Let's look at this example. The bank statement balance is 42,625,
and the unadjusted cash account balance which we get from the unadjusted trial balance is 37,725.
Because of timing differences these balances will be different. Looking at the two, can you tell which is correct?
No, actually you can't and in fact, it's a trick question because it's likely our actual cash balance
is something different than either of those numbers.
The focus of this video will be how to reconcile the book balance.
The book balance is our cash ledger balance which comes from our unadjusted trial balance.
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 items that can reconcile the book side, some of the more common items include
bank collections, interest revenue, bank fees and service charges,
EFT payments, NSF checks and book errors.
So, to start let's enter the book balance into our book side reconciliation form.
Let's assume the bank statement shows a collection of $18,250 that hasn't been recorded in the books.
It is common that customers could send money
to the bank directly on our behalf.
Let's also assume it is a collection of a notes receivable.
So we would add 18,252 the book balance because it was added to the bank balance.
Let's also assume that the bank statement shows interest earned of $150.
We would add $150 to the book balance because it was added to the bank balance.
Continuing let's assume that the bank statement shows a service charge and fees of $200.
We would deduct $200 from the book balance because it was deducted by the bank.
Let's assume the bank statement shows an EFT payment of 12,500 that hasn't been recorded by the books.
It's common that a company may have automatic payments set up.
Let's assume this is for rent expense for a warehouse.
We would deduct 12,500 from the book balance because it was deducted by the bank.
Let's assume the bank statement shows NSF checks totaling $4000.
These are bad checks our customers wrote us and we originally deposited. Now we're finding out that the checks aren't good.
We would deduct 4000 from the book balance because it was deducted by the bank.
The final item that reconciles the book balance are book errors.
Book errors can either add or subtract from the book balance depending on the nature of the error.
Let's assume that check 202 with incorrectly recorded by the accountant.
The amount deducted from the cash account was $1500.
The bank statement shows it cleared for $1000.
This slide shows an example of that error.
The accountant should have deducted 1000 from our account, but instead deducted 1500.
To determine the amount of the error, we take the difference between the two amounts, which is $500.
Then we have to think. If the accountant deducted too much
we need to add back the difference.
So on the book side we would add $500 as a book error and make a note that it is regarding a payment of an account.
To recap how we reconcile the book side, we take our cash balance,
plus bank collections,
plus interest revenue,
minus service charges, minus EFT payments, minus an NSF checks,
and plus or minus any book errors, to arrive at the adjusted cash balance.
When we compare the book side adjusted cash balance to the bank side adjusted cash balance they should be the same.
To learn how we arrived at the adjusted cash balance for the bank side, I would encourage you to watch that video example.