keeping cash in a bank account helps
control cash because banks have
established practices for safeguarding
customers money the documents used to
control a bank account include a
signature card which authorizes who has
access to the account deposit tickets
which summarize the amount of deposits
checks which provide a paper trail of
cash spending electronic funds transfers
sometimes known as EFT s this is a
system of transferring money directly
from one bank account to another without
any paper money changing hands the
chances for theft are reduced when the
company when the cash never comes to the
company so while having cash in the bank
is more protected than in other places
we still have to verify that the amounts
are correct and in doing so we need to
remember that there are two records of a
business's cash the first is the cash
account in the company's general ledger
commonly referred to as the book the
second is the bank statement which shows
the cash receipts and payments that have
cleared the bank the book and the bank
statement usually show different cash
balances differences arise because of
time lags in recording transactions for
example when a company writes a check
they deduct it from cash with a credit
their bank does not subtract the check
from their account until it clears the
bank which could be a few days later if
the end of the period falls in between
those times this will cause the cash
balance to be different in this example
check numbers 207 and 208 were written
and deducted from the book balance but
haven't cleared the bank by the end of
the period
these become reconciling items due to
time lag differences the process that we
go through to determine the differences
between the cash account and the bank
statement balance is known as a bank
reconciliation reconciliation is the
process of explaining the differences in
the balance
a bank reconciliation is done at the end
of the accounting period and as part of
step five in the accounting cycle
adjusting entries the result of the bank
reconciliation will be to adjust the
cash account and use the adjusted
balance for cash on the balance sheet
and the statement of cash flows
since there are two balances for cash
we will reconcile both the book balance
and the bank statement balance in the
process to determine if something
reconciles the bank side I often think
of it as in think of it in these terms
it is stuff the book knows about but the
bank does not the three most common
items are deposits in transit
outstanding checks and Bank errors
deposits in transit are receipts that
the company has recorded think debit to
cash and sent to the bank to be
deposited but the bank hasn't recorded
them yet this could happen if the end of
the month falls on a weekend they are
added they are added to the bank
statement balance in the reconciliation
process another example example of
something the book knows about but the
bank does not are checks written but
that have not yet cleared the bank these
are known as outstanding checks they are
deducted from the bank statement balance
in the reconciliation process the final
item that reconciles the bank statement
balance are Bank errors again the book
knows about a bank error and the bank
does not if the bank knew about the air
it would have fixed it and the error
wouldn't exist bank errors can either
add or subtract from the bank statement
balance depending on the nature of their
of the error this might require some
critical thinking to figure out so keep
that in mind the result of these
additions and deductions from the bank
statement balance is an adjusted cash
balance this number will be compared to
the results from reconciling the book
side to determine if something
reconciles the book side I often think
of it in these terms
it is stuff the bank knows about but the
book does not there are many more items
that can reconcile the book side some of
the more common items are bank
collections interest revenue bank
service charges and fees EFT payments
NSF checks and book errors many
companies have customer payments sent
directly to the bank instead of the
company this improves internal controls
over cash and speeds the collection
process if these collections were not
recorded at the time of receipt they
need to be recorded at the end of the
period some bank accounts are an
interest often companies don't know how
much interest they've earned until they
receive a bank statement both of these
items add to the book balance for the
cash account during the reconciliation
process banks Bank services are not free
usually two businesses any fees charge
for services or cheque printing etc need
to be deducted from the cash balance EFT
payments are electronic payments
directly from one bank to another and
often are automated if a company hasn't
recorded these yet these need to be
deducted they need to deduct these EFT
payments from cash during the
reconciliation process NSF checks are
checks that accompanies customers have
written them but the checks are no good
initially these customer deposits
increase the cash balance now we find
out at the end of the month that the
checks bounced so we need to deduct the
NSF checks from the cash balance during
the reconciliation process the final
item that reconciles the book balance
our book heirs again the bank knows
about the book heirs and the book does
not book errors can either add or
subtract from the cash balance depending
on the nature of the air like Bank
errors this might require some critical
thinking to figure out so keep that in
mind when you're
working on Booker's the results of these
additions and deductions from the book
balance is an adjusted cash balance this
number is compared to the results from
reconciling the bank side they should be
the same amount the final step in the
bank reconciliation process is to make
adjusting entries for the items that
reconcile the book side these need to
debit and credit the cash account so our
ledger balance matches the adjusted cash
balance from the reconciliation and that
concludes this introduction to bank
reconciliations I would encourage you to
watch the example videos for reconciling
the book side and the bank side as well
as adjusting entries to further your
mastery of this topic