Bank Reconciliation Myth Busting 9.05

QuickBooks Online 2021 bank reconciliation mythbusting. Let’s get into it with Intuit QuickBooks Online 2021. Here we are in our gray guitars practice file, we’re going to be going into the bank reconciliation process. But before we do so we want to discuss some common misconceptions about the bank reconciliation process, which we can characterize as myths about the bank reconciliation process. And any good myth will have some element of truth within it.


But then it’s going to take a wrong turn somewhere and many times the wrong turn that will be taken will be characterized or will be about or around the topics of one bank feeds, the idea that somehow the bank feeds has fundamentally changed the concept of the bank reconciliation process. And number two, that the process of reconciling is actually what the bank reconciliation is. And they’re actually kind of two different things. We have the reconciling process, and then the bank reconciliation. So let’s first just kind of recap the process here.



To do this, I’m going to be opening up some reports, I’m going to go up top, I’m going to right click on the tab up top and duplicate the tab up top, we’ll be opening up then our balance sheet here, go into the reports down below opening up the reports, we will then go into the balance sheet opening up our favorite report the balance sheet, we’re going to range change it at the top ending at the a 131 to one, so we’re ending at the end of January, we’re going to run that report, and then close up the hamburger hold down Control scroll up just a bit, we of course are focusing in on the cash account.



So the bank reconciliation is going to be a huge internal control, we really want to do the bank reconciliation because it’s given us an outside check on the cash account. And cash is kind of like the lifeblood of the accounting system. It’s involved in every other cycle. So we can verify the cash, then we have a good internal control not only over cash, but over other operating cycles as well.



The basic idea of the bank reconciliation is that we want to take a point in time and typically the end of the month is what’s going to be chosen because that’s when we have our summary information and verify out what’s on our books to what’s on the third party books, the bank’s books, the bank, who ideally is entering our information related to our cash account independently from our books. If that were the case, then we’re checking a second outside source against our books, and we’re getting kind of a double verification, if we can reconcile between the two meaning, here’s our amount on our in our books, if I take a bank statement, and here’s our mock bank statement, it’s in Excel.



This is our mock bank statement. And as of the same point in time, let’s just say for the purposes of this practice problem, the bank statement is saying that we have 89 335 in the bank account, well, these two things do not line up, that’s not going to be unusual, if we’re doing a full service bookkeeping system, due to the fact that we could have outstanding checks and outstanding deposits. That’s really what we’re looking for. We’re looking to find those outstanding checks and deposits, so we can determine exactly what the difference is.



And by reconciling the difference, we’re not trying to change those outstanding checks or deposits, we’re just trying to say what the timing difference is, because if I can tie exactly in to what the timing differences, then I know that the bank has recorded basically the same information that we have. And since they’re doing it independently, that gives us a third party double check that we have entered things correctly.



Now as we do that, usually there’s going to be kind of issues along the way, we might then make some corrections to our books, or possibly for items that are on the bank statement that are not in our system, and we’ll have to add them. But at the end of the day, we’re still not going to tie out to the bank, if we have a full service accounting system, most likely because we’ll have the outstanding checks and deposits.



The reconciliation then gives us that verification that although we have that timing difference, then we still have that that double check, we’re still correct, because we can tie exactly in to what is on the third party bank reconciliation. Now one of the problems that comes into play here is that we could enter our data into our system in a couple different ways. Meaning if I go back over to the desktop version, you don’t need the desktop version here. But I just want to take a look at the flow chart within it on the homepage.



So if I go to the desktop version homepage, just to look at the flowchart, we talked about different methods that we can start to enter the information into the accounting system. If I use a full service accounting method, meaning an accrual method, for example, where I were on the sales side, I enter an invoice and then I received the payment from the customer and then I make the deposit into our bookkeeping system. And I do all that independently from what happens in the bank.



Then the bank reconciliation process is going to be a process of verification because I entered it into our books, we entered it into our books independent from what the bank is doing and even if we’re on a cash basis We could still run this double check process, meaning if I was on a cash basis system for the revenue cycle, then when I get the money, like if I’m at the cash register, they’d give me the money, I would then record the Create sales receipt, which is a cash method item, I collected the money got the work at the same time recorded revenue at that point in time.



And then I would take that money and deposit it into the bank. Once again, even though on a cash basis system, I’m independent from the bank, I recorded my books, we recorded our books under that system, independent from anything the bank is doing. And then we took our money and recorded it into the bank. So when the bank then gives us their bank statement, at the end of the month, they have done their work independent from our work.



And that’s the best check, because now it’s a third party that’s doing the same thing that we are basically for cash. And that’s when the reconciliation is at its most powerful, the strongest. However, we can’t have a system where we’re not creating our books independent from the bank, for example, I might just take the bank statement at the end of the month. And just say, I’m just going to take what’s on the bank statement. For example, I’ll take this bank statement.



And I’m just going to take the deposits in assume that that’s revenue, put that into our books, basically recording it as revenue, and then all of the deductions, I’m going to put that into our books straight from the bank statement into our books, and assume that that is going to be some type of expense. And I’ll categorize those expenses, I could do that manually just taking the bank statements and entering it into our books in that format, which would be useful and might be done might be a good process to help us to generate the information we need, say for taxes at the end of the year and financial statement information.



But it’s a little bit different than Of course, a full service system. Now I’m dependent on the bank. So I could do that directly from the bank statements. Or I could use bank feeds to do that if I have a simplified, you know, accounting system here, and I’m just saying, hey, look, it’s gig work or something like that, and I don’t need to invoice anyone.



And I don’t need to like batch up my sales at the cash register and deposit it or anything like that. I’m just getting paid by an online marketing service or an online App Store for classes, you know, if you’re teaching classes, or YouTube is paying you or Google is paying you or Amazon is paying you and I’m just gonna get the money, and then record it as revenue when it hits my account, then I can just I can just wait till it hits the bank.



Now if I do that, once again, I’m not on a I’m not on simply a cash basis system, I’ve kind of taken even a step further in simplification and of cash basis system, because a cash based system would still imply that we enter the information independent from the bank, and then double check it to the bank. But now we have a system where we’re just saying, Hey, I’m just gonna wait till it clears the bank, and then take the information from the bank, and put that into our books directly.



So we’ve taken another step in simplification. Now, if that is the system that you have in that way, then you’re not going to have a difference in a timing difference between what’s on the banks statement and what’s on our books in that case, because we made our books directly from the bank statement. So in that kind of system you will have, you will have no difference typically from the bank and the books, but you still want to do the bank reconciliation, the bank reconciliation will not be as powerful.



Because you’re not doing a double checking system. However, you are checking that you have, you have taken all the information from the bank and entered it into your system, you’re double checking that you haven’t entered anything two times. And you’re double checking that you haven’t missed anything that somehow the bank feeds didn’t pick anything up. So if you’re using that kind of more simplified system or taking the information directly from the bank, it will simplify things and make the bank reconciliation kind of weaker in an internal control.



But it’s still something that’s going to be necessary to do. And note that if you’re using bank feeds, you may not have that simplified system. In any case, as well, the fact that you’re using bank feeds doesn’t mean you’re dependent on the bank. So if you’re using bank feeds, and you still need to record invoices, then the bank feeds can’t be used in the same kind of fashion, you’re still going to have to record things basically independently. And then you can use the bank feeds to kind of tie out and match.



And that’s going to be the second kind of issue with the bank feeds. That kind of confuses the bank reconciliation process. And let’s see if we can tie that down that has to do with the reconcile lien process versus what a bank reconciliation is. So what is a bank reconciliation, I’m going to look at a report here on on the desktop version again, and we discussed the fact that the bank reconciliation is basically just saying, here’s what’s on our books as of this point in time and reconciling to what’s on the bank statement, which would be this in our example problem.



And the difference being outstanding checks which we would have if we’re running things independently due to timing differences, outstanding checks and deposits. So if I if I minimize this Then, if I look at this example, on the desktop version, just to take a look at an example of a bank reconciliation, the desktop version, this is their summary report here, we’ll do a similar thing on the online version, we basically have the cleared balance, that’s basically the bank balance that would, that’s what would be on the bank statement.



And then we have the uncleared items with these would be the checks that we wrote, that have not yet cleared and the deposits that we made that have not cleared the bank, yet we knew about them, we wrote the checks. And if we’re doing our books independently, we wrote the check, we decreased our checking account when we wrote the check, but whoever received the checks gonna have to get it is gonna have to deposit it there, banks gonna have to talk to our bank, therefore, the bank doesn’t know about them yet. And that’s what the reconciliation difference is.



That’s why we have a difference in the balance as of the same point in time, because of a difference in information, a timing difference. And that reconciliation, that timing difference, will tell us exactly if we can reconcile exactly what the difference is, then it not only verifies or tells us what the timing differences were not so concerned, in other words, with these outstanding items, then with the fact that if I know exactly what they are, I have now verified all the other items in the system.



That’s basically what our goal is to do. Now, the summary report isn’t as as good because it doesn’t tell you exactly what those items are. It just says, hey, there’s five items. So then we have to go to the detailed report over here. And that’ll actually show us what the what these five items are, I’ll go into that more in more depth, when we actually go into the to the presentation about doing the bank reconciliation, but just realize that, that these are the things that we’re after is this reconciliation item.



And that kind of verifies and double checks that the whole, the whole accounting system is correct. So this is actually the bank reconciliation report, this is what we’re after you got an auditor comes in, and they say, hey, I want to verify your bank reconciliations, this is what they’re looking for. But a lot of people confuse that with what the process is of reconcile lien.



And which the bank feeds can kind of help with so the process of reconciling, let’s jump on over to the, to the desktop version, and say go to the first tab, we’re going to hold down Ctrl, scroll down to get down to that 100%. When we reconcile, we’re going to go down to the to the accounting tab down below. And then I’m going to go to the reconcile tab up top, usually you’re in the chart of accounts, we’re going to go to the reconcile tab, I’m going to hold down Ctrl scroll up just a bit, close the hamburger. And then it says which account Do you want to reconcile, typically the checking account.



And then we got this issue with the beginning balance this with the first bank reconciliation, which we’ll talk about when we’re in the next presentation is often an issue that this beginning balance doesn’t tie out to what’s on our books, because it should be 30,000. And it’s in here at zero. So we’ll deal with that more next time. But just if I was to go forward with the bank reconciliation process, the ending balance, I would take from our bank statement at 9335. In this example, so 89335. And then the ending date, I’m gonna say is the end of January, so January 31.



And then it says, enter any service items. So service charge, if we have bank feeds, I don’t like to do it in this format in the bank reconciliation. So these are adjustments for items that are often on the bank statement that we don’t have in our books yet. We’ll talk more about that later. But I don’t like to enter them here, I like to enter them directly into the, into the register.



So we’ll do that later. And then if I start the reconciliation, then it takes us to our reconciliation screen, which we’ll talk more about later. But notice what’s happening here is we’re just basically gonna tick and tie off what is on on the books, this is what’s in basically our our transaction in the books to what is on the bank over here, we’re gonna tick and tie this off to what is on the bank.



And we’ll do it line by line, there’s, there’s 50,000 there, we’ll come over here, we’ll check off the 50,000. Here’s 65,000. Here, we’ll come over here and we’ll check off the 65 and so on and so forth, we’ll actually tie this out. Now when I tie this whole thing out, we’re going to come up to a difference up top of zero. And that’s how I knew I’m going to be reconciled. That’s when we’re going to be reconciled. The things that we do not check off here will be the items that will be outstanding.



So this process of reconciling and getting this thing down to zero is an important thing. If we do that, then we’re basically doing a very important internal control. However, doing this doing that process is the process of reconciling if an auditor came in and said, You know, I need to verify your bank reconciliations, they’re not going to want you to see this, checking off, and then making this go down to zero. They’re gonna want to see the report of the bank reconciliation we talked about just a second ago. This is the process of reconciling to get there.



So it’s good that we do this and if this comes down to zero, then we’ve done we’ve done the reconciling the process, but the report that’s going to be generated is going to show The items that we didn’t check off, because those are going to be the ones that are going to going to show us the difference between the bank account and what is on our books. And that’s really, that’s really kind of what we’re after.



So people often then do this bank reconciling process, which is important, even if we don’t even ever look at the report. And because we do reconcile in that format, but the idea is that that’s what we’re after we’re after that reconciling process. And we’re after that by the things that we don’t check off, because those are going to be the things that are going to be outstanding. And that’ll become more clear, when we actually go through the process of this reconciling process and generate these reports. But this again, kind of ties into the bank feeds kind of myth here where the bank feeds will help us to tie these out.



Because if, for example, if I get if I’m building my books from the bank statement, jumping over to the desktop version, if I’m just saying, I’m building my books, not by me doing the data input, but just from the bank feeds, I’m just creating my books from the bank feeds. Or even if I’m doing my own books, and then I’m matching my data to the bank feeds as they come in, meaning I make the deposit myself independent from the bank. And then when the bank feed comes in, I match it to the bank, I match it out. Well, that matching process is the process of reconciling. That’s basically what we’re doing in the reconciling process, right?



We’re tying out what’s on our books to what the bank did, ideally, we would like to do that independently, we enter it independently, then the bank feeds flow into our system. And we can match the two out and we’re basically doing the process of reconciling. Like automatically as we do that. So so that that bank feeds helped us in the process of reconciling. But that’s different than the actual report, the report is the bank reconciliation. So after that reconciling process is done, then we should have a bank reconciliation.



So in other words, if I if I use the bank feeds, it might help me then when I get to the bank reconciliation report to do the actual bank reconciliation, all these might be checked off like automatically, because when I entered the bank feeds, the system was able to match out the bank feeds to what’s in our books, which is great, all these would be checked off. And I can then reconcile my report a lot easier, hopefully, with the bank feeds that might that might make the system faster.



But the bank feeds helped me to to do the process of reconciling so that I can make the bank reconciliation, they haven’t made bank reconciliations obsolete. They’ve, you know, they made it possibly faster to go through the process of reconciling so that we can create the bank reconciliation more quickly. Okay, so hopefully that made some sense. We’ll go into the bank reconciliation process in future presentations.

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