Hello, in this lecture, we’ll discuss a bank reconciliation. At the end of this, we will be able to describe what a bank reconciliation is perform a bank reconciliation, make a needed adjustments to our books in the reconciliation process, as well as record those adjustments. So this is going to start off the bank reconciliation process. We’ll start off with, of course, the bank statement. So the bank statement is going to come from the bank, generally, it happens at the end of the month, although we could get it electronically at any timeframe. But typically, it’s still good to get it as of the end of the month so that we can have a set timeframe as to when we’re going to reconcile our account and deal with the timing differences at that time. So this bank statement coming from the bank is going to be as of the end of February in this case, and we’ll have a typical information on a bank statement, which will be that we will have the beginning balance, and then we’re going to have the additions to it generally our deposits and then we’re going to have the corrections to it.
Generally the checks but also going to include things like bank fees and withdrawals in this case, and then we’ll come up to our ending balance. So that’s what the bank says we have as of the date, the cutoff date being February 28, then we’re going to sum up this information. So the total deposits here are going to consist of these deposits by date in this case, and that adds up to this number, which of course is up here in our summary. We also have the checks, we have the date, we have the check number, we have the amount, as well as the other information that is coming out of our bank account withdrawal, such as an ATM withdrawal in this case, and a bank service charge of a couple dollars that comes up with the amount that is going to come out and that will give us the ending balance. We’re going to compare the bank statement to our books.
So notice what the bank statement is doing. It’s recording all of our transactions. This is exactly what we record in our books. The bank is doing it again for us in the bank usually does a very good job of doing that. So the purpose of a bank statement is really to tie out the bank’s records to our records, thereby giving us a second check on assurance that we have recorded everything correctly. Now, this is the second hugest type of check that we have other than the double entry accounting system itself, in order to guard against making errors on our transactions. So and that’s because there’s so many transactions that go through the cash account. So many of the transactions that we’re going to make, of course, will either be a deposit to the cash count, or coming out of the cash count. Therefore, if we can verify cash in some other ways such as this, then that’s going to be a huge check for us to catch any errors that we may make.
So the bank reconciliation, therefore, is really needed to be done for any type of organizations, whether you’re large, whether you’re small, even a personal accounts, the reconciliation process is really something that should be done in any type of business and probably is applicable for personal finances as well. It’ll help to catch any errors that are happening. So if we go back to looking at our books now, here’s our bank statement on this side. And our books. If we look at the trial balance, we’ve got our cash account over here, we can see that we are in balance because the debits equal to credits, we’re showing revenue in this case of the 50,000. Down here, revenue, less expenses, there are no expenses and we also see that we’re in balanced by the green accounts being assets equaling the liabilities, which are the orange accounts and the owner’s equity been the capital and all the income statement.
So we are in balance in this way, we of course are concentrating on the cash account. So we’re going to take a look at the T account or the general ledger in terms of cash. So if we go over here, we can take a look at the GL. We have the GL by date, and it started at January 20. And going down to The end of the month, the end of February. And we’re seeing our list of activities, the debits are increasing the cash account as we can see. So the 1543 is going up by the 680 to the 15 723, then it’s a debit balance accounts going down with the credit down to 15 473, then it’s going down with a credit to 14 373. And then it got a debit, so it went up. So this is our running total over here. Of course, the end of this account as of the end of the month, ties out to our balance on the trial balance. Notice what it does not tie out to however, is the balance on the bank statement as of the end of the month. And that’s typically going to be the case that’s almost always going to be the case.
And that doesn’t necessarily mean we made an error. Even if we recorded everything perfectly, there still would be a timing difference because it is a timing difference, meaning if we write a check, then that check is going to come out of our books right away. So for example, this check here This 250 that was written is going to come out of our account as soon as we wrote it, which was on January 23. But it needs to go through the mail, it needs to be picked up by the recipient of the cheque within needs to take it to the bank, the bank needs to then contact our bank. So it’s not going to clear until a later date. So we recorded it correctly, we want it on our books. As soon as we write the check, we want to record that, but we can’t verify that it’s been cleared until it clears the bank, which in this case happened here on February 2, so that’s going to be the idea. And that’s what’s going to make the difference that will always be there. So we expect there to be a timing difference. Also note that the beginning balance here, this 1543 does not equal the beginning balance or the ending balance as of January, which would be the beginning balance as of February, which is 14 to 73 on our books, and that’s because of the timing difference of the last month.
So notice that if we took out these three transactions and We were up here, which on our books was before January 20, then we tie out. So we see that we tie out here. And that’s when we reconciled last month, we had these three transactions outstanding. So when we then reconcile this month, we expect that these three transactions have cleared. And then we’re going to go through the our current transactions and see what has cleared and see if there’s anything then that is outstanding. So that’s the process that we’re going to take a look at now. So let’s go ahead and do that. If this is a computer system, we generally do the same thing. If we had something like QuickBooks, it would basically give our beginning balance and then we would take our bank statement, and we’re just going to take and tie everything off. And so anything I see over here, I’m going to say there it is, it cleared the bank at two one. Here it is over here. It cleared our books. It was still outstanding as of the January now it has cleared that’s good.
Then we got the 500 I’m going to see if I can find it over here. 500 on this side. See the 500 deposit on this side, therefore it has cleared I’m gonna check that off. So here’s the 420. Here’s the 420. Once again, we wrote it on February 20, it cleared on February 21. These are deposits, we would expect them to clear within three days. Realistically, at this point, probably sooner than that probably like a day, they should they should be in there if their deposit checks on the other hand, typical to happen be longer than that. Here’s the 510. Here’s the 510. So we’ve checked all those off. Let’s take a look at the other side of it. And we have the check. In this case it cleared on to two check number 5005 or 1005. And in this case, we wrote it on January 23. Notice we have a longer timeframe between when we wrote it and when it clears. That’s going to be typical with checks if checks are outstanding for a longer timeframe. Not Not a problem. Usually that’s usually normal. So then we’re going to have the 1002 here.
We wrote it on the 31st. It was outstanding as of In the last month, it now has cleared in this month in February. And then we have a cheque that we wrote for 75. On February 10, it has now cleared on February 13. Here’s a check for 250. And we wrote it on February 12. It’s cleared on February 15. So we’ve tried everything out now. Now we’ve found everything on the bank that we could on our books. If there’s something except for Of course, these two transactions down here, the A and the two, those are not on our books. And the general rule is going to be this if it’s on the bank statement, and it’s not on our books, then we probably have to fix our books. Now the exception to that is what often people think of the reason of doing a bank reconciliation. And that is what if the bank made an error.
That does happen. I’ve seen errors before, but the bank is pretty good at it. So don’t often make an error, what happens a lot more often is that there’s transactions on the bank that we have to record. And that’s the case with, of course, these two transactions here, the 80. And the 280 represents something that maybe we went to the bank and took a withdraw and never came home and recorded that or to the office and recorded that withdraw. And therefore, obviously, it came out of our checking account, therefore, it should be reducing our checking account, it is deducted reduced from the bank side, we haven’t recorded it on our side, or something like bank charges if we got if we bought checks, or if we just had a non sufficient fund charge, something like that, then of course, the bank will just take it out of our account. We wouldn’t even know about it. We don’t know about it, until we get the bank statement and say, okay, they took, you know, in this case $2 for just service charges that we’re going to have to reduce from our side.
Also note that if we’re a small company, as some small companies may do a lot of stuff Basically on a debit card, or even individuals may do a lot of stuff on a debit card and actually record it monthly, meaning they’re going to get the bank statement, look at all the charges they have made, and basically record the transactions from the bank statement to the books in that fashion. Now, the other side of it is if we have something on our books, that’s not on the bank statement, such as these three items here. So we have these two checks, and this item is deposit, then that difference is probably due to timing differences, meaning we wrote these checks clearly and we made that deposit but they have not yet cleared the bank. The bank hasn’t had time to process those because these happened are these two checks have to once again get picked up by the recipient of the cheque and they have to deposit it and then tell our bank the deposit should take one to two days but this was deposited on February 28.
So what we’re going to do is we’re going to say okay, here’s these two checks, if we’re concerned about them, then what we want to do is call the bank maybe because no, when we’re doing this process, it’s going to be even though it’s as of the 28th of February. It’s gonna be sometime in March, because obviously we got the statement sometime in March. And so we can call the bank we can say, hey bank, or go online and say, hey, did these two checks clear sometime in March? And if they did, that’s what we would expect. And we say, okay, we’re just going to record that that’s a that’s a difference. That’s a timing difference. We’re good. Same with this deposit we’re getting with sometime in February. Now we can call the bank if we if we’re concerned about it and say, I would expect this deposit to have cleared sometime between you know, before March 3, is that the case? If it is then as of this time period, we just record that as the timing difference.
So first, let’s take care of these two items. We noted that these two items, were on the bank statement, but they’re not on our books. So what we’re going to do is just make the journal adjustment, let’s just make the adjustment for those two items, we need to fix our books. Meaning that if we took out $80 here, and we drew it out of the account, and just got cash for it, and we didn’t record it in our books, then what’s going to have to happen is cash is going to have to go down by that $80, we can see that cash has a debit balance, we need to make it go down, we’re going to do the opposite thing to it, therefore, that would be a credit. So that’s going to be this credit here, we’re going to credit cash by the $80, which will reduce the cash account, then we’re going to have to record some other side of it. So we know that cash has to go down. What about the other side? Most likely, it’s gonna be some kind of expense. If we took something out in cash and didn’t keep the receipt, that’s, you know, we should keep the receipt probably.
But if we took it out, and we don’t know what we spent the cash on, then we’re gonna have to put it somewhere. One place we could put it is probably the miscellaneous account here. So we’re probably we could put it into miscellaneous it’s going to be some type of expense most likely and expensive. Have debit balances, and once again, they only go up. So we’re going to make it go up by doing the same thing to it, we’re going to debit the $80 expense. If we record that, then what would happen is the expense goes from zero up to 80. It brings net income down because net income as a credit balance, it’s the 50 minus 80, would bring it down here. Also, of course, the cash has a debit balance, it would go down by that 80 and bring the cash balance down, that would put us back in balance, and the what the effect on the net income would be, once again, this is income, not a loss.
The other side of it if we had a bank charge, this would be also something that the bank would record that we would know about 10 we got bank statements, the bank took the money out, if there’s a non sufficient fund, if they charge us the late fee or something, then we just get it we go okay, we’re going to have to record that we have to reduce our cash account. Once again, cash has a debit balance, we’re going to do the opposite thing to it. Therefore we’re going to credit cash so we know that has to happen. So we’re going to go ahead and credit cash What’s the debit gonna go to what’s the expense account probably going to be an expense account. I personally like to make an expense account called bank service charges. So I like to record what the bank has taken out in a separate account, it is up to the bookkeeper to do that if they want to or not, because note that it is probably going to be a small amount.
So hopefully, hopefully the banks not taking a lot out. So since the amount some people might say is in material, then why don’t we just put that into like miscellaneous as well or something because it’s a small immaterial amount. Personally, most of the people I’ve seen, I kind of like to see how much the banks taken out even if it’s small, just to make sure it is small, but that’s a choice that the bookkeeper is going to make. In this case, we have a separate account, bank service charge, it’s an expense, expenses have debit balances, we’re gonna make it go up by doing the same thing to it, which in this case would be a debit. So we haven’t gone from zero up by the two here to $2. That’s going to bring down the net income the expense goes up which brings Down net income. And then the cash is the other side of the entry is being recorded here. That’s what’s making the 80 to the 80 plus the two. And so the, the cash has a debit balance, it’s going to go down by the credits for the $2 in that case, and now we’ve recorded these two transactions.
So now we can say, okay, those now I can see if we look at this same transaction in terms of our general ledger. Now, note that this is where we were at on our trial balance before these two transactions, we should also reflect this, this would be reflected on the general ledger as well meaning in our GL, we have as of the 28th, there’s that $80, that’s going to bring it down, represented by this journal entry. And here’s the $2, bringing it down, represented by this journal entry. So that would also of course, be reflected on our GL so that our new balance in the GL would be 16 two 56. So this is where we stand. Now, this is still where the bank statement is. So we’re still not in balance. Even though we’ve adjusted for these two amounts, what we have not adjusted for yet is, of course, these that were outstanding. So that’s what we’ll have to do next time. So now you’ll remember You’ll recall that we ticked and tied all this off, we’ve now taken tied these off, and we’re left with these items, these three items.
So these two, they’re on our books, but they’re not on the bank statement. And we wrote them as of the end of the month. So it’s expected, we would assume that we wrote them and they just haven’t cleared yet. So that’s going to be on the bank reconciliation. So the bank reconciliation should for the most part, be these timing differences, meaning this is what we started with. Or this is what is on the bank statement. And then we’re going to say what should be on the bank statement that if not do To timing differences, well, this 130 plus to 110 are checks that we wrote. And they’re not included in the ending balance on the bank statement. And they should be because it’s just a timing difference, they’re already out, the bank just hasn’t got to them yet in order to record them. Therefore, we’re going to reduce the balance by that. And that, what that’ll do is they’ll bring the balance down to 1556. And of course, we’re still not quite there yet, because our balance on the books is 16 256. At this time, what’s the difference if the deposit we haven’t yet recorded, I would hope.
So let’s do that. Now. So now we’ve found these two, again, these two are done the only outstanding item being this now at this time. So we found these so that of course will be recorded here. So now we have the outstanding deposit, same idea. We deposited it as of last year. of the month, therefore, the bank reconciliation for the month does not yet have it, we could verify that it has passed and cleared in March. But we just want to record as of this time that that’s the difference. And so if we take the 15, minus the outstanding checks plus the outstanding deposit, we come up to 16 to 56, which is now adjusted to what we have in our books. So what’s the purpose of this? Now we can say this is what’s on our books. And it ties out exactly to what’s on the bank statement. So we can double verify our, our entries, because we know exactly what the difference is. And the difference is exactly what we expect it to be. It’s the timing differences.
And if that’s the case, then we’ve double checked our, our work, and we’ve double checked it with a very strong source being the bank. And if our cashes in reconciliation, we have a much better verification and we We feel a lot more comfortable that our transactions are correct. So whether you’re a large business or a small business, if you get the cash reconciled, that is a huge check in order to to verify the books. So obviously we can see that this ties out here, it ties out to the general ledger, and it ties out to our nd balance on the trial balance. All right, so we are now able to describe what a bank reconciliation is perform a bank reconciliation, make needed adjustments to our books in the reconciliation process and record adjustments.