00:00:00
Want to learn how to do a
Bank Reconciliation?
00:00:02
In this video I'll show you
how to reconcile the
00:00:05
Bank Statement
to the Cash Book
00:00:06
in 7 simple steps...
00:00:08
[Music]
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Hey viewers,
I'm James and welcome to
00:00:14
Accounting Stuff.
The channel that teaches
00:00:16
you all there is to know about
Accounting Basics
00:00:19
and Bookkeeping Software.
In this video you'll learn how to
00:00:22
prepare a full
Bank Reconciliation
00:00:24
like this one
by yourself
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from scratch.
Looks a bit scary doesn't it?
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But don't worry I'm going to
break down the process for you
00:00:32
into seven easy steps that'll
make this whole Bank Rec
00:00:35
business seem like
a piece of cake.
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I've had to review my fair
share of bank reconciliations
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in my previous life as an
Auditor and today I'd like to
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share with you the approach
that I find easiest to follow.
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And before I forget…
this video is a continuation of
00:00:48
our series on Accounting Basics,
so if you'd like to see more videos
00:00:52
just like this then check out the
playlist up here
00:00:54
and don't forget to subscribe.
Let's do this...
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First off..
There are a couple of definitions
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that we need to clarify...
A Bank Statement...
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A Bank Statement is a list of all of
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the cash receipts and withdrawals
that a business thinks it has made over
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a period of time.
And it's managed as you would expect
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by the Bank.
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A Cash Book
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is an Accounting record of what
a business thinks it has in
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the bank along with all the
cash inflows (debits) and
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cash outflows (credits).
It's managed
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by the Business itself,
usually by an Accountant
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or Bookkeeper.
So on the one hand the Bank
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produces a Bank Statement
and on the other
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the Business maintains
a Cash Book.
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In an ideal world
the closing balances of both
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of these should equal
each other exactly.
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However in reality
that's not the case...
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and it's actually the reason
why the Bank Reconciliation exists…
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To make sure that these
reports agree on what's been
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going down in the bank.
I'll show you how that works
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in the moment,
but first,
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let me explain why the
Bank Statement and Cash Book
00:01:54
might disagree with each other
in the first place...
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There are three ways that these
differences can come about...
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Reason Number 1…
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Omissions.
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Omissions relate to transactions
that appear on the
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Bank Statement but haven't
yet been recorded by the
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Business in the Cash Book.
These include things like
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Missing Receipts,
Interest Received,
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Bank Fees
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and Bounced Cheques.
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A business might not know that
these transactions have
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hit their bank account
until they receive their
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Bank Statement at
the end of the month.
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Reason Number Two…
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Timing Differences.
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These are transactions that
are recorded in the
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Bank Statement
and the Cash Book in
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different periods.
The two most common
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Timing Differences are
Deposits in Transit
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and Outstanding Cheques...
A Deposit in Transit
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or as some people
like to call it...
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an Unrecorded Deposit.
Relates to cash that a
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business receives and
records in it's cash book
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during one period but that
doesn't appear in it's
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bank statement until
the following period.
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Typically these are cheques
or Electronic Fund Transfers
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that the business
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receives from customers
towards the end of the month
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that the bank doesn't
process immediately.
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An Outstanding Cheque is
a cheque that a business sends
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to a supplier in one month,
that might just sit on their desk
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for a while and not actually get
cashed in until the following month.
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So again we have that
timing difference between
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when the transaction is
recorded in the
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Bank Statement
and the Cash Book.
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The third way that we get
differences between the
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Bank Statement
and the Cash Book
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is because of Errors.
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Someone has messed up.
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Now these errors can be made
by the Bank or the Accountant
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preparing the Cash Book.
But more often than not,
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it's these guys...
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Shhh…
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So we first look for errors
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in the Cash Book,
not the Bank Statement.
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Although that is also possible...
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Make sense?
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Good, so we've identified
Omissions,
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Timing Differences
and Errors which can all
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cause differences between
the Bank Statement
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and the Cash Book.
The purpose of the
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Bank Reconciliation is to
identify every single one
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of these errors so we
know what the heck is going on.
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It then tees us up nicely to post a
journal into the General Ledger
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and bring that Cash Book
up to date
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by accounting for Omissions
and correcting for Errors.
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Those Timing Differences
in the Bank Statement...
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well there's not much we
accountants can do about those
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except identify them and let
them sort them sort
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themselves out
in a future periods.
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That's all well and good
but why is this useful?
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Why is it necessary?
Well I touched on it
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a moment ago,
but the Bank Reconciliation
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is essential if you want to
ensure that your books are
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up to date and give
an accurate picture of the business.
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It also allows you to calculate
the 'True Cash Balance'
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of the business.
That's how much money you've
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got after all of the
outstanding cheques and
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deposits have cleared the bank.
So when do these
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Bank Reconciliations
actually happen?
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Most businesses prepare their
Bank Recs on a monthly basis
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after they receive their
bank statements at the end of the month
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Large companies with many
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transactions might reconcile
on a weekly,
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or even a daily basis.
Whereas smaller companies
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with very few transactions
might only reconcile
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their cash account once
every six months.
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Right, I know what
you're probably thinking at this point...
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James you promised me
7 Steps at the start of this video,
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where's my 7 Steps?
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Hold tight, they're coming.
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We've dealt with what,
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why and when,
and now I'm going to show
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you how to prepare
a Bank Reconciliation.
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About time!
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To help you visualise these steps,
we are going to walk through them
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With an
example company...
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Chudley Cannons Inc.
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If your a Harry Potter
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nerd like I am…
then your probably aware
00:05:09
that that's Rons
favourite Quidditch Team.
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Trivia
00:05:12
Or, if you've been following
Accounting Stuff for
00:05:13
a while now...
you might also remember
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the Cannons from my videos
on the Cash Flow Statement.
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Which are up here.
For this example,
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we are going to reconcile
the Chudley Cannon's
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Cash Account for the
month ended 30th June.
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And now...
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The moment we've
all been waiting for…
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Bring on those steps...
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Step 1
Get copies of the
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Bank Statement
and Cash Book
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for the period that you want
to reconcile...
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So let's grab those then...
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On the left side of the screen
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we've got a copy of the
Chudley Cannon's
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Bank Statement
from Gringotts.
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This lists out all of the amounts
deducted and added to the
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Cannon's Cash Account
in June along with descriptions
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and the Opening
and Closing Balances.
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And beneath me we have a
Transaction Listing for the
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Unadjusted Cash Account.
This comes straight from
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the General Ledger and details
all of the transactions affecting
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the Cash Book.
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Along with dates,
descriptions,
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Debits and Credits,
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Opening and Closing Balances.
You'll notice that both of
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these reports are for the
period ended 30th June.
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They both have a very
similar layout and we do not
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want to confuse things.
So let's jot down
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Bank Statement
and Cash Book
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to make things clearer.
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Perfect…
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It's time for Step 2.
Set up the
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Bank Reconciliation Template.
So open a spreadsheet
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or grab some paper
and let's give this Bank Reconciliation
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a header.
Beneath that,
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we want to divide the page
in two,
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with the Bank Statement
on the left and the
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Cash Book on the right.
The reconciliation begins with
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the Unadjusted Closing Balances
from each report.
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These are our starting points
and the aim is to calculate
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the Adjusted Closing Balances
for each side
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to reconcile these numbers.
To help us with that...
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It's useful to note down
the unreconciled amount
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at the bottom of the page.
The aim of the game here
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is to get this to zero.
So what's going on
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in the middle here?
We've got a lot of blank space.
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This is where all
of our adjustment go.
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Remember the Omissions,
Timing Differences
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and Errors that we
talked about earlier?
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We adjust the
Bank Statement
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for Timing Differences
and Errors that are caused by the Bank.
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And we adjust the
Cash Book for Omissions
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and Errors made by the
Accountant or Bookkeeper.
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Timing Differences are made up
of Deposits in Transit,
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which we need to add to the
closing Bank Statement balance.
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And Outstanding Cheques
that we need to deduct.
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Bank Errors
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they can go either way...It depends
on the situation.
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On the Cash Book side...
Some common Omissions
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are the Missing Receipts
and Interest that we
00:07:32
need to add.
Along with Bank Fees
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and Bounced Cheques
that we need to deduct.
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The Errors in the
Cash Book also depend
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on the circumstances.
There we go...
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the full
Bank Reconciliation template.
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We'll enter the numbers
in a moment.
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But before that we've got Step 3.
Tick all of the matching
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transactions in
the Bank Statement
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and Cash Book.
These all agree with each other
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already so we're going to tick
them off so that we don't
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include them in the
Bank Reconciliation.
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A quick glance over
the Statements
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shows us that...
We can see a deposit
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of $3,592 in the
Bank Statement and
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Cash Book.
Cheque 104 for $235
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also appears in both reports.
As does the EFT payment
00:08:12
for $545 dollars.
And last but not least
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we have the EFT receipt
for $15,982.
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Cheque number 106
also appears in both statements but
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the amounts are different
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Hmm...
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We'll revisit that one.
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Moving swiftly on to
00:08:28
Step Number 4.
Here we need to calculate
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the adjusted Bank Statement
balance.
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Let's go...
Our template is telling us
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that we need to
add Deposits in Transit.
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Deposits in Transit relate to
Receipts that a business receives
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in one period,
and that the Bank deposits
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in another.
So we are looking for
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a debit that increases
our cash in the Cash Book
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and that doesn't appear
in the Bank Statement.
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On the 30th June,
we can see a transaction
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for $2,220 that seems
to fit the bill because
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there is no sign of it
over here.
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So we need to give that
one a reference,
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let's say 'a' and add it to
the Bank Statement side
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of our Bank Rec.
It goes here because that
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transaction already exists
in our Cash Book,
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making up part of the
unadjusted balance.
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Next, we want to find
any Outstanding Cheques.
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These are the cheques
that the Cannon's have
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sent out to a customer
this month,
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that haven't been
cashed in yet.
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They will appear as a
credit or reduction to
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cash in the Cash Book
because the payment has
00:09:18
been recognised in the
General Ledger but there
00:09:20
will be no sign of them in
the Bank Statement because
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they haven't been
cashed in yet.
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Hmmm...
00:09:26
Cheque 105
jumps out at me.
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The Cannon's have recorded
the payment of $910
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on the 12th June
and it doesn't appear
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in the Bank Statement.
Let's identify this as
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transaction 'b' and deduct it
from the Bank Statement
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side of our
Bank Reconciliation.
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Remember this transaction
already appears in the Cash Book
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and we expect this customer
to cash the cheque
00:09:45
the following month
which is when it will appear
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the Bank Statement.
So for now we
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adjust the Bank Statement.
The final adjustment to
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include on the
Bank Statement side
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of the Bank Rec
would be any Bank Errors
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that exist.
We don't appear to have any
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here and more often than not,
that's the case.
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If you happen to come across
any in your
00:10:01
Bank Reconciliations
then it's best to identify the
00:10:04
adjustment and contact the bank
so that they can
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fix the error ASAP.
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Look I don't know, it's your problem.
00:10:09
Sort it out…
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Now that we've worked out
the adjusted closing
00:10:12
Bank balance we should
be feeling pretty confident
00:10:15
that we've worked out the
'True Cash Balance'
00:10:17
of the business...
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$53,498.
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That's the Cash balance after
all Outstanding Cheques
00:10:24
and Deposits have
cleared the Bank.
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But we won't know for sure
until we have finished Step 5....
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Which is where we calculate
the adjusted Cash Book Balance.
00:10:32
That means we're on the
look out for Omissions
00:10:34
or stuff that's in here…
that we haven't recorded in here...
00:10:38
We've already written down
some of the common Omissions in our
00:10:40
Bank Reconciliation template
so let's work through these.
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Missing receipts are amounts
that have been added to
00:10:46
our Bank Account that we
haven't recorded in our Cash Book.
00:10:50
In this Bank Statement
we can see that the Cannon's
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received an
Electronic Funds Transfer
00:10:54
for $1,000 on the 29th June
and I can't see that anywhere
00:10:58
in the Cash Book so we must have
missed this one out.
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Let's reference that as
transaction 'c' and add it
00:11:03
to our Cash Book balance
in our Bank Reconciliation.
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Right, what's next?
00:11:08
Interest Received.
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We are looking for amounts
added to our Bank account
00:11:11
that have ‘interest’
in the description.
00:11:13
On the 30th June we can
see Interest Received of $107.
00:11:18
Has it been recorded in
the Cash Book already?
00:11:20
Nah…
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So we reference it as
00:11:22
transaction 'd' and add it to
our Cash Book balance
00:11:25
in our Bank Rec.
00:11:26
Bank fees.
00:11:28
These are costs that the
Bank charges us for
00:11:30
keeping our account open.
00:11:32
I can see that $50
00:11:34
was deducted from our account
on the 17th June
00:11:37
and we haven't included it in
our Cash Book.
00:11:39
We're going to label this one as transaction 'e'
and this time we are going to
00:11:42
deduct it from our
Cash Book balance
00:11:44
in our Bank Rec
because we need to
00:11:45
recognise the payment.
The last Omission that we're
00:11:47
looking for is Bounced Cheques.
These are cheques that
00:11:51
customers have mailed to us,
and that we've deposited in the bank.
00:11:54
Only to find that these have
been rejected because the
00:11:56
customer didn't have
sufficient funds to
00:11:58
honour the cheque.
This kind of cheque
00:12:00
is normally labelled as
an NSF cheque.
00:12:03
NSF stands for
'Not Sufficient Funds'.
00:12:06
We can see one in the
Bank Statement here...
00:12:09
NSF Cheque 2748
and the Bank has deducted
00:12:12
$6,000 from our account.
We need to reference this
00:12:15
as transaction 'f' and deduct
it from our
00:12:17
Cash Book Balance
in our Bank Reconciliation.
00:12:20
I smell the finish line.
00:12:21
The Unreconciled
Amount is
00:12:22
now just $45
and all that's left do is to
00:12:25
find errors in the Cash Book.
This is going to be easy
00:12:28
to spot because we've followed
all of the steps and have ticked
00:12:31
and referenced all of the
other transactions already.
00:12:34
And as if that wasn't enough,
we've got a note beneath the
00:12:36
Cash Account
Transaction Listing that explains
00:12:38
what the error is.
Cheque number 106 is for $7,050.
00:12:42
And it's been incorrectly entered
into the General Ledger.
00:12:46
It looks as though the
Bookkeeper or Accountant
00:12:48
that entered this cheque
made a typo or something
00:12:50
because it's been correctly
recorded in our Bank Statement.
00:12:53
No worries,
we will reference that as
00:12:54
transaction (g)
and deduct the
00:12:56
difference of $45
from the Cash Book Balance
00:12:59
in our Bank Rec.
00:13:00
Tad Daaaa!
00:13:02
Our Unreconciled Amount
is now zero!
00:13:04
And that also means that we have
completed Step 6.
00:13:07
Check that the adjusted
00:13:08
totals
match each other.
00:13:10
In order to complete
the Bank Reconciliation
00:13:12
it's critical that the
adjusted Bank Balance
00:13:14
matches the
adjusted Cash Book Balance
00:13:16
exactly.
That proves that we have
00:13:18
recorded all of the
Cash Transactions in the
00:13:20
General Ledger and what we've
worked out here is our
00:13:23
'True Cash Balance' of $53,498.
If you are still getting a difference
00:13:29
in your Bank Reconciliation
then unfortunately there is an
00:13:31
error somewhere in your workings
so you'll need to go back
00:13:34
over all those steps and
make sure that you've
00:13:35
done them correctly.
But today not my friend, not today...
00:13:39
We've crushed this Bank Rec
so we can move on to
00:13:41
the last part of the process.
Step 7.
00:13:44
Prepare the necessary
Journal Entries.
00:13:46
This is very important because
if we don't post these journals
00:13:48
to correct the Cash balance
in the current month,
00:13:50
then all of these Cash Book
adjustments will just appear again
00:13:53
next time we do the Bank Rec.
00:13:54
So let's do our future-selves a solid.
00:13:57
And prepare the journals.
00:13:57
We'll be thanking ourselves later.
00:13:59
Just to be clear..
00:14:00
the adjustments that we
have identified in the
00:14:02
Bank Statement side
are all Timing Differences.
00:14:05
We can leave these be
and they will correct
00:14:06
themselves in the future
when the Bank records
00:14:08
our Deposit
and when that Customer
00:14:10
cashes that cheque.
We are only posting
00:14:12
Journal Entries for the
adjustments that affect
00:14:14
our Cash Book.
So let's do it...
00:14:16
If your feeling kind of unsure
about Journal Entries
00:14:18
then that's ok...
00:14:20
Pause this video and
check out this one up here
00:14:22
that I made explaining them.
00:14:23
We need to lay out our
00:14:24
Journal Entry Template
with the Date,
00:14:26
Account,
Debit and Credit columns.
00:14:29
For the Date, we're going
to pick the 30th June
00:14:31
for all these entries because
it's the last day of the month
00:14:34
and it makes
month-end correcting journals
00:14:36
like this one easy for us spot
when reviewing the general ledger.
00:14:40
Going into this,
we also know that one side
00:14:42
of each transaction
has to hit
00:14:44
the Cash account because
these are all Cash Book adjustments.
00:14:47
Let's take it from the top...
00:14:48
Transaction 'c'
was for
00:14:49
Missing Receipts of $1,000.
We are adding this to our
00:14:54
Cash account so we need
to debit cash by $1,000
00:14:57
and the other side of the
journal is a credit to
00:15:00
decrease Accounts Receivables
because one of our
00:15:02
customers has paid us.
Next we have transaction 'd'.
00:15:07
Interest received of $107.
Again this is a debit to Cash
00:15:12
because the Cannon's have
earned that Interest
00:15:14
and the other side is
a credit to Interest Income
00:15:18
which is a form of Revenue.
In Transaction 'e' we were
00:15:21
charged Bank Fees so we
need to credit Cash by $50
00:15:25
to decrease them and
debit Bank Fees to
00:15:28
recognise the expense.
Then we have Transaction 'f'
00:15:31
which was for a $6,000
Bounced Cheque.
00:15:33
We credit Cash for this too
to reduce our Cash balance
00:15:37
and we debit Accounts Receivable
to increase it because the
00:15:40
customer still owes us
that $6,000.
00:15:43
And on to the final journal.
This one is for Transaction 'g'
00:15:47
which is an error that
we need to correct.
00:15:49
We had mistakenly recorded
a cheque payment in
00:15:51
our Cash Book at $7,005
which was actually
00:15:55
meant for $7,050.
So we need to credit Cash
00:15:59
to recognise the higher
payment value and
00:16:01
debit Accounts Payable
to bring those down.
00:16:04
Oh yeah..
00:16:05
That's the full Steps 1-7 complete.
00:16:07
All that's left to do is to
post this journal and the
00:16:10
General Ledger will be updated
for the June period to reflect
00:16:13
the 'True Cash Balance'
of our business.
00:16:15
Our work here is done.
00:16:16
That's how to prepare
00:16:17
a Bank Reconciliation
from start to finish.
00:16:20
I hope you find those
7 Steps useful
00:16:22
and start putting them
into practice in
00:16:24
your real life Bank Recs.
00:16:25
Thanks for watching this video
00:16:26
if you found it useful,
give it a like,
00:16:28
share it,
comment,
00:16:29
subscribe if you haven’t already!
There are new videos
00:16:31
every week here on
Accounting Stuff.
00:16:33
Best of luck with those
Bank Reconciliations.
00:16:36
If you keep to these Seven Steps
you'll smash them every time no problem.
00:16:39
See ya next time!
00:16:41
[Music]
