If you maintain a checking account at a bank, I assume you are familiar with bank reconciliation. You always get a bank statement with attachments, don’t you? All checks issued and paid by the bank are attached with a canceled stamp. You will also find attached debit and credit notes that have affected your account balance. What do you call these elements? Have you noticed that, as always, your cash balance on your record does not match or balance with the one shown on the statement?
At the end of each month, the comparison of the depositor’s cash records with the account statement received from the bank will yield the following reconciliation elements:
1. Item reconciliation book:
a) Credit Notes
b) Debit notes
c) Errors
2. Bank reconciliation items:
a) Deposits in transit
b) Outstanding checks
c) Errors
What are credit notes? Credit notes have the effect of increasing the bank balance. These are items credited by the bank to the depositor’s account but that the depositor has not yet recorded as cash receipts.
A typical example of a credit note is a note cashed by the bank in favor of the depositor and credited to the depositor’s account. Other good examples are overdue time deposits transferred by the bank to the depositor’s checking account and bank loan proceeds credited to the depositor’s account.
What about debit notes? Debit notes have the effect of decreasing the bank balance. They refer to items paid by the bank that are charged or debited by the bank to the depositor’s account but not yet recorded by the depositor as cash disbursements. Typical examples are as follows:
in. NSF or Non-Sufficient Funds Checks: Checks deposited but returned by the bank for insufficient funds.
B. Technically defective checks: checks deposited but returned as lacking a signature or countersignature, erased without a countersignature, mutilated checks, or the amount in figures conflicts with the amount in words.
against Charges for bank services – charges for interest, collection, checkbook and penalty.
D. Loan Reduction- Decrease in the balance of the depositor’s current account deducted by the bank in payment of the loan owed to the bank that has already expired.
The above are the reconciling items in the account balance of the depositor. These are items that require adjusting entries in the depositor’s book to bring the cash in the bank balance to its correct amount for balance sheet purposes.
To proceed with the bank reconciliation of the items, the deposits in transit are collections already registered by the depositor as cash receipts but not yet reflected in the bank statement.
Examples of deposits in transit are collections that have already been sent to the bank for deposit, but arrived too late to appear on the bank statement; and undeposited collections or cash in hand waiting to be delivered to the bank for deposit.
Outstanding checks are checks already posted by the depositor as cash disbursements but not yet reflected on the bank statement. They include checks drawn and already delivered to the beneficiaries but not yet presented for payment to the bank.
The errors will have to be analyzed for their adequate treatment. These are settlement items from the party that committed them.
