financial Accounting And Reporting 2)
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CASH AND CASH EQUIVALENTS

“Cash”, Definition
In layman’s term, “cash” is simply “money”, which is the standard medium of exchange in business transactions. This
refers to the currency and coins which are in circulation and legal tender.

In accounting, it is a broad term, which includes money and any other negotiable instrument that is payable in money
and acceptable by the bank for deposit and immediate credit. This means that checks, as long as they are acceptable by
the bank for deposit or encashment, are considered cash.

Standard Related to Cash and Cash Equivalents

There is no specific standard that deals with cash and cash equivalents. The only guidance is found in PAS1 –
Presentation of Financial Statements, which states that “an entity shall classify an asset as current when the asset is cash
or a cash equivalent unless it is restricted to settle a liability for more than twelve months at the end of the reporting
period”.

This means that cash items must be unrestricted in use for them to be presented as part of cash and cash equivalents.

Classifications of Cash
• Cash on hand – those cash items that are currently held by the entity, including those that are awaiting deposit.
o Examples: Bills and coins, checks, bank drafts, money orders
• Cash in bank – includes savings deposits, and demand deposit or checking account which are unrestricted as to
withdrawal.
• Cash fund set aside for current purposes
o Examples: Petty cash fund, payroll fund, dividend fund, tax fund, change fund

“Cash Equivalents”, Definition

PAS7 – Statement of Cash Flows defines cash equivalents as “short-term and highly liquid investments that are readily
convertible into cash and so near their maturity that they present insignificant risk of change in value because of changes
in interest rates”.

In other words, any short-term, highly liquid investments acquired near their maturity are considered cash equivalents.
The standard also mentioned as an example that acquisition of these investments within three months or less before
their maturity date would qualify such investments as cash equivalents.

Examples:
• Three-month BSP treasury bill
• Five-year BSP treasury bill purchased within three months before maturity date
• 90-day time deposit

Equity securities normally do not qualify as cash equivalents since they do not have any maturity date; however,
redeemable preference shares may qualify as cash equivalents since its redemption date can be considered as its
“maturity date”. This means that if redeemable preference shares are acquired within three months before its
redemption date, it is considered as cash equivalents.

Illustrative Problem 1
ARROWS Corporation has the following items on December 31, 2020:
• Bills and coins – P15,000
• Customer’s checks – P68,000
• Money order – P1,600
• Postage stamps – P800
• BDO Savings Account no. 0014 – P575,000
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• BPI Checking Account no. 11948 – P1,245,000

• MB Checking Account no. 151222 – P5,000,000 (restricted for future plant expansion)
• Petty cash fund – P10,000
• Payroll fund – P85,000
• Treasury bills (acquisition date: November 2, 2020; maturity date: January 31, 2021) – P40,000
• Treasury bills (acquisition date: July 1, 2020; maturity date: March 31, 2021) – P80,000
• 90-day time deposit – P200,000
• Investment in equity securities – P40,000

How much should be presented as part of cash and cash equivalents as of December 31, 2020?

Solution:
Bills and coins P15,000
Customer’s checks 68,000
Money order 1,600
BDO Savings Account no. 0014 575,000
BPI Checking Account no. 11948 1,245,000
Petty cash fund 10,000
Payroll fund 85,000
Treasury bills (acquisition date: November 2, 2020; maturity date: January 31, 2021) 40,000
90-day time deposit 200,000
Cash and cash equivalents P2,239,600

Notes:
• A postage stamp is a small piece of paper issued by a post office, postal administration, or other authorized
vendors to customers who pay postage, who then affix the stamp to the face or address-side of any item of mail
—an envelope or other postal cover —that they wish to send. Since this is not legal tender, it is not included as
cash.
• The MB Checking Account no. 151222 is excluded since it is restricted for a long-term purpose. Note that cash
items must be unrestricted in use.
• The treasury bills acquired last July 1, 2020 are excluded since they were not acquired within three months
before maturity date, which is March 31, 2021.
• Investment in equity securities are also excluded since equity securities don’t have maturity date.

Measurement
Cash is measured at fair value. As for cash items such as bills and coins, they are measured at their face value.

Cash in foreign currency is measured at the current exchange rate.

Cash held in a bank or financial institution, which is in bankruptcy or financial difficulty, should be measured at their face
value or estimated realizable value, whichever is lower.

Presentation
The caption “Cash and Cash Equivalents” is shown as the first line item under current assets.

Details comprising the cash and cash equivalents must be disclosed in the notes to the financial statements.

Other Considerations Related to Specific Items

Bank Overdraft
Bank overdraft is a credit balance in the cash in bank account, which results from the issuance of checks in excess of the
deposits. For instance, if a company issues a check for P100,000, when its current balance in its checking account is
P80,000, it would result to an overdraft of P20,000.
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Generally, overdrafts are not permitted in the Philippines.

Bank overdrafts are classified as current liability and should not be offset against other bank accounts with debit
balances, except when:
• the entity has another account in the same bank; or
• the amount is insignificant

For instance, an entity maintains the following bank accounts:

• Cash in Bank – BDO Account No. 44455; current balance is P500,000
• Cash in Bank – BPI Account No. 100001; current balance is P200,000
• Cash in Bank – BPI Account No. 100002; current balance is an overdraft of P15,000
• Cash in Bank – PNB Account No. 5992344; current balance is an overdraft of P22,000

The presentation would be as follows:

Current Assets:
Cash in Bank
BDO Account No. 44455 P500,000
BPI Account No. 100001 200,000
BPI Account No. 100002 (15,000) P685,000

Current Liabilities:
Bank Overdraft (PNB Account No. 5992344) P22,000

Note that the overdraft from BPI Account No. 100002 is offset against BPI Account No. 100001, since these accounts are
from the same bank. The overdraft from PNB Account No. 5992344, however, is presented as current liability.

Compensating Balance
A compensating balance generally takes the form of minimum checking or demand deposit account balance that must be
maintained in connection with a borrowing arrangement with a bank.

For instance, an entity borrows P1,000,000 from a bank and agrees to maintain a 10% compensating balance. The entity
can effectively can only use P900,000 out of its P1,000,000 loan since the P100,000, which represents the 10%
compensating balance, must be maintained in the account.

In this case, the compensating balance becomes a restriction, thus, cannot be presented as part of cash and cash
equivalents.

However, we have to take into account the classifications of compensating balance, as follows:
• Legally restricted compensating balance – this is a compensating balance from a formal compensating balance
agreement. The amount cannot be withdrawn in compliance with such agreement, thus, is effectively restricted.
The amount is presented separately as “cash held as compensating balance” under:
o Current assets, if the related loan is classified as current liability
o Non-current assets, if the related loan is classified as non-current liability
• Not legally restricted compensating balance – this arises from an informal compensating balance agreement. The
amount is not effectively restricted, thus, is still presented as part of cash.

Undelivered/Unreleased Checks
Undelivered/unreleased checks, as the term implies, are checks that have already been drawn and recorded by the
entity, but have not yet been given to the payee before the end of reporting period.

In effect, there is no payment yet since the check is still pending delivery; thus, the amount should still be part of the
cash balance of the entity.
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Accordingly, an adjusting entry is required to restore the cash balance and set up the liability, as follows:
Cash xxx
Accounts Payable/Appropriate Account xxx

Postdated Checks
A postdated check is a check that is drawn, recorded, and already given to the payee, but bears a date subsequent to the
end of reporting period.

Take note that the payee can only encash or deposit the check starting from the date indicated in the check.

For instance, ABC Company issues a check to XYZ Company on December 25, 2020 for P10,000. The check bears the date
January 5, 2021. In this case, the cash is still technically owned by ABC Company since XYZ Company can only
encash/deposit the check starting January 5, 2021.

If the issuer already recorded the issuance of the postdated check, an adjusting entry is required to restore the cash
balance and set up the liability, as follows:
Cash xxx
Accounts Payable/Appropriate Account xxx

Stale Check
Checks that have been held by the payee for a relatively long time without encashing or depositing such are considered
stale checks.

Stale checks cannot be enchased or deposited anymore, thus, the ownership of the cash amount reverts back to the
issuer.

The question is, how long should the check be held before it becomes stale?

The answer is, it is a matter of entity policy; which means that if the entity’s policy is that checks become stale if held for
three months, then checks issued become stale if not encashed or deposited within three months.

In practice, if there is no policy stated, checks become stale within six months.

For instance, ABC Company issued a P10,000 check to XYZ Company on June 25, 2020. The check bears the same date.
The entity prepared the following entry upon issuance:
Accounts Payable P10,000
Cash P10,000

On December 31, 2020, ABC Company discovers that XYZ Company has not yet encashed or deposited the check issued.
Since more than six months have already passed, the check is now considered as stale. An adjusting entry is then
required to revert the cash to ABC Company’s books, as follows:
Cash P10,000
Accounts Payable P10,000

In cases wherein the amount is immaterial, of if the payee decides to waive its right to collect the amount, the adjusting
entry to be prepared is as follows:
Cash P10,000
Miscellaneous Income P10,000
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Illustrative Problem 2
BOW Company has the following items on December 31, 2020:
Cash on hand P20,000
Cash in bank 8,000,000
Petty cash fund 10,000
Tax fund 275,000
Bond sinking fund 2,000,000
Treasury bills, acquired on Nov. 1, 2020; matures on Feb. 28, 2021 40,000
Treasury bills, acquired on Dec. 1, 2020; matures on Jan. 31, 2021 50,000
120-day time deposit 250,000

Additional information:
• Some information related to cash on hand are as follows:
o A customer check dated December 28, 2020, amounting to P5,000, is included in the balance.
o A customer check dated January 2, 2021, amounting to P3,000, is included in the balance.
o A check to be issued to a supplier, dated December 30, 2020, amounting to P8,000, is excluded from the
balance. The check has not yet been delivered to the supplier as of December 31, 2020.
o A check issued to a supplier on December 27, 2020, dated January 6, 2021, amounting to P4,000. The
amount is excluded from the balance.
• The cash in bank balance has the following breakdown:
o BDO account no. 414, amounting to P1,000,000. This amount is related to a long-term loan obtained
from the bank, with a legally restricted compensating balance of 10% (i.e. P100,000).
o BPI account no. 11123, amounting to P1,500,000. This amount is related to a long-term loan obtained
from the bank, with a compensating balance of 10% (i.e. P150,000). The compensating balance arises
from an informal agreement.
o PNB account no. 258, which is a US Dollar denominated account, with a balance of $20,000. The account
was opened last January 2, 2020, when the exchange rate was P50:$1. The account is currently carried at
P1,000,000. The exchange rate on December 31, 2020 is P49:$1.
o MB account no. 6654, amounting to P4,000,000. This amount is restricted for future plant expansion.
o Rural Bank of Wakanda, amounting to P500,000. The said bank has been declared bankrupt last
December 15, 2020. No amount is expected to be recovered from the deposit.

Requirements:
1. What is the correct cash on hand balance?
2. What is the correct cash in bank balance?
3. What is the correct cash equivalents balance?
4. What is the correct balance of cash and cash equivalents as of December 31, 2020?

Solution
Requirement 1
Unadjusted cash on hand balance, December 31, P20,00
2020 0
Customer check dated Jan. 2, 2021 (postdated) (3,000)
Check to be delivered to a supplier (undelivered) 8,000
Check issued to a supplier dated Jan. 6, 2021
(postdated) 4,000
P29,0
Correct cash on hand 00

Requirement 2
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P900,00
BDO account no. 414 (P1,000,000 - P100,000) 0
1,500,00
BPI account no. 11123 0
PNB account no. 258 ($20,000 * P49/$1) 980,000
P3,380,
Correct cash in bank 000

Requirement 3
Treasury bills, acquired Dec. 1, 2020; matures on Jan. P50,00
31, 2021 0
P50,0
Correct cash equivalents 00

Requirement 4
Correct cash on hand P29,000
3,380,00
Correct cash in bank 0
Petty cash fund 10,000
Tax fund 275,000
Correct cash equivalents 50,000
P3,744,
Cash and cash equivalents, Dec. 31, 2020 000

Notes:
• The customer check dated January 2, 2021, which is a postdated check, should not be included in the balance
since the amount is still technically owned by the customer. BOW can only encash or deposit the amount starting
January 2, 2021.
• The check to be issued to a supplier, dated December 30, 2020, amounting to P8,000, is an undelivered check. It
should be presented as part of cash of BOW.
• The check issued to a supplier on December 27, 2020, dated January 6, 2021, is a postdated check. The supplier
can only encash or deposit the amount starting January 6, 2021, thus, the amount is still technically owned by
BOW.
• The compensating balance under BDO Account No. 414 is legally restricted, thus, must be excluded from cash.
The compensating balance must be presented elsewhere under non-current assets since the related liability is
long-term.
• Foreign-currency denominated accounts must be translated using the current exchange rate.
• MB account no. 6654 must be excluded from cash since it is restricted in use. It must be presented under non-
current assets.
• The account in Rural Bank of Wakanda is presented the lower amount between the amount of deposit and the
recoverable amount. Since no amount is expected to be recovered, it must then be presented at zero, or
excluded from cash.
• Bond sinking fund is a fund specifically set up to pay for a bonds payable, which is generally a long-term liability.
Bond sinking fund is excluded from cash since it is essentially restricted. The presentation depends on the related
bonds payable, such that, if the bonds payable is presented under non-current liability, the bond sinking fund is
presented under non-current assets. Needless to say, if the bonds payable is reclassified under current liabilities,
the bond sinking fund is also reclassified under current assets.

Petty Cash Fund

Petty cash fund is money set aside to pay small expenses which cannot be paid conveniently by means of check.
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This is essential because of the imprest system, which is a system of control of cash which requires that all cash receipts
should be deposited intact and all cash disbursements should be made by means of check. While internal control ideally
requires that all payments should be made by means of check, this is sometimes impossible; thus, the need for a petty
cash fund.

This system normally requires a person to be assigned as a petty cash custodian. The custodian has the responsibility
over the petty cash fund, and keeps all the documents as proof of disbursements from the fund. The petty cash fund is
then replenished if the amount becomes too low.

There are two methods of handling the petty cash, namely:

a. Imprest fund system
b. Fluctuating fund system

Imprest Fund System

The imprest fund system is the one usually followed in practice in handling petty cash transactions.

The accounting procedures are as follows:

a. A check is drawn to establish the fund:
Petty Cash Fund xxx
Cash in Bank xxx

b. Payment of expenses out of the fund:

No journal entry required.

The petty cash custodian generally requires a signed petty cash voucher for such payments and simply prepares a
memorandum entry in the petty cash journal.

Note that payment of expenses does not decrease the petty cash balance in the books since no journal entry is made.

c. Replenishment of petty cash fund:

Expenses xxx
Cash in Bank xxx

Upon replenishment of the fund, that is the only time that the payments made for the expenses are recorded. The credit
is the check drawn from the bank to replenish the petty cash fund.

Note that the journal entry is similar to when a check is prepared to pay for expenses, which actually complies with the
internal control that requires that all payments should be made by means of check.

d. Increase in the fund:

Petty Cash Fund xxx
Cash in Bank xxx

e. Decrease in the fund:

Cash in Bank xxx
Petty Cash Fund xxx

f. Year-end adjustment, in case the petty cash fund is not replenished at the end of the reporting period:
Expenses xxx
Petty Cash Fund xxx
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When payments are made for expenses, no journal entry is prepared; thus, the petty cash fund balance will not change.
However, at the end of the reporting period, the true balance of the petty cash fund must be presented, therefore, a
credit to petty cash fund must be prepared. Also, the expenses must be recorded in the year they were incurred, thus, a
debit to such expenses should be made.

Note that at the start of the next period, a reversing entry must be made. This allows the company to follow the normal
procedure in the replenishment of the fund.

Fluctuating Fund System

Based from the term itself, the balance of the petty cash fund fluctuates whenever a transaction related to petty cash
fund is made.

The accounting procedures are as follows:

a. A check is drawn to establish the fund:
Petty Cash Fund xxx
Cash in Bank xxx

b. Payment of expenses out of the fund:

Expenses xxx
Petty Cash Fund xxx

c. Replenishment of petty cash fund:

Petty Cash Fund xxx
Cash in Bank xxx

d. Increase in the fund:

Petty Cash Fund xxx
Cash in Bank xxx

e. Decrease in the fund:

Cash in Bank xxx
Petty Cash Fund xxx

Illustrative Problem 3
CHEERS Corporation set up a petty cash fund on November 2, 2020, for P10,000.

Various expenses were paid in November. The fund was replenished on November 30, 2020, when the following
breakdown of the fund was as follows:
Bills and coins P3,300
Transportation expense 2,500
Supplies expense 3,000
Miscellaneous expenses 1,200
P10,0
Total 00

On December 1, 2020, the fund was increased to P20,000.

Various expenses were paid in December. As of December 31, 2020, the breakdown of the fund was as follows:
Bills and coins P2,000
Office repairs expense 12,000
Supplies expense 4,000
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Miscellaneous expenses 2,000

P20,0
Total 00

The fund was replenished on January 5, 2021.

Requirement:
Prepare the journal entries for 2020 related to the petty cash fund using:
a. The imprest fund system
b. The fluctuating fund system

Solution:

a. Imprest Fund System

Transaction/Date Accounts Debit Credit
Nov. 2, 2020 Petty Cash Fund P10,000
Cash in Bank P10,000

Expenses were incurred No Journal Entry

Replenishment of fund Transportation Expense 2,500

(Nov. 30, 2020) Supplies Expense 3,000
Miscellaneous Expense 1,200
Cash in Bank 6,700

Dec. 1, 2020 Petty Cash Fund 10,000

Cash in Bank 10,000

Dec. 31, 2020 Office Repairs Expense 12,000

Supplies Expense 4,000
Miscellaneous Expense 2,000
Petty Cash Fund 18,000

b. Fluctuating Fund System

Transaction/Date Accounts Debit Credit
Nov. 2, 2020 Petty Cash Fund P10,000
Cash in Bank P10,000

Expenses were incurred Transportation Expense 2,500

Supplies Expense 3,000
Miscellaneous Expense 1,200
Petty Cash Fund 6,700

Replenishment of fund Petty Cash Fund 6,700

(Nov. 30, 2020) Cash in Bank 6,700

Dec. 1, 2020 Petty Cash Fund 10,000

Cash in Bank 10,000

Dec. 31, 2020 Office Repairs Expense 12,000

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Supplies Expense 4,000

Miscellaneous Expense 2,000
Petty Cash Fund 18,000

BANK RECONCILIATION

Types of Bank Deposits

• Demand deposit – this is the current account or checking account where deposits are covered by deposit slips
where funds are withdrawable on demand by writing checks against the bank.
• Savings deposit/Savings account – the depositor is given a passbook and/or an ATM account. For savings account
without an ATM account, the passbook is required when making deposits and withdrawals.
• Time deposit – an interest-bearing deposit evidenced by a formal agreement embodied in an instrument called
certificate of deposit.

The Need for Bank Reconciliation

Bank reconciliation is only needed under demand deposits or checking accounts.

To understand what bank reconciliation is, it is important to have a background about how the entity and the bank
account for the same set of transactions.

Basically, the deposits made by an entity to a bank is considered as an asset by the depositor (i.e. cash in bank), and a
liability by the bank. The bank considers such as a liability since it is essentially a loan by the bank from the depositor.

For instance, Company A created a checking account with Bank of PI, and deposited P100,000.

The journal entry in Company A’s books is as follows:

Cash in Bank P100,000
Cash on Hand P100,000

The journal entry in Bank of PI’s books is as follows:

Cash P100,000
Demand Deposit – Company A P100,000

The credit to the demand deposit account recognizes the liability of the bank (Bank of PI) to the depositor (Company A).

Continuing the example, let’s say Company A draws and issues a check for P8,000 as payment for a payable. The journal
entry in Company A’s books is as follows:
Accounts Payable P8,000
Cash in Bank P8,000

When the payee presents the check to the bank for payment, the bank then prepares the following journal entry:
Demand Deposit – Company A P8,000
Cash P8,000

To summarize, whenever there is a debit (an increase) in the company’s cash in bank account, there should also be a
corresponding credit (increase) in the bank’s liability account.
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Needless to say, whenever there is a credit (a decrease) in the company’s cash in bank account, there should also be a
corresponding debit (decrease) in the bank’s liability account.

In other words, the balance of the cash in bank account of a company must always be equal to the demand deposit
account of the bank. Relating it to the example, Company A’s cash in bank balance is P92,000 (which is P100,000 minus
P8,000); while Bank of PI’s liability is also P92,000.

However, very frequently, there are items on the depositor’s book which do not appear on the bank records as of the
same date, or the other way around. In this case, the book balance (the depositor’s records) and the bank balance (the
bank records) must be reconciled.

Bank Reconciliation
A bank reconciliation is a statement which brings into agreement the cash balance per book and the cash balance per
bank. This is usually prepared monthly because the bank provides the depositor with the bank statement at the end of
every month.

A bank statement is a monthly report of the bank to the depositor showing:

a. The cash balance per bank at the beginning
b. The deposits made by the depositor and acknowledged by the bank
c. Other deposits made by other parties and acknowledged by the bank
d. The checks drawn by the depositor and paid by the bank
e. Charges made by the bank
f. The daily cash balance per bank during the month

When the bank statement is received, attached thereto are the depositor’s cancelled checks and any debit or credit
memoranda that have affected the depositor’s account.

The cancelled checks are the checks issued by the depositor and paid by the bank during the month. They are called
cancelled checks because they are literally cancelled by stamping or punching to show that they have already been paid.

Reconciling Items
At the end of every month, comparison between the cash records of the depositor and the bank statement received
from the bank will yield the following reconciling items:

Book Reconciling Items

1. Credit Memos
2. Debit Memos
3. Errors

Bank Reconciling Items

1. Deposits in Transit
2. Outstanding Checks
3. Errors

Credit Memos
Credit memos are essentially notifications to the depositor that its bank account has been credited (increased). The
increase normally does not represent those that are caused by the depositor, such as deposits.

Typical examples:
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.
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Credit memos become a book reconciling item since these essentially result to an understatement in the cash balance
per books. Since the bank increased the depositor’s account without the depositor increasing its own cash balance, an
adjustment must be made by the depositor in its books.

Debit Memos
Debit memos are the exact opposite of credit memos. They notify the depositor that its account has been debited
(decreased).

Typical examples of debit memos are:

a. No sufficient fund (NSF) checks – these are checks that are deposited but returned by the bank because of
insufficiency of fund. The other name for NSF check 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, erasures not countersigned, mutilated checks, conflict between amount in words
and amount in figures, etc.
c. Bank service charges – these include bank charges for interest, collection, checkbook, and penalties.
d. Reduction of loan – this pertains to amount deducted from the current account of the depositor in payment for
loan which the depositor owes to the bank and which has already matured.

For the same reason as credit memos, debit memos become a book reconciling item since the bank recorded a
transaction that the depositor did not yet take up in its books.

Deposits in Transit
Deposits in transit are collections already recorded by the depositor as cash receipts, but not yet reflected on the bank
statement.

These include:
a. Collections already forwarded to the bank for deposit but has not yet been received by the bank, or 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.

Deposits in transit are a bank reconciling item since these represent transactions recorded by the depositor but have not
yet been recorded by the bank.

Outstanding Checks
Outstanding checks are checks already issued and recorded by the depositor, but have not yet been presented by the
payee to the bank (thus, are still outstanding).

Errors
Errors are a reconciling item to the party who made such error. For instance, if the entity recorded a P100,000 deposit as
P10,000, an adjustment of P90,000 must be made to correct the amount.

There is no definite rule for errors since they have to be analyzed separately for proper treatment.

Forms of Bank Reconciliation

The following formats may be used in reconciling the book balance and the bank balance:
a. Adjusted balance method – under this method, the book balance and the bank balance are brought to a correct
cash balance that must appear on the balance sheet.
b. Book-to-bank method – under this method, the book balance is reconciled with the bank balance.
c. Bank-to-book method – this is the exact opposite of the book-to-bank method, wherein, under this method, the
bank balance is reconciled with the book balance.
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In practice, the Adjusted Balance Method is the preferred method.

Proforma Reconciliation – Adjusted Balance Method

Book balance, unadjusted xxx
Credit memos xxx
Debit memos (xxx)
xxx(xx
Errors x)
Book balance, adjusted xxx

Bank balance, unadjusted xxx

Deposits in transit xxx
Outstanding checks (xxx)
xxx(xx
Errors x)
Bank balance, adjusted xxx

The “book balance, adjusted” and the “bank balance, adjusted” must be equal.

Again, the adjustment for the errors depend on the effect of the errors made by the depositor and/or the bank.

Proforma Reconciliation – Book-to-Bank Method

Book balance, unadjusted xxx
Add: Credit memos xxx
Outstanding checks xxx
Errors, if any xxx xxx
Total xxx
Less: Debit memos xxx
Deposits in transit xxx
Errors, if any xxx xxx
Bank balance, unadjusted xxx

Proforma Reconciliation – Bank-to-Book Method

Bank balance, unadjusted xxx
Add: Deposits in transit xxx
Debit memos xxx
Errors, if any xxx xxx
Total xxx
Less: Outstanding checks xxx
Credit memos xxx
Errors, if any xxx xxx
Book balance, unadjusted xxx

Illustrative Problem 4
DANGER Corporation provided the following information:

Bank Statement
DANGER Corporation
Dat Check Withdra Depos Balan
e No. wal its ce
Dec 100,00 100,0
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.2 0 00
90,00
18 104 10,000 0
85,00
20 101 5,000 0
60,00
22 106 25,000 0
110,0
27 50,000 00
120,0
29 10,000 00
80,00
29 103 40,000 0
110,0
29 CM 30,000 00
DM - Service 108,0
31 charge 2,000 00

Cash in Bank Ledger

FIRST BANK
Dec. 100,00 Dec. Check No.
1 Deposit 0 4 101 5,000
Check No. 15,00
21 Deposit 50,000 6 102 0
Check No. 40,00
27 Deposit 10,000 8 103 0
Check No. 10,00
31 Deposit 80,000 8 104 0
Check No. 30,00
10 105 0
Check No. 25,00
14 106 0
Check No. 50,00
28 107 0

The credit made by the bank on December 29 represents the proceeds of a note received from a customer which was
given to the bank for collection by the entity on December 26.

Requirements:
1. How much is the deposit in transit?
2. How much is the outstanding check?
3. Prepare a bank reconciliation using the adjusted balance method.
4. Prepare a bank reconciliation using the book-to-bank method.
5. Prepare a bank reconciliation using the bank-to-book method.
6. Prepare the adjusting entries of DANGER Corporation.

Solution:
Requirement 1
Deposits made by the entity
Dec. 1 deposit 100,000
Dec. 21 deposit 50,000
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Dec. 27 deposit 10,000

Dec. 31 deposit 80,000 240,000
Less: Deposits received and recorded by the bank
Received on Dec. 2 100,000
Received on Dec. 27 50,000
Received on Dec. 29 10,000 160,000
Deposit in transit 80,000
Another way to determine the deposit in transit is simply to compare the bank statement and the cash ledger. Since only
the P80,000 deposit made by the entity on December 31 did not appear in the bank statement, it is the only deposit in
transit.

Requirement 2
Total amount of checks issued and recorded by the
entity
Check no. 101 5,000
Check no. 102 15,000
Check no. 103 40,000
Check no. 104 10,000
Check no. 105 30,000
Check no. 106 25,000
Check no. 107 50,000 175,000
Less: Total amount of checks paid and recorded by the
bank
Check no. 101 5,000
Check no. 103 40,000
Check no. 104 10,000
Check no. 106 25,000 80,000
Outstanding checks 95,000
Another way to determine the total amount of outstanding checks is to determine the checks issued by the entity that
did not appear in the bank statement. Consequently, check numbers 102, 105, and 107, were not yet paid; thus, they
comprise the total outstanding checks for the month.
Check no. 102 15,000
Check no. 105 30,000
Check no. 107 50,000
Outstanding checks 95,000

Requirement 3
Book balance, unadjusted* 65,000
Credit memos 30,000
Debit memos (2,000)
Book balance, adjusted 93,000

Bank balance, unadjusted 108,000

Deposits in transit 80,000
Outstanding checks (95,000)
Bank balance, adjusted 93,000

*The “book balance, unadjusted” is simply determined using the cash balance ledger, as follows:
FIRST BANK
Dec. 100,00 Dec.
1 Deposit 0 4 Check No. 101 5,000
 lOMoAR cPSD| 8508438

15,00
21 Deposit 50,000 6 Check No. 102 0
40,00
27 Deposit 10,000 8 Check No. 103 0
10,00
31 Deposit 80,000 8 Check No. 104 0
30,00
10 Check No. 105 0
25,00
14 Check No. 106 0
50,00
28 Check No. 107 0
Ending balance 65,000

Requirement 4
Book balance, unadjusted 65,000
Add: Credit memos 30,000
Outstanding checks 95,000 125,000
Total 190,000
Less: Debit memos 2,000
Deposits in transit 80,000 82,000
108,00
Bank balance, unadjusted 0

Requirement 5
Bank balance, unadjusted 108,000
Add: Deposits in transit 80,000
Debit memos 2,000 82,000
Total 190,000
Less: Outstanding checks 95,000
Credit memos 30,000 125,000
Book balance, unadjusted 65,000

Requirement 6
Entry to record the proceeds of note:
Cash in Bank 30,000
Notes Receivable 30,000

Entry to record the service charge:

Service Charge 2,000
Cash in Bank 2,000