If you are maintaining a checking account with a bank, I guess you are familiar with bank reconciliation. You always receive a bank statement with attachments, didn’t you? All checks you issued and paid by the bank are attached with stamped canceled. You will also find attached thereto, debit and credit memos that have affected your account balance. What do you call these items? Did you notice that as always, your cash balance per your record does not agree or balance with that shown in the statement?
At the end of every month, comparing the cash records of the depositor with the bank statement received from the bank will bring forth the following reconciling items:
1. Book reconciling items:
a) Credit memos
b) Debit memos
2. Bank reconciling items:
a) Deposits in transit
b) Outstanding checks
What are credit memos? Credit memos have the effect of increasing the bank balance. They are items credited by the bank to the account of the depositor but not yet recorded by the depositor as cash receipts.
A typical example of a credit memo is a note collected by the bank in favor of the depositor and credited to the account of the depositor. Other good examples are matured time deposits transferred by the bank to the current account of the depositor and proceeds of bank loan credited to the depositor’s account.
What about debit memos? Debit memos have the effect of decreasing the bank balance. They refer to items paid by bank which are charged or debited by the bank to the account of the depositor but not yet recorded by the depositor as cash disbursements. Typical examples are, as follows:
a. NSF or no sufficient fund checks – checks deposited but returned by the bank for insufficiency of funds.
b. Technically defective checks – checks deposited but returned for having no signature or countersignature, erasures not countersigned, mutilated checks, or the amount in figures conflicts with the amount in words.
c. Bank services charges – charges for interest, collection, checkbook and penalty.
d. Reduction for loan- decrease in current account balance of the depositor deducted by the bank in payment for loan owed to the bank which has already matured.
The preceding are the reconciling items in the book balance of the depositor. These are items that require adjusting entries on the book of the depositor to bring the cash in bank balance to its correct amount for balance sheet purposes.
To proceed with the bank reconciling items, deposit in transit are collections already recorded by the depositor as cash receipts but not yet reflected on the bank statement.
Examples of deposit in transit are collections already forwarded to the bank for deposit but too late to appear in the bank statement; and undeposited collections or those cash on hand awaiting delivery to the bank for deposit.
Outstanding checks are checks already recorded by the depositor as cash disbursements but not yet reflected on the bank statement. They include checks drawn and already released to payees but not yet presented for payment to the bank.
Errors will have to be analyzed for proper treatment. These are reconciling items of the party who committed them.