 Hello and welcome to this session in which we will discuss the bank reconciliation. This topic is covered on the CPA exam as well as intermediate accounting. As an accounting student you should be very familiar with the concept of bank reconciliation. Whether you are an accounting student or a CPA candidate, I strongly suggest you take a look at my website farhatlectures.com. I don't replace your CPA review course. I am a useful addition. I explain the material differently than your CPA review course. I can help you understand the theory behind the concept which in turn will help you learn your material faster with your CPA review course. Your risk is one month of subscription. Your potential gain is passing the CPA exam. I can help you add 10 to 15 points to your score by explaining the material differently by helping you understand it better. If not for anything, take a look at my website to find out how well or not well your university is doing on the CPA exam. I do have resources for other college courses such as advanced accounting, governmental accounting, managerial accounting, auditing and others. My CPA supplemental resources are aligned with your review course such as Roger, Becker, Wiley and Gleam. So it's very easy to go back and forth between my material and your CPA review course. Also on my website I give you access to all the AI CPA previously released questions, almost 1500 with detailed solution. If you have not connected with me on LinkedIn, please do so. Take a look at my LinkedIn recommendation, like this recording, share it with other connect with me on Instagram, Facebook, Twitter and Reddit. Let's start by discussing the purpose of the bank reconciliation. Once you understand the purpose of the bank reconciliation, the big picture, then it will be easier for you to understand the small pieces. Here's what we're doing in a bank reconciliation. We are reconciling to account. Reconciliation means you are comparing two things and make sure they equal to each other. We are reconciling the cash general ledger. That's one purpose to the bank. That's one party to the bank balance to find the true cash balance. Simply put, we have a cash account in our general ledger and we have the bank statement, bank statement that the bank provides us. Remember the bank statement should be a reflection of your cash balance. So why do we need to reconcile them if the bank statement is a reflection of your bank balance to establish the true cash balance on the balance sheet, the true one? Why it's true? Are you saying that my cash balance is not true or my bank balance is not true? And the answer is they could differ. Why they could differ because of timing differences. There's something that we called timing differences. Simply put, certain things they're going to occur and we're going to record them in the cash account but they will not be recorded in the bank statement until later or they're going to be recorded on the bank statement but they will not be recorded in the cash balance until later date because of those timing differences we need to prepare this bank reconciliation to make sure this account, the cash general ledger and our bank balance are the same. Also, as we prepare the bank reconciliation we may discover error or fraud, errors or fraud. Why? Because as we are comparing the cash balance, all the transaction to the bank statement, if there's any errors we're going to be able to catch it. If there's any fraud, if somebody's not making the deposit, if we have a deposit here that's not on the bank balance, we need to find out why. Why is it still outstanding? Where's the money? If we recorded the cash in the books in the same concept, if we pay someone, this is our chance to see who are we paying? Okay, so it's a way to, it's a part of your internal control and the bank reconciliation is prepared by an independent third party. What does that mean? This is why it's part of the internal control. You don't want the people that make the deposit or write the checks, prepare the bank reconciliation. You want someone other than these parties. Why? Because you want to have a third sets of eyes looking at these financial statements and by doing so they will double check the work of others. That's the purpose of the bank reconciliation, independent third party. Now we have two sides for any bank reconciliation. We have the bank balance and we have the general ledger balance. And what we do, we're going to start with the bank balance, look at the timing differences and find the true bank balance. Same thing, we're going to look at the cash general ledger which is the books. Look at the reconciliation, looking at these timing differences and find the true cash ledger. Let's start with the bank balance. What is a timing difference? Well, an example of a timing difference is outstanding checks. What is this outstanding checks? Let's assume I wrote a check to my, I paid my payable, I paid $300. I wrote a check for $300 and I paid my suppliers. So what did I do? I debited my AP 300, I credited my cash 300. Well, when I did so, I credited my cash 300 and let's assume I made the payment December 29. I sent the check December 29 and I sent this check to my suppliers. Well, my supplier did not receive the check until January 5 and it took them a few days to deposit and it took the bank a few days to clear. It did not clear my bank until January the 10th. So notice, on December 31, I deducted the money from my cash. It did not clear the bank until January 10th. So you see, notice the timing difference. Therefore, there's going to be a $3 difference between my cash balance and my bank statement. So what do I need to do? On my bank statement, I need to deduct this $300 to reflect the 300 both. So now the 300 is both on my bank balance and in my cash, in my cash balance. Same concept applied to something called deposit and transit. Now it's the opposite. Let's assume I received on December 30th $1,000 worth of checks from my customers. Therefore, I debited a I debited cash, credited a count receivable $1,000. So this $1,000 already reflected in my books and I made that deposit on December 30th. The bank was closed December 31st. They did not open till January 1st. In January 1st, the bank added the deposit. Well, that deposit, that $1,000 deposit will not appear on my December 31st statement. Therefore, what I have to do, I have to add this $1,000 to my bank reconciliation. Therefore, deposit and transit is another timing difference. Also, what you could do, what could happen is the bank could have made an error on your bank balance. They could have deducted money from your account by mistake, maybe cleared another company's check against your account by mistake because the numbers are similar or the name is similar or they could have gave you money by mistake. Somebody made a deposit and they deposited that money in your account. Well, what do we have to do? We have to account for those differences. We have to account for those differences. And once we account for all those three differences, usually those are the three things that appear on the bank reconciliation. We come up with the true bank balance. Now, here's what I'm going to tell you. I'm going to go, I'm going to explain this concept. I'm going to work an example, but I have more examples. Please work more examples. I have more advanced examples. Okay. And the reason I'm saying this because, okay, you can memorize this, you can understand it, but you want to work a few examples until you get it. And on my website, I do have practice questions to do so. So make sure you practice more bank reconciliation. So now we are done with the bank balance. I usually start with the bank balance because it's easier to figure out the bank balance in my opinion, or it's easier. It's not a proper or not proper. I just like to complete the bank balance because usually the bank balance will have outstanding checks and deposit and transit in the real world. Now, in the real world, I prepared many, many bank reconciliation because we dealt, my firm dealt with small and medium-sized companies, and small and medium-sized companies, they cannot afford a third party to do the reconciliation. So they outsource this third party to their CPA firms to us. So we are the third party. Okay. Now, this is the bank balance. Now, the first thing when you're preparing a bank balance and when you're learning this process, you want to understand where each item goes. So the first thing is once you are giving an item, you have to identify whether it goes, whether it affect the bank balance, or whether it's affected your books, your general ledger. So the only thing that affect the bank balance are outstanding checks, deposit and transit, and if there's an error. So it's easy to kind of know what affect the bank balance. And practically everything else affect the cash general ledger. Now, how do you adjust the cash general ledger? What you do is you would look at your bank statement. When you are adjusting your general ledger, you are examining your bank statement, and you are looking at your bank statement and finding out if there's anything on your bank statement that appears on your bank statement, but it does not appear in your cash general ledger. Like what? Interest earned. If you earned any interest, like $10 of interest, you're going to know about it when you receive your bank statement. Well, once you know that you earned this $10 of interest, then guess what? You're going to add $10 to your cash books, because if it's on the bank statement, you're going to add it to your books. You will add $10 to your books. Another example will be notes or money collected on your behalf by the bank. Sometimes the customers might send the check directly to the bank because you ordered them to do so. Let's assume the bank collected a note or some money from your customers of $500. Well, it's on your bank statement, but it's not on your books yet. Well, you will have to add. You have to debit your cash $500. And by the way, anything that affects your books, you will need a journal entry for it. You would need a journal entry, and we would look at an example to see how you process those journal entries. So those are two items that could increase, that could be on your bank statement, not on your books. We need to add them to your books. And to add them to your books, you need to journalize. So simply put, you will be debiting cash, crediting something else. Also, the bank might charge you like a service fee or check printing fees or some type of miscellaneous fee. Well, if that's the case, the bank took $20 from your bank account. It's on your bank statement. It's already on this end. Well, we need to deduct $20 from your cash. Therefore, now you will adjust your cash book balance. NSF checks, which is non-sufficient checks. How does that work? Well, here's what happened. Someone sent you a check. A customer sends you a check. Forehead. I sent you a check. I sent you a check for $200. What you did is you debited cash, $200. You credited a counter-receivable forehead, $200. And you would say, great, now I have $200 in my cash balance. Now, you did not know that this check is no good, because you don't know, but you're looking at the check. You don't know. You took this check and you deposited that check in your bank account. The bank contacted Forehead's bank and Forehead's bank told them Forehead does not have money in his account. The check will bounced. This check is considered now non-sufficient fund checks. Now the bank told you, you have $200 added to your cash account. The bank telling you that $200 is no good. So what you need to do, you need to deduct $200 from your cash account, because the bank told you that cash is no good, that check is no good, and sometimes they may charge you a fee. And if there's a fee, you will deduct it from your cash account, because the bank already deducted it from their side. So non-sufficient checks is another item you need to deduct. Now to fix this, you're going to debit account receivable forehead, $200, and credit cash $200. And who knows, you might even add $20 to their balance, because build them for $20 and consider it like some sort of a fee revenue of $20 in case the bank charged you another $20 for that. But this is how you fix non-sufficient checks. And at this point, you may discover an error that you made. And if there's an error, you will need to determine whether it's going to increase your balance or reduce your balance. And we'll work an example with errors. So notice, you could make an error, the bank could make an error, depending on which side is the error. So the first thing when you're preparing a bank reconciliation is you need to determine which side does this entry affect? Does it affect my bank or does it affect my cash? Then determine whether you're going to add or subtract. So first determine which side does it affect, because if it's on the wrong side, it doesn't matter whether you think it's an addition or a subtraction from your cash. First decide which side. Then you will get to your true cash balance. And your true cash balance at this point should equal to your true bank balance. And hopefully it will equal to each other. Because in the real world, if it is not equal to each other, it's held. Then you have to go through every check and make sure nobody made a mistake. And sometimes some companies could write 400, 500 checks a month. And at some point, I will be dizzy looking at those numbers. Comparing each check, check number 205 for this amount, I'll make sure it's clear for this amount, so on and so forth. It will be held. But that's done. So let's take a look at an example to illustrate this concept. Adam Cash General Ledger balance is of December 31st. 20x5 is 21,190. Okay, good. So all what we're told here is that the cash balance, we have a cash balance of 21,190. The bank statement of Bank of America for the same period shows an ending balance of 21,000, 21,853. 21,853. So notice the cash balance, the cash balance and the bank balance are not the same for the same date. Why? There are timing differences. Now we're going to start to look at the timing differences. Again, the first thing every time you have a timing difference, first identify, does it affect the cash or does it affect the bank? Then determine whether you need to add it or whether you need to subtract it. A deposit of $3,793 that Adam mailed on December 31st did not appear on the bank statement. Well, I'm telling you here clearly, it did not appear on the bank statement. Therefore, the adjustment should be for the bank statement. So this is a bank adjustment. And if it's a deposit in transit, I already have it in my cash because I already, when I, before I made the deposit, I added the money to my cash. Therefore, I have to add deposit in transit. I have to add $3,793. I'm done with this item. Checks written in December, but did not clear the bank are as follow. Okay, let's take a look at them. We have check number 8327 for $3,400. Check number 8348 for $250. Check number 8349 for $351. Now you can add them up on the CPA exam. You might have to add each check separately. I'm going to add them all up. So simply put we have $4,001 of outstanding checks. Again, I'm going to do it in one shot on the CPA exam. You might have to deal with each check separately. So those are outstanding checks. They were written in December, but they're not appearing on the bank statement. Well, again, if they're not appearing on the bank statement, I have to deal with them on the bank statement. So this is a bank statement adjustment. So I have to deal with outstanding checks, outstanding checks. And I have to deduct $4,001. So those are outstanding. Those are the outstanding checks. I deduct $4,001. Again, it affect my bank balance. Bank service charge of $20 are not yet recorded on Adam's books. Well, think about it. Where do you find out about your bank charge? Well, you're looking at your bank statement and you say, Oh my God, they charge me $20. Well, it's already on your bank balance. If it's already on your bank balance, you don't need to take it out again. You need to deduct a fee, a service fee of $20 from your cash account because you did not record this. Now remember this $20 already reflected in the $21,853. Now we needed to reflect it on the books. The bank returned one of Adam's customers checks for $240 with the bank statement mark non-sufficient fund. So someone paid you $240 and when you receive this money, you debit at cash $240, you credited the account for $240. Therefore, this $240 cash is already in this balance. The bank is telling you, well, this cash is no good. So what do you need to do? You need to deduct non-sufficient for $240. Let's see. Adam discovered that's incorrectly recorded check number 8322 written in December for $121 in the payment of an accounts payable as $212. Okay. So here's what happened here. So first of all, Adam discovered, so it's an Adam issue. It's not the bank that incorrectly recorded a check for check number 8322. You wrote it for, you said, I wrote a check. So here's what happened. You wrote the check. The actual check was for $121. And the bank cleared it for $121. On your books, what you did is you debited accounts payable $211 and you credited cash $211. So first you need to know the amount of the error. Well, first take the difference between $211 and $121. That's the error, $211 minus $121. So there's an error of $90. Simply put, you wrote a check for $121. You thought you wrote it for $211. So you took too much out of your bank account, not your bank account, your cash account, because the bank will clear it only for $121. It will clear it what's on the bank, what's on the check, but you made the error. Therefore, you have to deduct $90 from your cash balance. So this is an error and you made the error and you have to deduct $90. Again, the error, it could have been the opposite. The check could have been for $211 and you wrote $121. So you have to be careful. First, find the difference and determine who made the mistake. First, who made the mistake? I did. The company did. So it's going to affect the cash balance. Find the difference and the mistake. Then find out whether that difference I should add to my cash or deduct from my cash. Here I took too much from my cash up front. I have to reverse it. I have to add $90. I'm sorry, I have to add $90. I have to add $90. Adam has not yet recorded an 800 of notes received while collected by the bank on his behalf. So the bank collected $800 on our behalf, which is great, but it's not showing on our books because now we're aware of it. So the bank is already aware of it. So this $800 is already part of the $21,853. Now notes collected, notes receivable collected, we're going to add $800. Let's see. A check for Adam with 2Ds in the amount of $175 that the bank incorrectly charged to Adam was listed with the clear checks. So we saw a check. We saw another check that we did not really, we're not familiar with and it looks like they deducted $175 from our account, but the check was written against Adam company ADDAM, which is the bank made a mistake. The bank made a mistake and they took $175 from us. Now we need to tell the bank give us $175 from our perspective. We need to add. This is an error that the bank made. Now we looked at everything. We cleared everything. Now let's do our math and make sure this adds up and hopefully it will add up. I'm going to do the book balance first. $21,190. I'm going to deduct $20 for the service fee, $240 for the non-sufficient check. I'm going to add $90. The error that I made and I'm going to add $800 for the note receivable collected. So $21,820. Now all of these I'll need to prepare a journal entry because I changed my cash. Okay. I'm going to show you the journal entries on the next slide. My bank balance, I started with $21,853. I'm going to add deposit and transit $3,793. Let's do it again. $21,853 plus $3,793. I'm going to deduct my outstanding checks $4,001 and I'm going to add the error which is $175 and this should equal to $21,820. And let me show you how it looks like on the other end. This is what a bank deposit looks like. We start with a bank balance, add deposit outstanding which is outstanding deposits, add the error that the bank made, take out the check outstanding, we're done with the bank. Now we're also done with the books and this is the entries for the books. As I told you, everything that we did on the books will need a journal entry. So let's start with the journal entries. First, for the $90, we made an error. Remember, we deducted $90 from our cash account and reduced our account spable by $90. Well, we have to reverse this. We have to give ourselves the cash and we have to increase our account spable because we reduce our account spable but more than we should have. Okay. So this is the entry to fix the error. Notes collected. I'm going to add $800 to my cash and I'm going to credit my notes receivable, $800. And I'm done with this one, non-service fee. Well, I'm going to debit bank service expense, $20, credit cash, $20. For the non-sufficient check, I'm going to debit account receivable for that customer and credit my cash, $240. What I want you to notice is the following. Now, I could have this all in one entry. So notice every entry will affect your cash account. Every entry will affect your cash account. Every entry will affect your cash account. Every entry will affect your cash account. So I can do this all in one entry. Simply put, net the cash, either it's a debit or a credit, and debit and credit the other account in one entry. I just want to show it to you separately. So this way you can see each entry separately. As I told you, you want to work more examples and to work more examples, go to my website. I have more examples. At the end of this recording, I'm going to remind you whether you are an accounting student or a CPA candidate. Take a look at my website, farhatlectures.com. I don't replace your CPA review course. I'm a useful addition to your resources, to your CPA review course. I can help you do better on the exam. I can help you pass the exam. Invest in yourself. Invest in your career. Don't shortchange yourself. My fee is nominal. You can give it a try. You like it, you keep it. If not, you cancel. Good luck, study hard, and of course, stay safe.