Proof of Cash

(Based on Financial Accounting Volume 1, 2015 Edition, Valix-Peralta)

NOTE: Proof of cash revolves mostly around Two-Date Bank Reconciliation in order to gain PROOF that the CASH recorded truly
exists.

Definition of terms:

 Bank Reconciliation – Matching balances of the Entity’s accounting records for cash, that
with the Bank Records.
 Two-Date Bank Reconciliation – It is the same as bank reconciliation, but with two dates.
The beginning and the ending period.
 Deposit in Transit – Cash (currency, coins, checks, electronic transfers) that has rightfully
been reported in the balance sheet as cash, but has not yet been updated at the banks’
books
o If the DIT is from a previous month, it has already been added to the beginning
balance of the bank because the DIT has been confirmed and recorded by the
bank at present; therefore is deducted from the deposits or receipts of the bank.
o If the DIT is in the current month, although received by the entity, it is not yet
recorded by the bank. It will then be added to the deposits column and to the
bank books total updated balance.
 Outstanding Checks – These are checks already recorded by the depositor as cash
disbursements, but not yet reflected in the bank statement.
o If the Outstanding Check is from the previous month, deduct from the beginning
balance, deduct from the withdrawals.
o If the Outstanding Check is from the present month, deduct from ending
balance, then add to withdrawals.
 Bank Service Charges – These are charges from the bank in processing the client
transactions.
 Bank Credit Memos – These are items on a company’s bank account statement that
increases a company’s checking account balances like refunds from previous bank
charges, a note collected by the bank, interest earned for having money on deposit
added by the bank to the company’s account, etc.
 NSF “No Sufficient Funds” Checks – These are checks that have been rejected by the
bank due to insufficient funding of the client bank balances.
Pro-Forma Computations in Summary: (In T-Account Form)

1. Adjusted Balance Method

 Book Balance (Per Month/Period)

_ Cash in Bank_______________
Balance per Book – Beginning P xx Balance – Beginning xx | Debit Memos xx
Add: Credit Memos xx Credit Memos xx | Balance – Ending xx
Total P xx
Less: Debut Memos xx
Balance per Book – Ending P xx

 Bank Balance (Per Month/Period)

Balance per Bank – Beginning P xx
_ X Company_______________
Add: Deposit in Transit xx
Outstanding Checks xx |Balance -Beginning xx
Total P xx Balance -Ending xx |Deposit in Transit xx
Less: Outstanding Checks xx
Balance per Bank – Ending P xx

 Deposits in Transit  Outstanding Checks

Deposit in Transit – Beginning P xx Outstanding Checks – Beginning P xx
Add: Cash Recipts Deposited xx Add: Checks Drawn (By Depositor) xx
Total Deposits (To be acknowledged by the bank) P xx Total Checks to be paid by the ban P xx
Less: Deposits (Already acknowledged by the bank) xx Less: Checks Paid by the Bank xx
Deposit in Transit – Ending Balance P xx Outstanding Checks – Ending P xx

Book Debits Bank Credits Book Credits Bank Debits

 Book to Bank Method  Bank to Book Method

Book Balance P xx Bank Balance P xx
Add: Credit Memos Add: Debit Memos
Outstanding Checks xx Deposit in Transit xx
Total P xx Total P xx
Less: Debit Memos Less: Credit Memos
Deposit in Transit xx Outstanding Checks xx
Bank Balance P xx Book Balance P xx
 BANK
Beginning
Deposits Drawings Ending
Participles Period
(Dr) (Cr) Period

Unadjusted Balances XX XX XX XX
Deposits in Transit:
Beginning XX (XX)
Ending XX XX
Outstanding Checks:
Beginning (XX) (XX)
Ending XX (XX)

Adjusted Balances XX XX XX XX

BOOK
Beginning
Receipts Disbursements Ending
Participles Period
(Dr) (Cr) Period

Unadjusted Balances XX XX XX XX

Bank Service Charges:

Beginning (XX)
(XX)
Ending XX (XX)

Bank Credit Memo:

Beginning (XX)
(XX)
Ending XX XX

Bank Service Charges:

Beginning (XX)
(XX)
Ending XX (XX)

Adjusted Balances XX XX XX XX
Notes/Reminders for the chapter:

Proof of Cash – an expanded reconciliation in that it includes proof of disbursement

and receipts

Three Methods:
 Adjusted Balance Method
 Book to Bank Method
 Bank to Book Method

When solving, be reminded that;

1. The ending balances of “Deposits – Withdrawals” and “Receipts – Disbursement”

will be representing the balances for the whole month.
2. “Deposits – Withdrawals” and “Receipts – Disbursement” will have equal balances
3. The user/client will be adjusting by how the bank operates in order to check the
balances because the user cannot touch the bank records for adjustments.
4. Do not assume a negative balance.
5. Always compute, taking it one step at a time.
6. In book/bank recon, fill in first the beginning and ending balances; followed by the
books’ debit and credit balances (Unadjusted).
7. Cash accounts deposited in the bank are assets of a client, but a liability for the
bank.
Problem Sample:
Problems are taken from the book “CPA Examination: Practical Financial Accounting, Volume one”
by Conrardo T. Valix and Christian Aris M. Valix

Problem 1 (AICPA Adapted) Page 191 from the book, Problem 17-1

Lazer Company had the following bank reconciliation on June 30:

Balance per bank statement, June 30 3,000,000

Deposit in transit 400,000
Total 3,400,000
Outstanding checks ( 900,000)
Balance per book, June 30 2,500,000

The bank statement for the month of July showed the following:
* Deposits, including P200,000 note collected for Lazer 9,000,000
* Disbursements, including P140,000 NSF Customer checks 7,000,000
and P10,000 service charge

All reconciling items on June 30 cleared through the bank in July. The outstanding checks
totaled P600,000 and the deposit in transit amounted to P1,000,000 on July 31.

Questions:
1. What is the adjusted cash in bank on July 31?
2. What is the cash balance per book on July 31?
3. What is the amount of cash receipts per book in July?
4. What is the amount of cash disbursement per book in July?

Problem 2 (AICPA Adapted) Page 197 from the book, Problem 17-4

Oro Company had the following bank reconciliation on March 31:

Balance per bank statement, March 31 4,650,000

Add: Deposits in transit 1,030,000
Total 5,680,000
Less: Outstanding checks 1,260,000
Balance per book, March 31 4,420,000

Data per bank statement for the month of April:

* Deposits 5,840,000
* Disbursements 4,970,000

All reconciliation items on March 31 cleared through the bank in April.

Outstanding checks on April 30 totaled P700,000 and there were no deposits in transit on April.

Question: What is the cash balance per book on April 30?

Solutions:
Problem 1:

1. What is the adjusted cash in bank on July 31?

Balance per bank, June 30 3,000,000

July bank deposits 9,000,000
July bank disbursements (7,000,000)
Balance per bank, July 31 5,000,000
July deposit in transit 1,000,000
July outstanding checks ( 600,000) The balance per
Adjusted bank balance 5,400,000 book on July 31
is “SQUEEZED”
2. What is the cash balance per book on July 31? by working back
from the
Balance per book, July 31 (SQUEEZED/WORKED BACK) 5,350,000
adjusted
Note collected by the bank in July 200,000
balance, as
NSF customer check in July ( 140,000)
computed from
Service charge in July ( 10,000)
the previous
Adjusted book balance 5,400,000
solution.
3. What is the amount of cash receipts per book on July?

Deposits per bank statement for July 9,000,000

Note collected by bank in July ( 200,000)
Deposit in transit – June 30 ( 400,000)
Deposit in transit – July 31 1,000,000
Cash receipts per book for July 9,400,000

4. What is the amount of cash disbursement per book in July?

Disbursement per bank statement for July 7,000,000
NSF check in July ( 140,000)
Service charge in July ( 10,000)
Outstanding checks – June 30 ( 900,000)
Outstanding checks – July 31 600,000
Cash disbursement per book for July 6,550,000

Additional: Proof of the cash balance per book – July 31

Balance per book – June 30 (Given) 2,500,000

Book receipts for July (Answer to number 3) 9,400,000
Book disbursements for July (Answer to number 4) (6,550,000)
Balance per book – July 31 5,350,000
Problem 2:

Balance per bank – March 31 4,650,000

Bank deposits – April 5,840,000
Bank disbursements – April (4,970,000)
Balance per bank – April 30 5,520,000
Outstanding checks – April 30 ( 700,000)
Adjusted cash in bank – April 30 4,820,000