 Zero Accounting Software 2023 Bank Reconciliation Mythbusting. Get ready to become an Accounting Hero with Zero 2023. Here we are in first a word from our sponsor. Well actually these are just items that we picked from the YouTube Shopping Affiliate Program but that's actually good for you because these aren't things that we're just given to us from some large corporation which we don't even use in exchange for us selling them to you. These are things that we actually researched, purchased and used ourselves. Ugg Slippers. I usually walk around my home in just my socks but I wanted a high quality pair of slippers that didn't have a heel on them so I can slip them on easily, give me a little bit more warmth than just my socks provide and which has a sole on them so I can deal with messes in the home such as spilled liquid or broken glass without getting my socks wet or my feet cut up and the Ugg Slippers do a great job with that. I like the quality of the slippers. They feel like they're going to last a long time. They will probably outlast me so I recommend the Ugg Slippers. If you would like a commercial free experience consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com where we have many different courses. You can purchase one at a time or have a subscription model giving you access to all of the courses. Courses which are well organized have other resources like Excel files and PDF files to download and no commercials. In our custom zero home page going into the company file we set up in a prior presentation and get great guitars duplicating some tabs to put reports in like we do every time. Right click in the tab up top so we can duplicate it right click in the tab up top so we can duplicate it again back to the tab to the middle bit accounting drop down that is and we're going to open up the balance sheet a slightly customized one but if you don't have a customized balance sheet you can open just the normal balance sheet tabbing to the right accounting drop down we're going to open a comparative income statement if you don't have that you can just open the normal income statement that comparative income statement showing the two months of data input that we have put in place thus far January and February. So now we're going to go into the bank reconciliation process comparing the two months that we have done so we can do the two bank reconciliation side by side January and then February looking at the differences from the problems for the first bank reconciliation which is often the most difficult one and then the second one which should be easier reflecting the bank reconciliation process after going through that first difficult month of bank reconciliation. Now before we dive into the bank reconciliations and how to do them we want to talk about what the importance of the bank reconciliation is and some misconceptions out there about bank reconciliation or what I perceive to be some misconceptions that are out there about bank reconciliation and I think they come around come around or arise in part due to the bank feeds. So in other words the big misconception I think is out there is that because you have bank feeds the bank reconciliation process becomes obsolete and that's not necessarily the case. You could have a situation where the bank feeds are basically doing the bank reconciliation for you making the bank reconciliation much easier but we still have the concept of a bank reconciliation which is going to be an important concept. So just note if I go to the first tab here when we're thinking about using accounting software we are really leveling up the amount of assurance we have over our accounting system. So for example in the United States if you were sole proprietorship in your small business you might be putting together your financial statements for internal uses but also you're trying to get the financial statements together for taxes income tax reporting at the end of the year. Sometimes people will just try to compile based on their receipts or based on the bank statements what they have spent over the year and income statement because the income statement is the performance statement for an income tax that is the basis to create your schedule C for income taxes. But when you do that you don't have the double entry accounting system so there's a huge possibility that errors are going to be made in that kind of system because you're kind of just you're winging it you're just kind of putting stuff together whereas if you actually track your information in a double entry accounting system which is easy to do with software like zero then you have that big level of assurance that's one of the huge internal controls we have the double entry accounting system being reflected by the balance sheet which shows assets total assets equaling liabilities and the equity. So if you are using software just by using the software you have leveled up your amount of assurance over your bookkeeping substantially because you're using the double entry accounting system even if you don't know how to use the double entry accounting system and that's basically one of the biggest innovations in you know good bookkeeping. So and that's also where a lot of frustration comes in for people because when you enter something into the software and you feel like the software is not doing what you want it to do it's usually because the software is trying to force you to enter something that won't throw the double entry accounting system out of balance which is good because we want it we want that internal control. So that's the biggest internal control we have now the second biggest internal control we have which all businesses should do is the bank reconciliation. So the bank reconciliation is reconciling the cash account to an external source of that being the bank. So we have the bank statements and we have our internal data input into our system those are two separate sources by two separate institutions in theory and there's more or less levels of assurance based on our bookkeeping which we'll talk about in a second. But that second level of assurance gives us a lot of assurance over that the flow activity that's happening in the checking account. Now you might think well I can just go to the bank account online banking I could just go into the online banking and I can look at the balance on the bank account at any given time and I can kind of double check that it's at least close to what's in my zero account and then that's good that's all I need to do I can verify cash that way. I can do a whole reconciliation kind of process. Now note that first of all when you tie out when you look in your online banking it will not always be the case that as of a certain date even if using bank feeds that the number here will match the bank depending on your bookkeeping system it might but there are many situations where it won't even if you didn't do anything wrong because of outstanding items outstanding checks and deposits. So you can kind of get an idea so you might say that's good enough I can get an idea of it and so that's all I really need. But by reconciling the checking account you're not really just checking your cash account you're checking all the transactions that are that are flowing through the checking account. So you'll recall that if I go into the checking account here just to give us an idea of why this is so important if I go into the checking account we can see all the different kinds of transactions and the source documents that go through the checking account receive money forms spend money forms transfer forms and you know you have the most the largest variety of different types of data input transactions in the checking account than any other account in other words if I go back to any other account over here on the balance sheet and we say like the accounts receivable it's going to go up with an invoice down when we receive the payment inventory goes up when we purchase it down when we sell the inventory right fixed assets only goes up when we purchase it very rarely compared to other types of accounts whereas the cash account has all these different kind of activities that are going into it why because the cash account is the lifeblood of the company it's involved in every cycle so we're not just trying to verify the number in cash we're trying to verify all the transactions that have gone through cash because that way we're giving at least some verification on every other cycle in our accounting our accounting cycle so if I say if I look at my bank account and I say well the checking account is off by you know five hundred dollars or something but that's pretty close because I know there's outstanding items so I'm okay with my cash account I think I'm fine and that's cool well then but that if you're off by even if you're off by like three dollars or something like that and there's a difference of three dollars that three dollars could have been because of five deposits and twenty checks that just happen to net out to be off by three dollars and and so that means that even though your checking account is pretty close to where it should be you're missing a whole lot of activity in your accounting system and that means that your income statement your performance statement might be completely wrong because you're missing a bunch of of of deposits as well as a bunch of checks that just happen to kind of net out and expenses that happen to net out so that's kind of the idea of what what we need the reconciliation for we need to check it so that we can check all the transactions to get a better idea of that let's take a look at a flow chart this is a quick books desktop flow chart but we're just looking at the flow of operations here which is basically the same for most accounting cycles now note that whatever cycle we're looking at vendor or payables cycle the customers or receivable cycle or the employee cycle cash is involved that's the point here so if I look at the vendor cycle at the end of the cycle cash is going to go out of the business for the purchase of goods and services they're going to be used to help generate revenue in the future customer cycle at the end of the cycle cash hopefully is going to be coming into the business for goods and services we provided to customers to help generate revenue and the employee or payroll cycle cash is going out to pay for services of our employees in order to help us to generate the revenue so let's kind of think about how the bank feeds might fit into this because here's the common misconception I turn on bank feeds the bank feeds are connected now to the bank so I don't need to reconcile because the system basically does it for me now that could be the case you know to some extent depending on how how you're dealing with the bank feeds so you can kind of break this out between a cash or a cruel basis on by cycle vendor cycle and customer cycle if you're running payroll through the accounting system then you're not going to be using a cash based system for payroll because the withholdings and stuff will throw you off of the cash based system so let's let's look at the let's look at the vendor cycle and the vendor cycle many small businesses will be using a cash based system which means the bank feeds can help out to to process the transactions easily making also the bank reconciliation is quite easy so in other words if I'm paying for normal kind of things like Verizon my phone bill my telephone bill and whatnot if I'm paying them just as they come up and I'm using electronic payments to pay for those items then instead of me manually entering the check form or decrease to the bank account money out form into the system I can just wait till it clears the bank and then use the information from the bank to record the activity and that's quite common for small businesses notice that's a step away from a full service accounting process because in a full service accounting process what you would want to do is you enter the transaction on your side and then on the on the banks side it clears the bank and then you match the two out in the reconciliation given you an external verification of the data input whereas if you're just relying on what clears the bank in order to then record it on your side what happens is is now you're relying on the bank right if the bank is wrong then you're not going to kind of catch that usually the bank is not going to be wrong and you're in that's a system that's fine to use but your internal controls you can see are less than if you did the two-step kind of process now it used to be in the past most of the stuff we paid for was paid with checks physical checks and that's when you have to do that the reconciliation becomes a bigger issue because when you mail out a check now you've got this big timing difference between the time you wrote the check and the time that the check is going to be received and clear the bank and that's when you get this big difference between what's on your books because you know you wrote the check you know you don't have that money anymore even though it's kind of in limbo because it hasn't been pulled out of your bank account yet because it hasn't yet cleared the bank but these days if you do electronic transfers which many small many businesses do it's the easy thing to do then the timing difference is very small and so that means that you can kind of rely on the bank to record the transaction and that's just the easy thing to do and that means that from a reconciliation standpoint those transactions are basically checked off already as something that has been reconciled because you took them directly from the bank now if however you're going to use a check format you write checks well then then you're going to have to write the check first that's the way you want to do it so you can track the outstanding checks to make sure that if there's a problem if the check got lost in the mail you can say hey look I mailed the check and we can see if it cleared or not and if you enter bills into the system now you're dealing with an accounts payable transaction now you have an accrual component of the transaction and you and that throws kind of a wrench into the the system of just just relying on the bank feeds to record the transactions because you're going to record the expense when you enter the actual bill. So a lot of times small businesses can kind of use a cash based system and kind of rely on the bank feeds which are which are which helps with the bank reconciliation and and they're making payments electronically either with electronic transfers or possibly with credit cards both of which can be connected to the bank feeds. Let's look at the customer or vendor the customer side of things the sales side the revenue side. Now if this is where there's a lot of variation depending on the industry you're in if you're in an industry where you can wait till something clears the bank before recording the revenue then you have a system where you can kind of rely on the bank feeds and you can have a quite easy system which makes the bank reconciliation very easy meaning if I'm recording all of my expenses as they clear the bank using the bank feeds and I'm recording all of my revenue as the deposits clear the bank then my bank balance should match exactly what's on what's on the bank running balance making my bank reconciliation easy because I constructed my books not independent from the bank but entirely from the bank statement and so so the reconciliation won't have any outstanding items so it will be quite easy but you can only do that if you're in an industry where the deposits are you can wait till they clear the bank and you're not tracking the accounts receivable or anything like that so something like gig work works quite well for that if you're getting paid by YouTube and you just get the money you let it clear the bank and then you record revenue as it clears the bank then you could your bank reconciliations will be very easy you won't have anything to reconcile you still should do them just to make sure that you didn't double input anything or miss something but it should be just a click just there it is it's the same good but then if you go a step away to a cashed based system at a receipt like a food truck situation for example then you're probably going to want to input some internal controls you're not going to want to sell all the stuff from your food truck during the day make the deposit and then wait till the closet deposit clears the bank to record revenue from the bank feeds you could do that that might work but you're losing kind of a lot of internal controls that a lot of times people want when you have a cash register for example you're probably going to want to enter the cash register receipts as you receive them and then match your cash register receipts that you have to the actual money that you have received if they were cash or other forms of payment and then you're going to have this grouping issue that you're going to want to group the money as you deposit it into the bank in the same format that you expect to see it on the bank feeds so in that system usually due to the internal controls you're going to enter the transactions yourself in a more full-service bookkeeping system and then when they clear the bank you're going to match them to the bank feeds so you're not going to actually record transactions from the bank feeds you're using the bank feeds to help you reconcile the bank feeds are a reconciliation tool in that case and then if you're in if you're having a cruel system that throws a wrench into the bank feeds because now you're going to have to send out an invoice which doesn't have cash related to it so you so you have to record revenue from something that doesn't have cash and then you're going to receive the money which you could wait till it clears the bank with the bank feeds and match it to the invoice possibly or you receive the money make the deposit and then match it to the bank feeds so we'll talk more about those processes when we get to the bank feed section but we just want to point them out here in the reconciliation now in the employee section if you run employee through zero with gusto that automatically takes you out of the system where you're on a cash based system because you're going to have to track if you're in the United States at least withholdings which are you know the taxes social security Medicare federal income tax which again makes the whole bank feed system a little bit more complex because you're going to have to enter the transactions first and then reconcile to the bank you can't wait till something clears the bank and then record the payroll from the transactions from the bank feed we talked about some workarounds with that to try to stay in a cash based system if you have like a an external payroll provider that's doing all the other stuff and and then you might be able to work around a cash based system in that way making periodic adjustments from the reports from the external payroll provider alright so there so so that's the idea here so you still need to do the bank reconciliation it just will be easier or less easy depending on the bank feeds that you have in place now the other thing I want to point out is people often confuse the process of reconciling the bank with a bank reconciliation so just note that a bank reconciliation is a report that's showing the differences reconciling between what's on your checking account and what's on the bank account and it's usually done monthly so if at the end of the year I had this amount in my check in my checking account in my books but the bank said that I had a hundred thousand in the bank then there's a difference between those two numbers we want to reconcile what that difference is what could that difference be well it could be errors but assuming there's no errors it's going to be outstanding items outstanding deposits outstanding checks that we know about we have entered which have not yet cleared the bank and if we can if we can tie this out exactly to what's on the bank statement at the right exact date then we have good assurance not only that this balance is correct but that every transaction in the checking account is correct verifying the other side of every transactions in our book keeping system so oftentimes when we do the bank reconciliation we're actually going to we're actually going to go through the process of ticking and tying everything out and that's in part what we do with the bank feeds sometimes when we're matching the bank feed transactions to what we entered in the system we're basically reconciling the bank account at that time but that reconciling process even if you don't look at the bank statement after the bank reconciliation it's still important to reconcile reconcile lean is the internal control process and that's a great thing to do but that's different from the bank reconciliation which is the actual report that you would create after you have done reconciling which would show the book balance and the bank balance and the differences between the two outstanding items typically all right so we'll get into actually doing the bank reconciliation and future presentations the first month of the bank reconciliation often has its own little quirks to it but once you get through the first month the bank reconciliation should be quite easy so we'll do two months side by side