How To Do A Bank Reconciliation (EASY WAY) - YouTube

Want to learn how to do a Bank Reconciliation?

In this video I'll show you how to reconcile the

Bank Statement to the Cash Book

in 7 simple steps...

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Hey viewers, I'm James and welcome to

Accounting Stuff. The channel that teaches

you all there is to know about Accounting Basics

and Bookkeeping Software. In this video you'll learn how to

prepare a full Bank Reconciliation

like this one by yourself

from scratch. Looks a bit scary doesn't it?

But don't worry I'm going to break down the process for you

into seven easy steps that'll make this whole Bank Rec

business seem like a piece of cake.

I've had to review my fair share of bank reconciliations

in my previous life as an Auditor and today I'd like to

share with you the approach that I find easiest to follow.

And before I forget… this video is a continuation of

our series on Accounting Basics, so if you'd like to see more videos

just like this then check out the playlist up here

and don't forget to subscribe. Let's do this...

First off.. There are a couple of definitions

that we need to clarify... A Bank Statement...

A Bank Statement is a list of all of

the cash receipts and withdrawals that a business thinks it has made over

a period of time. And it's managed as you would expect

by the Bank.

A Cash Book

is an Accounting record of what a business thinks it has in

the bank along with all the cash inflows (debits) and

cash outflows (credits). It's managed

by the Business itself, usually by an Accountant

or Bookkeeper. So on the one hand the Bank

produces a Bank Statement and on the other

the Business maintains a Cash Book.

In an ideal world the closing balances of both

of these should equal each other exactly.

However in reality that's not the case...

and it's actually the reason why the Bank Reconciliation exists…

To make sure that these reports agree on what's been

going down in the bank. I'll show you how that works

in the moment, but first,

let me explain why the Bank Statement and Cash Book

might disagree with each other in the first place...

There are three ways that these differences can come about...

Reason Number 1…

Omissions.

Omissions relate to transactions that appear on the

Bank Statement but haven't yet been recorded by the

Business in the Cash Book. These include things like

Missing Receipts, Interest Received,

Bank Fees

and Bounced Cheques.

A business might not know that these transactions have

hit their bank account until they receive their

Bank Statement at the end of the month.

Reason Number Two…

Timing Differences.

These are transactions that are recorded in the

Bank Statement and the Cash Book in

different periods. The two most common

Timing Differences are Deposits in Transit

and Outstanding Cheques... A Deposit in Transit

or as some people like to call it...

an Unrecorded Deposit. Relates to cash that a

business receives and records in it's cash book

during one period but that doesn't appear in it's

bank statement until the following period.

Typically these are cheques or Electronic Fund Transfers

that the business

receives from customers towards the end of the month

that the bank doesn't process immediately.

An Outstanding Cheque is a cheque that a business sends

to a supplier in one month, that might just sit on their desk

for a while and not actually get cashed in until the following month.

So again we have that timing difference between

when the transaction is recorded in the

Bank Statement and the Cash Book.

The third way that we get differences between the

Bank Statement and the Cash Book

is because of Errors.

Someone has messed up.

Now these errors can be made by the Bank or the Accountant

preparing the Cash Book. But more often than not,

it's these guys...

Shhh…

So we first look for errors

in the Cash Book, not the Bank Statement.

Although that is also possible...

Make sense?

Good, so we've identified Omissions,

Timing Differences and Errors which can all

cause differences between the Bank Statement

and the Cash Book. The purpose of the

Bank Reconciliation is to identify every single one

of these errors so we know what the heck is going on.

It then tees us up nicely to post a journal into the General Ledger

and bring that Cash Book up to date

by accounting for Omissions and correcting for Errors.

Those Timing Differences in the Bank Statement...

well there's not much we accountants can do about those

except identify them and let them sort them sort

themselves out in a future periods.

That's all well and good but why is this useful?

Why is it necessary? Well I touched on it

a moment ago, but the Bank Reconciliation

is essential if you want to ensure that your books are

up to date and give an accurate picture of the business.

It also allows you to calculate the 'True Cash Balance'

of the business. That's how much money you've

got after all of the outstanding cheques and

deposits have cleared the bank. So when do these

Bank Reconciliations actually happen?

Most businesses prepare their Bank Recs on a monthly basis

after they receive their bank statements at the end of the month

Large companies with many

transactions might reconcile on a weekly,

or even a daily basis. Whereas smaller companies

with very few transactions might only reconcile

their cash account once every six months.

Right, I know what you're probably thinking at this point...

James you promised me 7 Steps at the start of this video,

where's my 7 Steps?

Hold tight, they're coming.

We've dealt with what,

why and when, and now I'm going to show

you how to prepare a Bank Reconciliation.

About time!

To help you visualise these steps, we are going to walk through them

With an example company...

Chudley Cannons Inc.

If your a Harry Potter

nerd like I am… then your probably aware

that that's Rons favourite Quidditch Team.

Trivia

Or, if you've been following Accounting Stuff for

a while now... you might also remember

the Cannons from my videos on the Cash Flow Statement.

Which are up here. For this example,

we are going to reconcile the Chudley Cannon's

Cash Account for the month ended 30th June.

And now...

The moment we've all been waiting for…

Bring on those steps...

Step 1 Get copies of the

Bank Statement and Cash Book

for the period that you want to reconcile...

So let's grab those then...

On the left side of the screen

we've got a copy of the Chudley Cannon's

Bank Statement from Gringotts.

This lists out all of the amounts deducted and added to the

Cannon's Cash Account in June along with descriptions

and the Opening and Closing Balances.

And beneath me we have a Transaction Listing for the

Unadjusted Cash Account. This comes straight from

the General Ledger and details all of the transactions affecting

the Cash Book.

Along with dates, descriptions,

Debits and Credits,

Opening and Closing Balances. You'll notice that both of

these reports are for the period ended 30th June.

They both have a very similar layout and we do not

want to confuse things. So let's jot down

Bank Statement and Cash Book

to make things clearer.

Perfect…

It's time for Step 2. Set up the

Bank Reconciliation Template. So open a spreadsheet

or grab some paper and let's give this Bank Reconciliation

a header. Beneath that,

we want to divide the page in two,

with the Bank Statement on the left and the

Cash Book on the right. The reconciliation begins with

the Unadjusted Closing Balances from each report.

These are our starting points and the aim is to calculate

the Adjusted Closing Balances for each side

to reconcile these numbers. To help us with that...

It's useful to note down the unreconciled amount

at the bottom of the page. The aim of the game here

is to get this to zero. So what's going on

in the middle here? We've got a lot of blank space.

This is where all of our adjustment go.

Remember the Omissions, Timing Differences

and Errors that we talked about earlier?

We adjust the Bank Statement

for Timing Differences and Errors that are caused by the Bank.

And we adjust the Cash Book for Omissions

and Errors made by the Accountant or Bookkeeper.

Timing Differences are made up of Deposits in Transit,

which we need to add to the closing Bank Statement balance.

And Outstanding Cheques that we need to deduct.

Bank Errors

they can go either way...It depends on the situation.

On the Cash Book side... Some common Omissions

are the Missing Receipts and Interest that we

need to add. Along with Bank Fees

and Bounced Cheques that we need to deduct.

The Errors in the Cash Book also depend

on the circumstances. There we go...

the full Bank Reconciliation template.

We'll enter the numbers in a moment.

But before that we've got Step 3. Tick all of the matching

transactions in the Bank Statement

and Cash Book. These all agree with each other

already so we're going to tick them off so that we don't

include them in the Bank Reconciliation.

A quick glance over the Statements

shows us that... We can see a deposit

of $3,592 in the Bank Statement and

Cash Book. Cheque 104 for $235

also appears in both reports. As does the EFT payment

for $545 dollars. And last but not least

we have the EFT receipt for $15,982.

Cheque number 106 also appears in both statements but

the amounts are different

Hmm...

We'll revisit that one.

Moving swiftly on to

Step Number 4. Here we need to calculate

the adjusted Bank Statement balance.

Let's go... Our template is telling us

that we need to add Deposits in Transit.

Deposits in Transit relate to Receipts that a business receives

in one period, and that the Bank deposits

in another. So we are looking for

a debit that increases our cash in the Cash Book

and that doesn't appear in the Bank Statement.

On the 30th June, we can see a transaction

for $2,220 that seems to fit the bill because

there is no sign of it over here.

So we need to give that one a reference,

let's say 'a' and add it to the Bank Statement side

of our Bank Rec. It goes here because that

transaction already exists in our Cash Book,

making up part of the unadjusted balance.

Next, we want to find any Outstanding Cheques.

These are the cheques that the Cannon's have

sent out to a customer this month,

that haven't been cashed in yet.

They will appear as a credit or reduction to

cash in the Cash Book because the payment has

been recognised in the General Ledger but there

will be no sign of them in the Bank Statement because

they haven't been cashed in yet.

Hmmm...

Cheque 105 jumps out at me.

The Cannon's have recorded the payment of $910

on the 12th June and it doesn't appear

in the Bank Statement. Let's identify this as

transaction 'b' and deduct it from the Bank Statement

side of our Bank Reconciliation.

Remember this transaction already appears in the Cash Book

and we expect this customer to cash the cheque

the following month which is when it will appear

the Bank Statement. So for now we

adjust the Bank Statement. The final adjustment to

include on the Bank Statement side

of the Bank Rec would be any Bank Errors

that exist. We don't appear to have any

here and more often than not, that's the case.

If you happen to come across any in your

Bank Reconciliations then it's best to identify the

adjustment and contact the bank so that they can

fix the error ASAP.

Look I don't know, it's your problem.

Sort it out…

Now that we've worked out the adjusted closing

Bank balance we should be feeling pretty confident

that we've worked out the 'True Cash Balance'

of the business...

$53,498.

That's the Cash balance after all Outstanding Cheques

and Deposits have cleared the Bank.

But we won't know for sure until we have finished Step 5....

Which is where we calculate the adjusted Cash Book Balance.

That means we're on the look out for Omissions

or stuff that's in here… that we haven't recorded in here...

We've already written down some of the common Omissions in our

Bank Reconciliation template so let's work through these.

Missing receipts are amounts that have been added to

our Bank Account that we haven't recorded in our Cash Book.

In this Bank Statement we can see that the Cannon's

received an Electronic Funds Transfer

for $1,000 on the 29th June and I can't see that anywhere

in the Cash Book so we must have missed this one out.

Let's reference that as transaction 'c' and add it

to our Cash Book balance in our Bank Reconciliation.

Right, what's next?

Interest Received.

We are looking for amounts added to our Bank account

that have ‘interest’ in the description.

On the 30th June we can see Interest Received of $107.

Has it been recorded in the Cash Book already?

Nah…

So we reference it as

transaction 'd' and add it to our Cash Book balance

in our Bank Rec.

Bank fees.

These are costs that the Bank charges us for

keeping our account open.

I can see that $50

was deducted from our account on the 17th June

and we haven't included it in our Cash Book.

We're going to label this one as transaction 'e' and this time we are going to

deduct it from our Cash Book balance

in our Bank Rec because we need to

recognise the payment. The last Omission that we're

looking for is Bounced Cheques. These are cheques that

customers have mailed to us, and that we've deposited in the bank.

Only to find that these have been rejected because the

customer didn't have sufficient funds to

honour the cheque. This kind of cheque

is normally labelled as an NSF cheque.

NSF stands for 'Not Sufficient Funds'.

We can see one in the Bank Statement here...

NSF Cheque 2748 and the Bank has deducted

$6,000 from our account. We need to reference this

as transaction 'f' and deduct it from our

Cash Book Balance in our Bank Reconciliation.

I smell the finish line.

The Unreconciled Amount is

now just $45 and all that's left do is to

find errors in the Cash Book. This is going to be easy

to spot because we've followed all of the steps and have ticked

and referenced all of the other transactions already.

And as if that wasn't enough, we've got a note beneath the

Cash Account Transaction Listing that explains

what the error is. Cheque number 106 is for $7,050.

And it's been incorrectly entered into the General Ledger.

It looks as though the Bookkeeper or Accountant

that entered this cheque made a typo or something

because it's been correctly recorded in our Bank Statement.

No worries, we will reference that as

transaction (g) and deduct the

difference of $45 from the Cash Book Balance

in our Bank Rec.

Tad Daaaa!

Our Unreconciled Amount is now zero!

And that also means that we have completed Step 6.

Check that the adjusted

totals match each other.

In order to complete the Bank Reconciliation

it's critical that the adjusted Bank Balance

matches the adjusted Cash Book Balance

exactly. That proves that we have

recorded all of the Cash Transactions in the

General Ledger and what we've worked out here is our

'True Cash Balance' of $53,498. If you are still getting a difference

in your Bank Reconciliation then unfortunately there is an

error somewhere in your workings so you'll need to go back

over all those steps and make sure that you've

done them correctly. But today not my friend, not today...

We've crushed this Bank Rec so we can move on to

the last part of the process. Step 7.

Prepare the necessary Journal Entries.

This is very important because if we don't post these journals

to correct the Cash balance in the current month,

then all of these Cash Book adjustments will just appear again

next time we do the Bank Rec.

So let's do our future-selves a solid.

And prepare the journals.

We'll be thanking ourselves later.

Just to be clear..

the adjustments that we have identified in the

Bank Statement side are all Timing Differences.

We can leave these be and they will correct

themselves in the future when the Bank records

our Deposit and when that Customer

cashes that cheque. We are only posting

Journal Entries for the adjustments that affect

our Cash Book. So let's do it...

If your feeling kind of unsure about Journal Entries

then that's ok...

Pause this video and check out this one up here

that I made explaining them.

We need to lay out our

Journal Entry Template with the Date,

Account, Debit and Credit columns.

For the Date, we're going to pick the 30th June

for all these entries because it's the last day of the month

and it makes month-end correcting journals

like this one easy for us spot when reviewing the general ledger.

Going into this, we also know that one side

of each transaction has to hit

the Cash account because these are all Cash Book adjustments.

Let's take it from the top...

Transaction 'c' was for

Missing Receipts of $1,000. We are adding this to our

Cash account so we need to debit cash by $1,000

and the other side of the journal is a credit to

decrease Accounts Receivables because one of our

customers has paid us. Next we have transaction 'd'.

Interest received of $107. Again this is a debit to Cash

because the Cannon's have earned that Interest

and the other side is a credit to Interest Income

which is a form of Revenue. In Transaction 'e' we were

charged Bank Fees so we need to credit Cash by $50

to decrease them and debit Bank Fees to

recognise the expense. Then we have Transaction 'f'

which was for a $6,000 Bounced Cheque.

We credit Cash for this too to reduce our Cash balance

and we debit Accounts Receivable to increase it because the

customer still owes us that $6,000.

And on to the final journal. This one is for Transaction 'g'

which is an error that we need to correct.

We had mistakenly recorded a cheque payment in

our Cash Book at $7,005 which was actually

meant for $7,050. So we need to credit Cash

to recognise the higher payment value and

debit Accounts Payable to bring those down.

Oh yeah..

That's the full Steps 1-7 complete.

All that's left to do is to post this journal and the

General Ledger will be updated for the June period to reflect

the 'True Cash Balance' of our business.

Our work here is done.

That's how to prepare

a Bank Reconciliation from start to finish.

I hope you find those 7 Steps useful

and start putting them into practice in

your real life Bank Recs.

Thanks for watching this video

if you found it useful, give it a like,

share it, comment,

subscribe if you haven’t already! There are new videos

every week here on Accounting Stuff.

Best of luck with those Bank Reconciliations.

If you keep to these Seven Steps you'll smash them every time no problem.

See ya next time!

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