Proof of Cash

PROOF OF CASH Two-date bank reconciliation = the bank reconciliation is so-called “two-date: because it literally involves two dates. The procedures followed for a one-date reconciliation are the same for a two-date bank reconciliation. A two-date bank reconciliation becomes complicated only when certain facts or data are omitted, hence the necessity for computing them. But if all the facts are available, then reconciliation statements will simply be prepared as of the two dates prepared. Among others, the omitted information may be any one or a combination of the following: a) Book balance – beginning and ending b) Bank balance – beginning and ending c) Deposit in transit – beginning and ending d) Outstanding checks – beginning and ending If the ending balance are not given, the following formulas may help. If beginning balances are omitted, the formulas should simply be reversed or just work back. Computation of book balance Balance per book – beginning of month xx Add: Book debits during the month xx Total xx Less: Book credits during the month xx Balance per book – end of month xx Book debits= refer to cash receipts or all items debited to the cash in bank account. Book credits= refer to cash disbursements or all items credited to the cash in bank account. In a T-account form, the cash in bank may appear as follows: Cash in bank Balance – beginning xx Book credits Book debits Balance – ending xx xx xx Computation of bank balance Balance per bank – beginning of month xx Add: Bank credits during the month xx Total xx Less: Bank debits during the month xx Balance per bank – end of month xx Bank credits= refer to all items credited to the amount of the depositor which include deposits acknowledged by bank and credit memos. In the absence of any statement to the contrary, bank credits are assumed to be deposits acknowledged by bank. Bank debits= refer to all items debited to the account of the depositor which includes checks paid by the bank and debit memos. In the absence of any statement to the contrary, bank debits are assumed to be checks paid by bank. In a T-account form, the depositor’s account, Company X, will appear as follows: Company X Book debits xx Balance – ending xx Balance – beginning xx Bank credits xx Computation of deposit in transit Deposits in transit – beginning of month xx Add: Cash receipts deposited during the month xx Total deposits to be acknowledge by the bank xx Less: Deposits acknowledge by bank during month xx Deposit in transit – end of month xx Computation of outstanding checks Outstanding checks – beginning of month xx Add: Checks drawn by depositor during the month xx Total checks to be paid by bank xx Less: Checks paid by bank during the month xx Outstanding checks – end of month xx Illustration: In reconciling the cash in bank with the bank statement balance for the moths of January and February, the following data are gathered: Cash in bank ledger Balance, January 31 50,000 Book debits for February, including January CM for note collected of P15,000 200,000 Book credits for February, including NSF check of P5,000 and service charge of P1,000 for January 180,000 Bank statement for February Balance, January 31 84,000 Bank credits for February, including CM for note collected of P20,000 and January deposit in transit of P40,000 170,000 Book debits for February, including NSF check of P10,000 and January outstanding check of P65,000 130,000 The bank reconciliation for the month of January can easily be prepared because all the necessary data are available Balance per book, January 31 50,000 Note collected by bank in January 15,000 Total 65,000 NSF check for January ( 5,000) Service charge for January ( 1,000) Adjusted book balance 59,000 Balance per bank, January 31 84,000 Deposit in transit for January 40,000 Total 124,000 Outstanding check for January ( 65,000) Adjusted bank balance 59,000 The bank reconciliation for the month of February requires computation of balance per book, deposits in transit and outstanding checks. Computation of book balance: Balance per book – January 31 50,000 Add: Book debits during February 200,000 Total 250,000 Less: Book credits during February 180,000 Balance per book – February 28 70,000 Computation of bank balance: Balance per bank – January 31 84,000 Add: Bank credits during February 170,000 Total 254,000 Less: Bank debits during February 130,000 Balance per bank 124,000 Computation of deposit in transit: Deposit in transit – January 31 40,000 Add: Cash receipts during February: Book debits Less: January CM for note collected 200,000 15,000 185,000 Total 225,000 Less: Deposits acknowledged by bank in February Bank credits Less: February CM for note collected Deposits in transit – February 28 175,000 20,000 150,000 75,000 The January CM of P15,000 is deducted from the book debits of P200,000 because this item is a cash receipt not representing deposit for the month of February. In other words, procedurewise, all items debited to the cash in bank account which do not represent deposits should be deducted from the book debits total to arrive at the cash receipts deposited. In the absence of any statement to the contrary, book debits are assumed to be cash receipts deposited. The February CM of P20,000 for note collected is deducted from the bank credits because this is not a deposit. In other words, all items credited to the depositor’s account which do not represent deposits should be deducted from the bank credits to determine the deposits acknowledge by bank. Moreover, bank credits are assumed to be deposits acknowledged by bank in the absence of any statement to the contrary. Computation of outstanding checks: Outstanding checks – January 31 65,000 Add: Checks drawn by depositor during February: Book credits Less: January DMs 180,000 6,000 Total 174,000 239,000 Less: Checks paid by bank during February: Bank debits Less: February NSF Outstanding checks – February 28 130,000 10,000 120,000 119,000 The January DMs of P6,000 are deducted from the book credits, because they are cash disbursements not representing checks. In other words, all items not representing checks credited to the cash in bank account should be deducted from the book credits total to arrive at the checks drawn by the depositor. But as a rule, all book credits in the absence of any statement to the contrary are assumed to be checks issued. The February DM for NSF of P10,000 is deducted from the bank debits because this is not a bank disbursement representing a check paid. In other words, all items debited to the account of the depositor not representing checks paid should be deducted from the bank debits total to arrive at the checks paid by bank. But as a rule, all bank debits in the absence of any statement to the contrary are assumed to be checks paid by bank. Company X Bank Reconciliation February 28 Balance per book 70,000 Note collected by bank in February 20,000 Total 90,000 NSF check for February ( 10,000) Adjusted book balance 80,000 Balance per bank Deposits in transit for February Total Outstanding checks for February Adjusted bank balance 124,000 75,000 199,000 (119,000) 80,000 Proof of Cash A proof of cash is an expanded reconciliation in that it includes proof of receipts and disbursements. = This approach may be useful in discovering possible discrepancies in handling cash particularly when cash receipts have been recorded but have not been deposited. There are three forms of proof of cash namely: a) Adjusted balance method b) Book to bank method c) Bank to book method In all three forms, a four-column worksheet is necessary, although under the adjusted balance method, an 8-column worksheet may be required. For our illustration, let us summarized the data used in the two-date reconciliation. January 31 February 28 Balance per book 50,000 70,000 Balance per bank 84,000 124,000 Book debits 200,000 Book credits 180,000 Bank debits 130,000 Bank credits 170,000 Deposits in transit 40,000 75,000 Outstanding checks 65,000 119,000 NSF check 5,000 10,000 Service charge 1,000 Note collected by bank 15,000 20,000 The book debits and credits and the bank debits and credits for January are not listed anymore because they are not necessary. The proof of cash pertains to the receipts and disbursements for the current month of February. Adjusted balance method COMPANY X PROOF OF CASH For the month of February Balance per book January 31 Receipts 50,000 200,000 15,000 ( 15,000) Disbursements February 28 180,000 70,000 Note collected: January February 20,000 20,000 NSF check: January ( 5,000) ( 5,000) February 10,000 (10,000) 0 ( 1,000) 0 Service charge: January ( 1,000) Adjusted book balance 59,000 205,000 184,000 80,000 Balance per bank 84,000 170,000 130,000 124,000 40,000 ( 40,000) Deposits in transit: January February 75,000 75,000 Outstanding checks: January February Adjusted bank balance ( 65,000) 0 59,000 ( 65,000) 0 119,000 (119,000) 205,000 184,000 80,000 General comments: a) The January 31 and February 28 columns require no further explanation. b) The receipts and disbursements columns pertain to the current month of February. Actually, the proof of cash is a reconciliation of the receipts and disbursements for the current period. c) The proof of cash, following the adjusted balance method, means that the book receipts and disbursements for the current month are adjusted to equal the correct receipts and disbursements for the current month. Comments on the book items: a) Credit memos of the previous month do not affect the bank receipts for the current but increased the book receipts for the current month because the credit memos for the previous month are recorded only by the depositor during the current month. Consequently, the book receipts for the current month are overstated in relation to the correct receipts for the current month. Hence, credit memos of the previous month are deducted from the book receipts for the current month. Thus, the January note collected amounting to P15,000, is deducted from the February book receipts. b) Credit memos of the current month already increased the bank receipts for the current month but have no effect on the book receipts for the current month because the credit memos of the current month are not yet recorded by the depositor during the current month. Consequently, the book receipts for the current month are understated in relation to the correct receipts for the current month. Hence, credit memos of the current month are added to the book receipts for the current month. Thus, the February note collected, amounting to P20,000, is added to the February book receipts. c) Debit memos of the previous month do not affect the bank disbursements for the current month but increased the book disbursements for the current month because the debit memos of the previous month are recorded only by the depositor during the current month. Consequently, the book disbursements for the current month are overstated in relation to the correct disbursements for the current month. Hence, debit memos of the previous month are deducted from the book disbursements for the current month. Thus, the January NSF of P5,000 and January service charge of P1,000 are deducted from the February book disbursements. d) Debit memos of the current month already increased bank disbursements for the current month but have no effect on the book disbursements for the current month because the debit memos of the current month are not yet recorded by the depositor. Consequently, the book disbursements for the current month are understated in relation to the correct disbursements for the current month. Hence, debit memos of the current month are added to the book disbursements for the current month. Thus, the February NSF of P10,000 is added to the February book disbursements. Comments on the bank items: a) Deposits in transit of previous month do not affect book receipts for the current month but increased bank receipts for the current month because the deposits are recorded only by the bank during the current month. Consequently, bank receipts for the current month are overstated in relation to the correct receipts for the current month. Hence, deposits in transit of the previous month are deducted from the bank receipts for the current month. Thus, January deposit in transit of P40,000 is deducted from the February bank receipts. b) Deposit in transit of the current month already increased book receipts but have no effect on the bank receipts for the current month because the deposits are not yet recorded by the bank during the current month. Consequently, the bank receipts for the current month are understated in relation to the correct receipts for the current month. Hence, deposits in transit of the current month are added to the bank receipts of the current month. Thus, the February deposit in transit of P75,000 is added to the February bank receipts. c) Outstanding checks of the previous month do not affect the book disbursements but increased bank disbursements for the current month because the outstanding checks of the previous month are paid only by the bank during the current month. Consequently, the bank disbursements for the current month are overstated in relation to the correct disbursements for the current month. Hence, outstanding checks of the previous month are deducted from the bank disbursements for the current month. Thus, the January outstanding check of P65,000 is deducted from the February bank disbursements. d) Outstanding checks of the current month increased the book disbursements for the current month but have no effect on the bank disbursements for the current month because the checks are not yet paid by the bank during the current month. Consequently, the bank disbursements for the current month are understated in relation to the correct disbursements for the current month. Hence, outstanding checks of the current month are added to the bank disbursements for the current month. Thus, the February outstanding check of P119,000 is added to the February bank disbursements. Book to bank method COMPANY X PROOF OF CASH For the month of February Balance per Book January 31 Receipts Disbursements 50,000 200,000 180,000 15,000 ( 15,000) February 25 70,000 Note collected: January February 20,000 20,000 NSF Check: January ( 5,000) ( 5,000) February 10,000 ( 10,000) Service Charge: January ( 1,000) ( 1,000) Deposits in transit: January ( 40,000) February 40,000 ( 75,000) ( 75,000) Outstanding checks: January February Balance per Bank 65,000 65,000 0 0 (119,000) (119,000) 84,000 170,000 130,000 24,000 Comments: a) The book reconciling items – note collected, NSF check and service charge – are treated in the same manner following the adjusted balance method. b) The bank reconciling items – deposited in transit and outstanding check – are treated in the “reverse”. c) The book to bank proof of cash means that the book receipts and disbursements are adjusted to equal the bank receipts and disbursements. d) Deposit in transit of previous month do not affect the book receipts for the current month but increased the bank receipts for the current month. Consequently, the book receipts for the current month are understated in relation to the bank receipts for the current month. Hence, deposits in transit of the previous month are added to the book receipts for the current month. Thus, the January deposit in transit of P40,000 is added to the February book receipts. e) Deposits in transit of the current month increased the book receipts for the current month but have no effect on the bank receipts for the current month. Consequently, the book receipts for the current month are overstated in relation to the bank receipts for the current month. Hence, deposits in transit of the current month are deducted from the book receipts for the current month. Thus, the February deposit in transit of P75,000 is deducted from the February book receipts. f) Outstanding checks of the previous month do not affect the book disbursements for the current month but increased the bank disbursements for the current month. Consequently, the book disbursements for the current month are understated in relation to the bank disbursements for the current month. Hence, outstanding checks of the previous month are added to the book disbursements for the current month. g) Outstanding checks of the current month increased the book disbursements for the current month but have no effect yet on the bank disbursements for the current month Consequently, the book disbursements for the current month are overstated in relation to the bank disbursements for the current month. Hence, outstanding checks of the current month are deducted from the book disbursements for the current month. Thus, the February outstanding check of P119,000 is deducted from the February book disbursements. Bank to book method COMPANY X PROOF OF CASH For the month of February Balance per bank January 31 Receipts Disbursements February 28 84,000 170,000 130,000 124,000 40,000 ( 40,000) Deposits In transit: January February 75,000 75,000 Outstanding checks: January ( 65,000) ( 65,000) February 119,000 ( 119,000) Note collected: January ( 15,000) February 15,000 ( 20,000) ( 20,000) NSF Check: January 5,000 5,000 February ( 10,000) 10,000 Service charge: January Balance per book 1,000 0 1,000 0 50,000 200,000 180,000 70,000 Comments: a) The bank reconciling items – deposit in transit and outstanding check – are treated in the same manner following the adjusted balance method. b) The book reconciling items – note collected, NSF and service charge – are treated in the “reverse”. c) The bank to book proof of cash means that the bank receipts and disbursements for the current month are adjusted to equal the book receipts and disbursements for the current month. d) Credit memos of previous month do not affect the bank receipts for the current month but increased the book receipts for the current month. Consequently, the bank receipts for the current month are understated in relation to the book receipts for the current month. Hence, the credit memos of the previous month are added to the bank receipts for the current month. Thus, the January note collected of P15,000 is added to the February bank receipts. e) Credit memos of the current month increased the bank receipts for the current month but have no effect yet on the book receipts for the current month. Consequently, the bank receipts of the current month are overstated in relation to the book receipts of the current month. Hence, the credit memos of the current month are deducted from the bank receipts for the current month. Thus, the February note collected of P20,000 is deducted from the February bank receipts. f) Debit memos of previous month do not affect the bank disbursements for the current month but increased the book disbursements for the current month. Consequently, the bank disbursement for the current month are understated in the relation to the book disbursements for the current month. Hence, the debit memos of previous month are added to the bank disbursements for the current month. Thus, the January NSF of P5,000 and the January service charge of P1,000 are added to the February bank disbursements/ g) Debit memos of current month increased the bank disbursements for the current month but have no effect yet on the book disbursements for the current month. Consequently, the bank disbursements for the current month are overstated in relation to the book disbursements for the current month. Hence, the debit memos of current month are deducted from the bank disbursements for the current month. Thus, the February NSF of P10,000 is deducted from the February bank disbursements for the current month.