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...
[Music]
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!
[Music]