QuickBooks Online 2022 bank reconciliation mythbusting. Get ready because it’s go time with QuickBooks Online 2022. Here we are in our get great guitars practice file, we set up with a 30 day free trial holding down control scrolling up a bit to get to the one to 5% currently in the homepage, otherwise known as the get things done.
Change to the accounting view, it’s something you can do by going to the cog up top and switch to the accounting view down below. We will be toggling back and forth between the two views, either here or by jumping over to the practice file, or the sample company currently in the accounting view.
Going back over to our get great guitars opening up a few tabs, we can put reports in by going to the tab up top right clicking on it and duplicating it back to the tab to the left, right clicking on it and duplicating it. Again, as that is thinking I’m going to jump on over to our sample company file, which is in the accounting view,
noting that the reports in the accounting view are on the left hand side here. If we go back to the Business View, second tab reports are going to be located under that business overview. And then in the reports on the left hand side closing up the hamburger, let’s open up that balance sheet report.
Looking at the good old balance sheet, we’re going to change the dates up top from January, we’re just going to look at January this time. So oh one two to it’s already there. Oh
130 122. That’s what we want. I’ll run it again. And then I’m going to go to the income statement just looking for January as well looking at the business overview, the reports and then we’re going to go into the profit and loss the income statement, close up the hamburger within the month of January same kind of thing here. So I’m going to go back to the first tab.
We are of course focused in on the cash account, we’re going to be reconciling the cash account in our books to the cash account on the bank side of things using the bank statement as of a point in time that in this case being January 31 2022. Note, however, we’re not just trying to verify that the cash Indian balance, as of in this case, January 31 2022, is correct.
We also want to look at the details, it’s kind of like drilling down on the cash account, and verifying that all the transactions that are going into that ending balance of cash are correct as well. And noting that the double entry accounting system has a second side to each transaction.
And cash is in essence, the lifeblood of the company. It’s part of every flow that we are doing within the accounting system. In other words, it’s in the purchasing process or expense cycle, it’s in the sales cycle or accounts receivable cycle,
it’s in the employee ease cycle. So we can verify those transactions that have cash in them, then we’re hit we’re getting a huge internal control, not just over cash, but over all the other cycles in the accounting process.
That’s really what we’re after. And that level of internal control is second, really only to the double entry accounting system itself. In other words, by using the accounting software, you’re using a double entry accounting system, that means your balance sheet is in balance, that means your trial balance has an equal number of debits and credits.
The accounting software itself will not allow you, for the most part to do anything that will be out of balance. So whenever you put something into the software, and it’s like I can’t do that, because it’s going to put me out of balance.
And I’m not going to let you put me out of balance. That’s when one of the major internal controls that we have in accounting, but it’s not going to stop us from making any errors in for example, we could still make errors if we had the double entry accounting system.
by omitting a transaction just not including it at all, or entering a transaction twice, or having a transaction that has the same dollar amount that has the same debit and credit. But they’re both wrong. They’re both Miss keyed. The second internal control is of course, the bank reconciliation.
And so that is going to pick up some of those other errors. If we omitted a transaction that went through the bank, then we’re going to see it during the bank reconciliation process. If we data input the wrong amount, we’re going to see that in the bank reconciliation process. If there’s a cash component to it, if we entered something twice, we’re going to see that in the bank reconciliation process.
So it’s a huge internal control that we want to have not just for cash, but for the whole accounting system. If you if you have accounting software from my perspective as basically a tax preparer or if I was doing an audit or something like that or a review.
If someone is using the double entry accounting system through software that gives a huge level of assurance I feel a lot better than if someone was to make the books by hand at this point in time and to if they’re doing the big record conciliation properly, that then is the next biggest thing and a general sense where I’m feeling okay, I feel a lot more comfortable,
that things are going fairly smoothly with the bookkeeping processes, either of those things are not done, then I feel a lot less secure, about about the process that’s being made doesn’t mean it’s wrong, per se.
But it means that the potential those two controls, mean that there’s a lot more ways that things can go wrong, that those things will not be picked up with these two big internal controls.
Okay, there’s two myths with the bank reconciliation, we want to take a look at one is the idea that, that the process of reconcile lien is actually the bank reconciliation, those two things are not really the same thing. The bank reconciliation is actually a report that we’re going to we’re going to generate at the end of the process.
And the reason people typically think of the of the process of reconcile lien, as the bank reconcile a tion is because reconcile lien is what we actually do, we go through and we take and tie everything off. But if an auditor was to ask you for something to say, hey, what’s what’s, where’s the bank reconciliation, it would be the report that is generated after you do the reconcile lien process. The second kind of myth I
want to look at is just the idea that, that when you use bank feeds, because we have bank feeds that can go into here, in other words, an automatic connection to the bank, that somehow that is eliminating the need for the bank reconciliation.
That’s not true. Although it does change in some cases. And that’ll be dependent on the type of bookkeeping system we have, in terms of how the bank reconciliation could be done. So hopefully, it’ll make it easier. But it doesn’t mean you’re going to stop the bank reconciliation process altogether.
So let’s take a look at those two items. So when we go through the process of a bank reconciliation, basically, what we’re doing is we’re going to be taking our information that’s going to be coming from the general ledger here and ticking and tying it off matching it up, this is my mock bank statement to the transactions that are in the bank statement.
So and that’s going to be basically the process, we’ll do that by going into the software will say that we’re going to go into the hamburger left hand side, it’s under the bookkeeping area on the left hand side.
And we won’t actually go into it right now. But it’s on the reconcile tab at the bottom. If you go into the get started, what it’ll basically do is pull in the the balance the the general ledger numbers, in essence, that we have entered on our side, and will in essence, just be ticking and tying them off to what is on the balance sheet, I’m going to open my balance sheet back up because I opened it up on the wrong tab here.
So let’s open the balance sheet back up, go back into the balance sheet, and then close up the hamburger.
And if so if I drill down on the cash account, in essence, we’re just going to be looking at our transactions here and tying each of these transactions off to the bank statement.
And that gives us some assurance that of course, we entered the transaction, and the bank entered the transaction. So we got that kind of double assurance and it cleared the bank, which gives us some more confidence that the transaction is a legitimate transaction.
So the fact that we do that, and then and then it’ll say that we’ve completely reconciled if we do that process, to the point where we’ve got a zero balance, I’ll we’ll go over this in more detail in the future. But the system will say, hey, look, you’ve reconciled it. And then I hit the reconcile button.
A lot of times we think about that as the bank reconciliation. But that’s the process of reconcile lean, because what will happen here is we’ll typically find everything that’s on the bank statement,
the general process will be if it’s on the bank statement, then we’re going to have to tick it off on our books. It’s got to be in our general ledger, unless the bank statement is wrong. What if there’s something on the bank statement that’s not in our books?
Well, if it’s not wrong, which usually it’s not, the bank is usually right, then we have to add it to our books, because the bank because the bank says that was this transaction, we’re gonna have to put it in our books, and then we can take it off.
So everything on the bank statement generally will have to be on our books unless the bank statement is wrong, which isn’t typically the case. However, if it’s on our books, and it’s not on the bank statement, it could possibly be a legitimate thing, especially if we’re doing a separate transaction as we enter the data separate from the bank.
And it’s something close to the end of the month. And most likely, or especially if we’re using cheques, actual physical checks, because those are going to have the longest lag time between the point that we write the check and the point that they actually cleared the bank, resulting in a timing difference.
So that’s what we’re looking for. We’re looking for these timing differences, which will be very, they’ll definitely be there, especially when we have the checks that we’re still writing.
This timing difference does go down in time, of course, when we have electronic transfers, so the bank reconciliation process should be easier as We have the electronic transfers, because you don’t got this big lag time between when you write the check, and when do you when it clears the bank.
So that’s really what that difference is what you’re looking for. So after you check everything off, then really what the system is doing is taking the items that were not checked off. And those are gonna be the items that were put in our system that has not yet cleared the the bank.
And it’s going to create a bank reconciliation, looking something like this, that will be tying out what’s on the bank to the book. Now this is just this is not exactly what we’ll create in this one. But it looks pretty similar. And so we’ve got the clear balance here.
Notice, really, you’re starting here, there’s two bank reconciliations we’ll look at and QuickBooks, they usually have a summary report, which we’re looking at here. And a detailed report, the summary reports easier to read, but it actually doesn’t have the detail that you want. So I’ll talk about that in a second here.
But the detailed reports, it’s kind of overwhelming with all the data. So we’ll look at both of those reports. After we do the bank reconciliation, let’s just look at the summary here. This cleared balance represents the items that we tick off in our system, because we saw them on the bank statement.
So the cleared balance to 61. To 4185, for example, ties out to the clear balance on the bank statement. And then we’ve got the unclear transactions, the items that we did not take off.
These are the things that QuickBooks is going to create as the reconciling items, the ones that basically we know about, because we entered them haven’t cleared the bank, most likely because of timing differences.
And here’s where the problem is. I would like to see those six, if you gave this to an auditor, and just said, yeah, there’s six items that add up to this this amount. That is the difference.
They’re gonna say, Well, what are those actual items? You know, because we want it that’s the point, we want to know what the difference is. Exactly. And so so that’s why this statement doesn’t give you all the details, let’s just say these six items, but any case, you get the idea that these items are the uncleared items.
That’s the difference. That’s the reconciliation. That’s how we get to the cleared balance to what’s on our bank statement. So this would be on our books, then, if we go back into our books for the cash account, on the balance sheet as of January 31. So that would be matching out right here.
It doesn’t exactly right now, because we’re going to have some adjustments that we’re going to be needing to enter as we go through the bank reconciliation process. But that’s the general.
That’s the general idea of it. And if I can drill down exactly what this difference is, then then I can be confident not only about, you know these differences, but about all the other ones.
Because if I if I can reconcile exactly, then that gives me a huge increased level of assurance that all the transactions are correct. So in other words, I’m not just trying to find out whether or not these ones that have not yet cleared will clear which I can do,
because I can then look in February after the reconciliation date to see if these uncleared items have been cleared in the following month, if they have which we would expect them to. That’s great.
And but that’s not really the main goal of the reconciliation, the main goal is to say these are legitimate transactions that result in a legitimate difference. And if I can tie that out exactly, then I can, I can basically be way more confident about all the other transactions, the whole thing that’s in basically the double entry accounting system.
And as we can see, if you go into the cash account, we have the most type of of transaction types in cash, because cash is the lifeblood of the business, it goes into every other cycle here.
So that means that if I can get assurance on all these transactions, then I have assurance on the other side of the double entry accounting system, which gives me a huge level of internal control over the rest of it as well.
Okay, so now, let’s think about the kind of myth about about well, what if I turn on bank feeds how, if I turn on bank feeds, then I don’t need to do the bank reconciliation, right, because then I’m connected to the bank. So I don’t have to do the bank reconciliation. That’s not, that’s not exactly true. However, there, you could have a very simplified version of the bank reconciliation.
And for that, let’s take a look at at a flowchart. This is a flowchart from the desktop version. But it’s just a flowchart. So we’re just thinking about the flowchart here.
And remember, it really depends on how complex your accounting system and if you’re, if you’re using accrual type of transactions, you’re still going to have some transactions that are not cash related.
So you get you’re going to have a little bit more complexity in the accounting system just in terms of how you’re going to apply the bank feeds, and you can still use bank feeds,
but you’re gonna you’re it’s gonna be a little bit more complex to put them in place. If you’re on a cash basis, and you’re still using the full accounting system, you would be using register transactions as you make the sales transactions, for example.
So you would still be entering the data on your side and then the bank would be would would be entering their transactions. However, it’s possible in some industries if you’re in a more simplified industry, and able to Do this such as gig work, for example, such as if you get your money from like Amazon, and you’re not tracking inventory or anything complex like that.
Or if you get your money from like a platform like YouTube or something like that, or AdSense, or you’re getting revenue for royalties or something like that, well, then when you get the money,
you’re probably just saying, I’m just going to take that deposit, and record it as income when I receive it. In other words, you’re kind of on a cash basis, but you’re not doing the sales receipt. In that case, you’re simply recording the deposit when it’s clears the bank.
So you’re kind of, you’re moving even further from a cash basis to a more simplified method than the cash basis, which is one where you just kind of build your financial statements from the bank information. So in that sense, you’re just going to wait till everything clears the bank, if you’re on that method.
And you would only be on that method, if you’re in an industry that allows you to be on that method. So if you’re in an industry where I have a cash register in front of me, I can’t really do that.
Because I’m going to have to use the cash register to record the transactions if I’m in an industry where I have to invoice the customers, but I have to invoice the customers because that’s what the industry standard is. But if I’m in industry, where I’m just going to collect the money and put it into the checking account,
then that would be the most simplified way we can do the bank, the bank feeds, because then the bank feeds, we can just wait till it clears the bank and record our books based on the bank. Now that’s different than a full service accounting system, even a cash based one, because of a full service accounting system.
For example, in a cash based one, we would be recording the sales receipt, when we make the sale, then typically making the deposit on our side.
And then we would be comparing what we deposited on our side to what cleared the bank, you see, that’s a much bigger internal control, because now we entered it on our own separately, and then the bank entered it on their own based on our deposit.
And when we compare those two, we’re comparing two different sets of books done one internally the other externally.
If on the other hand, you go into the system where you’re dependent on the bank, to make the transaction, you’re waiting until it clears the bank to make the transaction, you no longer have two sets of books, you’re just making your books based on what the bank did.
There’s nothing really wrong with that. But that’s a much more simplified system, and you’re losing a lot of the internal control. So if you were to do that, then the bank reconciliation process would be a whole lot easier.
Because when you do the bank reconciliation process there, there aren’t going to be any outstanding checks, or outstanding deposits on the check side of things on the cash outflows. If you make all of your payments with electronic transfers, you don’t write any checks.
And then you don’t record any of the bills or checks when you write the check. But you just wait till they clear the bank. And then you record those items when they cleared the bank, then again, you’re not on a cash basis, you’re on a basis further simplified than a cash basis, you’re dependent on the bank to record all of your transactions.
That means that of course, there’s not going to be any reconciling items when you do the bank reconciliation, because there are no outstanding checks, there are no outstanding deposits, because you waited until they cleared the bank before you recorded them.
So you still want to do the bank reconciliation in that case, although it should be really easy to do, because because that what’s in our book should match what’s on the banks books.
So what you’re doing with the bank reconciliation process there is just tying out and making sure that you didn’t miss any transactions within the bank feed process, and that no transactions were duplicated in the bank feed process.
So it’s still important, but it’s a lot easier. But if you’re doing a full service accounting system, then you’re gonna have to enter the transactions in some way on your side. And then you’re going to have to match them to what what was entered on the bank.
And in that case, you can still use the bank feeds because the bank feed will will pull in a deposit. So let’s say we made the deposit on our side sales receipt, and then the deposit for $100. And then the bank feed.
Also we pulled in that $100 What the bank feed will do is a match out what they pulled in to the $100 we deposited and it’ll basically reconcile so it will help us kind of doing the reconciliation process as we entered the bank feeds, it’s not going to help us record the transaction because we’re still going to record it on our end.
But the bank fee can help us tie out what’s on the books to on our side and possibly make the reconciliation process process faster in that case.
So that’s going to be so those are going to be the kind of the mythbusting there it’s possible to simplify the process if you’re dependent on the bank feeds, but some in some industries are not going to be basically you can’t just wait till it clears the bank if you’re in certain industries.
Okay, so that’s going to be the general idea here. So basic takeaways. The bank reconciliation is good it’d be important for pretty much all businesses, large businesses, small businesses, infant businesses on a cash basis, accrual basis.
And even if you’re dependent on the bank, it’s a huge internal control that you want to you want to put in place in your accounting system. And, and so we’ll get into basically the details of it the reconciliation process in future presentations. And we’ll do that in a step by step process.
And just remember, as you’re doing the bank reconciliation, you’re not trying to just fix the bank account the cash account or make sure it’s correct, you’re trying to get a reconciliation on all of the accounts, right, if the cash account was off by $5, or something like that, that’s not really a big deal.
However, if your reconciliation is off by $5, it might be because you’re missing like 10 deposits, and 20 checks or something like that, that happens to net out to $5.
So the idea when you’re reconciling, and the reason you want to want to do it, which might motivate you to make sure to do it would be that you’re getting a huge internal control check.
Not only just with the bank account, but with all the other transactions that are involved, or at least those that involve cash and cash is involved in all the major accounting cycles.