 Hello, and welcome to this session. This is Professor Farhad. In this session, we would look at a bank reconciliation, the topic that's covered in financial accounting introductory course, as well as an advanced accounting courses, and surely covered on the CPA FAR exam. As always, I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have 1600 plus accounting, auditing, tax, and finance lectures. This is a list of all the courses that I cover, including CPA questions. If you like my lectures, please click on the like button, share them, put them in playlists. If they benefit you, it means they might benefit other people, especially these days with the coronavirus out there. Many students can get some help with online courses, and please connect with me on Instagram. On my website, farhadlectures.com, you will find additional resources. If you're studying for your CPA exam, or you would like to supplement your accounting education. So, the first thing we're going to look at is sorting what we called source document that comes with a bank. The first one is a deposit ticket. What is a deposit ticket? Well, when you deposit money in the bank, they will give you, you will fill out a form, then you will get a receipt, like a deposit receipt, but you have to fill out a ticket. What is a deposit ticket? Well, it's used to deposit money in the bank, so you have to fill it out. It's a source document for the bank. You'll list the cash that you are depositing, as well as the checks, along with the amount. It serves as proof of deposit, and they will give you, the bank will also give you a receipt. And this is what a deposit ticket looks like. So basically here's the date on October 2nd. We deposited in total $240 cash, $36.50, and the checks, $203.50, and those are the checks. On the back, you would list the checks and the amount, okay? And basically the memo is deposit checks. You deposited some money. The company is Videobuster Company. So this is the company that's depositing the money. Now you also, after you deposit the money, you write checks. And remember what we talked about in the prior session? All disbursement should be made by check. It's used to withdraw money from the bank. That includes the maker, the signor of the check, the payee, and the payer. Simply put, the check tells you everything you need to know about the transaction. And to illustrate the point, let's take a look at the check. Here we are dealing with Videobuster Company. Videobuster Company is called the maker of the check, the company that's making the check. The date is October 3rd. When? First of all, who? When? October 3rd. There's a check number. There's a check serial number. These are pre-numbered, so we can account for all checks pre-numbered. The payee. Who are we paying? We're paying Hillcrest Lightning. So who we are paying? How much? 375. And the number is written as well. And memo for what? Stored Lightning design. And who signs the check? I don't know who signs it, but it doesn't look very clear, but that's the signature of the person. So the check tells you everything about the transaction. It's a good record. Of who, when, why, and how much. Then for the old checks, one of the old checks, you will have a remittance advice. Basically, you keep this for your own record, so this way you can record the transaction. This is where a check looks like. The check goes to the bank, then get deposited into the bank, into the other bank. Now, a bank statement, that's an important document we need to talk about today because with a bank statement, we're going to have to prepare a bank reconciliation. What is a bank statement? Well, maybe you're not familiar with a bank statement. Usually the bank statement is sent on a monthly basis. And this bank statement is October 31st, 2019, for the month of October, for Video Buster Company. This is their account number. This is the at first national bank, Hillcrest, New York. It's a member of the FDIC. It's not, you know, general information. What would the bank statement shows? It tells you, what was your beginning balance at the beginning of the period 1,610? How much total checks and debits? Now, in the banking language, debit means they took the money away from you. They took 723 in total checks and debit. Total deposit and credit is 1,163. So if we take the beginning, minus the checks and the debits, add the deposit and the credit, we get the current balance of 2,050. Simply put, as of October 31st, your balance per bank statement is 2,050. Now, what they do, the bank will show you an itemized list of all the deposits and all the debits and all the credits and the debits. So it will show you everything that took place. For example, here we have the date. These are the checks and the debits. There was it on October 3rd, a check number 121 for $375. On October 12th, there is a DM. What is a DM? DM is a debit memo. Debit memo, it means they took money away from you. Now, on the debit memo, they'll explain it a little bit further. For example, this debit memo is for check printing. So they charge you $23 on October 14th. There was a check number 122 for $70. October 16th, check number 123 for $25. It was an electronic fund transfer. EFT, they'll tell you what everything means. October 23rd, check number 125 for $15. October 25th, there was a $20. NSF, what is NSF? NSF is the non-sufficient funds. Someone gave you a check for $20, but the check was not good. When that happens, we call it an NSF non-sufficient fund. Then they took $10 with that non-sufficient fund because the check was no good. Then October 26th, there was a check number 127 for $185. All what I'm doing is I'm going over the bank statement because we're gonna be using this information shortly to prepare a bank reconciliation. Then they showed you the deposit for the 1163. You made a deposit on October 2nd. There was a deposit, electronic fund transfer for $100. October 16th, $330. October 23rd, there was a 485 CM. What is a CM? CM is credit memo. Credit memo, it means they gave you money. Someone deposited money on your behalf, 485. October 31st, 8IN, what is IN? IN is interest, so they gave you interest of $8. So this is what the bank statement would look like and don't worry, we're gonna work with this shortly to prepare a bank reconciliation. Now according to your bank statement, your balance in the bank is clearly showing $2,050. Now if we look at your cash general ledger, your cash ledger, your balance in the cash ledger is 1,405, huh? Your bank saying you have 2,050, your cash ledger is showing 1,405. There is a discrepancy. There is a difference between the two. Is that possible? Of course that's possible. That's normal, that's the norm. Your bank statement as of October 31st, most likely will not equal to your cash ledger October 31st. Why? Because there are what's called differences, differences between the two balances. And the purpose of the bank reconciliation is to make sure we can account for all the differences. Well, the purpose of a reconciliation, reconciliation is what? Reconciliation is taking two things, two things. Let's assume A and B. And what you are doing with A and B is basically trying to find the difference between them. And can you account for the differences? Because at the end, you have to account for everything. So you're taking item A and item B. And what you're doing is you are accounting for everything in item A and everything in item B, making sure they're equal to each other if they don't. And this is what a bank reconciliation is. And once we prepare one, it will make more sense. So what could be some differences? So a bank reconciliation is prepared, not periodically, it's prepared, should be prepared monthly, should be prepared monthly. It prepared monthly to explain the difference between the cash reported on the bank, which is in our situation was 2050, and the cash balance on the company, which was 1,405. So what are the differences? Why would differences exist? That's the first thing. Why would differences exist? Well, let's think about it. If we are looking at the bank balance, what could be missing from the bank statement? Well, few things could be missing from the bank statement. One is something called deposit and transit. What do we mean deposit and transit? It means you receive the money at your company. And what you did, you recorded the amount. Let's assume you received $500 today. You recorded the amount that you received $500. You went to the bank and you deposited that money in the bank. Well, maybe it took the bank a day or two until that money showed in your bank statement. So by the time you received your bank statement, well, your books are showing $500, your bank is showing. So what we need is not showing that amount because it's not reflected there. Let's assume we are dealing with the bank statement at the end of October. Well, if you make a deposit October 31st, there's a good chance it will not show until the November 1st. So what happened is on your books, the deposit shows on your bank it doesn't. So if we have anything called deposit and transit, we are going to add. So those are the rules you need to know. So we're gonna look at our bank balance, add any deposit and transit. Second thing we do is we deduct, subtract any outstanding checks. What are outstanding checks? When you write a check to someone, what you do is you deduct that money from your balance at the company. Because when you wrote the check, you say, I wrote the check, I mailed it, let me reduce my cash balance. That check may take a few days until it receives the intended recipient. And that recipient may wait a day or two or three days until they deposit that money under bank account. Then it may take two or three days until the bank clear the checks. So there's a time and difference from the time you write a check and deduct that money on your bank state, on your book general ledger until that money clear the bank. We call those outstanding checks. What do we need to do with outstanding checks? We need to deduct outstanding checks. Now on the bank side, there could be an error. If the bank made an error, you might have to add some money to your bank account or you have to deduct. Sometime the bank might took some money from your account by mistake. Sometime they added some money to your account by mistake. Well, you have to find out what happened and make the appropriate adjustment. So those are the bank, not the adjustment, inform the bank about it because you don't need to make any adjustment because the bank made the error. Now, so this is your bank balance adjustment. Then you look at your book balance. You remember the book balance was 1,405, the book balance. Then you add any interest that the bank gave you because you were not aware of it until you received your bank statement. You add any unrecorded cash receipts. Oftentimes what happened, large companies, the customer paid the bank directly. So they don't pay the company, it's part of their internal control. They ask the customer to send the check to the bank. This way the money gets faster to the bank. In this way, the company does not have to worry about having the checks on site. It's a part of the internal control system. Therefore, if there's any unrecorded deposit, you would record those deposits, you add them. Then you deduct, you subtract any bank fees if the bank took money away from you for any reason. Check printing, monthly fees, any other fees. And you deduct NSF checks, non-sufficient funds. What are the non-sufficient funds? Someone paid you a check, you thought it was good. Then you find out that individual does not have money in their bank account. So what you do is you deduct that money out because it's no longer, you thought it was a good check, but now you find out it's not good. Then at this point, you will determine whether you made an error, you add or subtract, and here you have to make an adjustment. And every time you make any adjustment on your book balance, you have any adjustment on your book balance, you have to prepare an adjustment. And we'll see what does that mean in a moment by preparing an adjustment. That means you have to prepare a journal entry. This is what I mean by adjustment. Now, another way to look at this is let me show you before we prepare kind of a bank reconciliation what it looks like. You start with your cash per bank and your cash per books. And you have to find out what items are different between the two and reconcile them, reconcile them. Well, you add deposit and transit for the bank, you deduct outstanding checks. I just told you this. Then you add or subtract any bank errors, any bank errors, depending on the bank errors. Then you find your adjusted cash balance. On your cash per books, you'll start with your cash per books, which is our cash per bank was 2,050. Our cash per books was 1,405. You add any collection and interest, you deduct any bank fees and non-sufficient checks. If there's any error, you will take care of that. Then you'll find your adjusted cash balance. So the purpose is to figure out what is your adjusted cash balance and those two, hopefully they will equal to each other. So preparing a bank reconciliation is very traditional business at CPA firm. I was working in the CPA firm, I would prepare three to five bank reconciliation a week for different companies. Three to five a week for companies because those companies, they wanted someone to prepare their bank reconciliation other than their employer, other than their employees, not employer, other than their employees because they wanted a third party, someone that does not have access to their cash to make sure looking over accounting for everything. So let's go back and revisit. Okay, so remember adjusting entries are recorded for the reconciling item on the book. So everything we do here, we're gonna have to prepare and adjusting. And now let's take a look at an actual bank reconciliation or prepare an actual bank reconciliation. Remember I told you we're gonna revisit the bank statement, we're gonna revisit the bank statement and look at the cash general ledger. So let's take a look at this transaction and see what we are required to do. Here's what a bank reconciliation requires us to do. Everything that's on the bank statement should be on the books and everything that's on the books should be on the bank statement. The first thing I'm gonna try to find out is reconcile the bank statement, okay? My bank statement shows I have a balance of $2050. Now, I need to find out if everything that's on the books is also on the bank statement. I'm gonna start with my deposits. Notice here I have the debits and here I have the credits. I deposited $240 October 2nd. The debt $240 made it to the bank. Here's the deposits. Yes, it did. So if it made it, that's it. I don't have to worry about anything. It's in both places. October the 15th, there was an electronic fund transfer of $100 debit. I received that money. It's on my books. I don't have to deposit in my bank. Yes, it is. It's done. On, I have another deposit October 16th for $330. October 16th, $330. I don't have to do anything. Done. Deposit October 31st for $150. I don't see this deposit. Notice this deposit is deposit in transit. I made the deposit and notice it's done at the end of the month. That's why maybe I made the deposit after three o'clock. So it did not show in my October statement. Therefore, deposit in transit, I'm gonna add $145. By adding $145, basically I accounted for it. I can cross it out, okay? Now I have some stuff on my bank statement. I don't see that's in the books, but once I take care of the book side, I will take care of that, okay? Now, in addition to the deposit in transit, I have to find out if all my checks cleared. In other words, do I have any outstanding checks? Well, let's start with my checks. Check number 121 for $375, let's see. Check number 121, $375, it's in both places. Out, I don't have to worry about this. It's not outstanding. Check number 122 for $70. Right here, check number 122 for $70. That's out too. Check number 123 for $25. Check number 123, it was an electronic fund transfer. That's out, that's done. Check number 124 for $150. I don't see that. I see I jumped from 123 to 125. Well, guess what? Outstanding checks, I just find out that check number 124 for $150 is outstanding checks. Therefore I have to deduct $150 as outstanding checks. Once I deducted from my bank balance, basically I accounted for it, I can cross it out. Check number 125 for $15. Check number 125, $15, that's out. Check number 126 for $200. I don't see check number 126 for $200. Well, that's another outstanding checks, minus 200. I accounted for it. Check number 127 for $185. Check number 127 for $185. That's it, I accounted for all the deposit and transit and outstanding checks. I'm gonna assume there is no error and I'm gonna compute my adjusted bank balance. So my bank balance should be 1,845. Taken 2,050, plus 1 to 45, minus 150, minus 200. So basically I'm done with my bank balance. Now, I'm assuming there is no error. If my balance doesn't work, then I have to go back and find the error and that's the hardest thing. And that's the hardest thing when you're preparing a bank reconciliation if there's an error, because the bank could have made an error or you could have made an error. Well, let's look to see if it's gonna balance once I follow my reconciliation. My book balance is starting at 1,405. Now, what I would do is, I'm gonna look at the bank statement and anything that's on the bank statement that's not on the books, I have to figure it out. Basically, we kind of nail it because we kind of isolate them. What's left is this, kind of, I just wanna highlight them before I do anything. Here's the items that they're on the bank statement, but they're not on the books because we kind of figure out everything that's on the books, the checks and the deposits. Now, $23, this is a debit memorandum. It means they took $23 and let me tell you, this $23 is for check printing charge. Well, guess what? I have to deduct this $23. I have to deduct this $23 and this $23 would require a journal entry. Simply put, because I'm deducting $23 from my books because this is the book balance and this is the bank. I have to make a journal entry. We'll worry about the journal entries at the end. I just wanna let you know that I need a journal entry for that. Then after that, so I'm done with this. After that, October 25th, I see there was a non-sufficient fund check for $20 and $10 fee for that. So they charged me a $10 fee because the check was no good. So I have to take $30 and this is another journal entry for that for the non-sufficient fund checks. So basically I'm done with everything on this side. What I'm left with is $485 credit memorandum. The bank paid me, but I don't see the debit here. Then I have to add. I have to add, I have to add $485 and I need a journal entry for that. We'll worry about the journal entry later. And they gave me $8 deposit. I don't see a debit here. I'm gonna add $8 and I'm gonna have to prepare a journal entry for this interest. Well, if I net my book balance, they will net to $1845 and I should be very happy if those two numbers equal to each other. It means I don't have to do anything anymore. I'm technically done. I'm technically done, okay? Now, let me show you how a bank reconciliation is properly reported. It just showed you how mechanically you go through it but this is how it goes. The bank reconciliation have three headings, the name of the company, bank reconciliation and the date. First, you start with the bank side. It was 2050, you add deposit and transit. You're up to 2,195, deduct outstanding checks, check number 124, check number 126. We come up to the adjusted bank balance. Then we start with your book balance, which was 1,405, collected $485, collected $8 of interest. Remember, those would require a journal entry would give us a balance of 1,898. Then we deducted the check printing charge and the non-sufficient fund, that which is total of $53 and notice 1,845 equal to 1,845. Now, what do we have to do? We have to prepare the journal entries. We have to prepare basically four journal entries, two for the deposit and two for a withdrawal. Well, let's do the deposit first. For the 485, somebody paid their note, we debit cash, credit notes receivable. So somebody owed us money for 85 and they paid it. For the interest revenue, we received $8. For interest revenue, we debit cash, credit interest revenue. So notice, cash, cash. So always when you adjust your bank statement, cash is involved. You either received cash or you paid cash. So we're done with those two journal entries. Then for the $23, we're gonna call it miscellaneous expense. We can call it check printing expense, miscellaneous expense. It doesn't matter and we credit cash. And for the non-sufficient check, we credit cash and debit the person that gave us the check, account receivable, T-Woods. Because when T-Woods send us the money, we assume it's a good money. Therefore we debit at the account receivable, we credit at cash. Now what we find out, that entry is no good. Therefore we have to, I'm sorry, when we receive the money, we get the opposite. We debit at cash, credit at account receivable, for T-Woods. Now we find out that this check is no good. We have to reverse the entry. And reverse in the entry means debit account receivable for T-Wood. Initially he owed us $20. Now he's gonna owe us $30 because the bank charges $30. Notice it would involve cash as well. It's credit to cash. So simply put, after we make the adjustment, this is what we started with. The unadjusted balance added for 85, added eight, subtracted 23, subtracted 30. Our adjusted book balance is 1,845, which is the same as our adjusted bank balance 1,845. Remember, we don't have to do any adjustment for this side. Why? Because we already made all the proper adjustments. So when we deposited the money, we already added the money to our books. When we wrote the checks, we deducted the checks from our books. So we don't have to do anything for the bank side. So there's no journal entry. And this is basically how we prepare a bank reconciliation. Please like the sloucher. If you like it, share it, put it in playlist. And if you're looking for additional material, please visit my website, especially if you're studying for your CPA exam. The CPA exam is a 20 to 30 year, 20 to 30 year investment in your career. Make it, take it seriously, take it seriously. And you will, you will pass. I'm here to help you study hard. Please stay safe, especially this during this corona time.