I'm Larry Walter and this is
of accounting dot-com chapter six in
this module we will look at the bank
reconciliation now bank reconciliation
is helpful to identify errors and
irregularities as well as adjustments
that are needed to the cash account to
bring it up to date the reconciliation
should be prepared by an independent
person who is not otherwise involved in
recording cash receipts and
disbursements this is an important
separation of duties control feature the
the reconciliation is useful to compare
the amount of cash reported in the
general ledger to that that's shown on
the bank statement the bank statement is
the document that's received
periodically from the bank showing the
activity to the bank account the
deposits and withdrawals from that bank
account the amount in the general ledger
usually differs from the amount that
appears as the ending balance of cash
for the bank statement let's consider
why that's the case
first there are items on company records
things that have been recorded in the
general ledger that have not yet been
captured by the bank to look closer at
those let's think about deposits in
transit a company might make a deposit
at the bank perhaps you've seen a sign
that said deposits made after 3 p.m.
will not be posted till the next day's
business well that deposit would be
debited to cash from the company's
general ledger but it might be a day or
two or maybe even laps over a weekend
before it's recorded a process by the
bank and reflected in the bank statement
a similar item but in an opposite
direction are outstanding checks these
are checks that are written by the
company delivered to a vendor but not
yet deposited by that vendor perhaps so
or maybe they're out there in the float
actions been removed from the company's
general ledger cash account but not yet
removed from the cash account on the
bank statement finally there's I Tamar
reflected on the bank statement that may
not yet be recorded by the company
these would consist of things such as
NSF checks or not sufficient funds
checks or you may know them as hot
checks we deposited a check but it
bounced so the funds were removed from
our bank account by the bank we may
learn of that when we prepare a bank
reconciliation the bank statement may
reflect Bank service charges or the bank
might have collected a note that we left
at the bank for collection those funds
may be have now been posted to our
account this may be our first learning
of it when we look at the bank statement
and the bank reconciliation
the bank might have posted interest
earnings to our account and now we're
learning about that in the
reconciliation process so the bank
reconciliation is really a dual task one
is to reconcile the balance per the bank
statement to the correct amount the
other is to reconcile the balance for
the company records to the correct
amount so here's a format for doing that
on the left-hand side is the first
reconciliation that takes us from the
balance for the bank statement fifty
thousand seven hundred and thirty nine
dollars in this case it adds back
deposits in transit and similar receipts
entered on company records but not yet
reported on the bank statement and it
deducts outstanding checks and similar
disbursements entered on company records
but not yet reported on the bank
statement to arrive at the correct
amount of cash on the other side we take
the ending balance / the company records
forty seven thousand five thirty five
assuming that's the amount of the
general ledger and we add back interest
and similar receipts that are reported
on the bank statement but not yet
entered on company records and we deduct
NSF checks and similar disbursements
reported on the bank statement but not
yet entered on the company records and
we should find the correct balance and
the correct balance should equal that is
the bottom reconciliation on the Left
should equal the bottom reconciliation
on the right now importantly journal
entries must be prepared for all items
identified in the reconciliation of the
ending balance / company records to the
correct cash balance we need to debit
cash for things that suggest an increase
in cash and credit items that suggest a
decrease in cash to move us from the
balance pro the company records to the
correct amount of cash this is an
important reason for doing a
reconciliation so here's an example this
again is the same reconciliation we
looked at a moment ago and notice that
the cash on the company records forty
seven thousand needs to be increased by
four thousand nine hundred and sixty
eight dollars to reflect the correct
amount of cash and so we'll prepare a
journal entry debiting cash reflecting
the increase in this case for four
thousand nine hundred and sixty eight
dollars in turn will record debits for
expenses for example in this
reconciliation I assume there was an
electronic funds transfer to pay a
utility bill of one hundred and nine
dollars the
company had not yet reflected on their
books hence they need to debit utilities
expense
there were NSF check and NSF check fees
at total four hundred and sixty-two
dollars we're going to try to collect
that from our customer so we'll debit
accounts receivable to reflect our
intent to try to go back and make the
customer make good on that hot cheque we
have service charges at the bank and so
we'll record that as a miscellaneous
expense also the credits here reflected
credit to note receivable for the note
collection along with related interest
on the note of four hundred and fifty
dollars another interest that was posted
by the Bank of a hundred and nineteen
dollars so here we have a balance
journal entry to reflect what caused the
four thousand nine hundred and sixty
eight dollar increase in cash and so
importantly the reconciliation not only
tells you the activity to cash and and
brings you back into synchronization
with your bank your bank's records but
it also provides a data entry point for
updating your cash account in the
general ledger