 books. If there's something, except for, of course, these two transactions down here, the 80 and the two, those are not on our books. And the general rule is going to be this, if it's on the bank statement, and it's not on our books, then we probably have to fix our books. Now the exception to that is what often people think of the reason of doing a bank reconciliation. And that is what if the bank made an error? That does happen. I've seen errors before, but the bank is pretty good at it. So they don't often make an error. What happens a lot more often is that there's transactions on the bank that we have to record. And that's the case with, of course, these two transactions here, the 80 and the two, 80 represents something that maybe we went to the bank and took a withdrawal and never came home and recorded that or to the office and recorded that withdrawal. And therefore, obviously it came out of our checking account. Therefore, it should be reducing our checking account. It is deducted reduced from the bank's side. We haven't recorded it on our side or something like bank charges. If we got a, if we bought checks or if we just had a non-sufficient fund charge, something like that, then of course the bank will just take it out of our account. We wouldn't even know about it. We don't know about it until we get the bank statement and say, okay, they took, in this case, $2 for just surface charges that we're going to have to reduce from our side. Also note that if we're a small company, some small companies may do a lot of stuff basically on a debit card or even individuals may do a lot of stuff on a debit card and actually record it monthly, meaning they're going to get the bank statement, look at all the charges they have made and basically record the transactions from the bank statement to the books in that fashion. Now, the other side of it is if we have something on our books that's not on the bank statement, such as these three items here, so we have these two checks and this item, this deposit, then that difference is probably due to timing differences, meaning we wrote these checks clearly and we made that deposit, but they have not yet cleared the bank. The bank hasn't had time to process those because these two checks have to once again get picked up by the recipient of the check and they have to deposit it and then tell our bank the deposit should take one to two days, but this was deposited on February 28. So what we're going to do is we're going to say, okay, here's these two checks. If we're concerned about them, then what we want to do is call the bank maybe because note when we're doing this process, it's going to be even though it's as of the 28th of February, it's going to be some time in March because obviously we got the statement some time in March and so we can call the bank. We can say, hey, bank or go online and say, hey, did these two checks clear some time in March? And if they did, that's what we would expect and we say, okay, we're just going to record that that's a that's a difference. That's a timing difference. We're good. Same with this deposit, we can with some time in February now, we can call the bank if we're concerned about it and say, I would expect this deposit to have cleared sometime between, you know, before March 3rd. Is that the case? If it is then as of this time period, we just record that as the timing difference. So first let's take care of these two items. We noted that these two items were on the bank statement, but they're not on our books. So what we're going to do is just make the adjustment. Let's just make the adjustment for those two items. We need to fix our books, meaning that if we took out $80 here and we drew it out of the account and just got cash for it and we didn't record it in our books, then what's going to happen to happen is cash is going to have to go down by that $80. We can see that cash has a debit balance. We need to make it go down. We're going to do the opposite thing to it, but therefore that would be a credit. So that's going to be this credit here. We're going to credit cash by the $80, which will reduce the cash account. Then we're going to have to record some other side of it. So we know that cash has to go down. What about the other side? Most likely it's going to be some kind of expense. If we took something out in cash and didn't keep the receipt, that's, you know, we should keep the receipt probably, but if we took it out and we don't know what we spent the cash on, then we're going to have to put it somewhere. One place we can put it is probably the miscellaneous account here. So we're probably, we could put it in the miscellaneous. It's going to be some type of expense, most likely, and expenses have debit balances. And once again, they only go up. So we're going to make it go up by doing the same thing to it. We're going to debit the $80 expense. If we record that then, what would happen is the expense goes from zero up to 80. It brings net income down because net income has a credit balance. It's the 50 minus the 80 would bring it down here. Also, of course, the cash has a debit balance. It would go down by that 80 and bring the cash balance down. That would put it back in balance. And there's what the effect on the net income would be. Once again, this is income, not a loss. The other side of it, if we had a bank charge, this would be also something that the bank would record that we wouldn't know about until we got the bank statement. So the bank took the money out. If there's a non-sufficient fund, if they charge us a late fee or something, then we just get it and we go, okay, we're going to have to record that. We're going to have to reduce our cash account. Once again, cash has a debit balance. We're going to do the opposite thing to it. Therefore, we're going to credit cash. So we know that has to happen. So we're going to go ahead and credit cash. What's the debit going to go to? What's the expense account? Probably going to be an expense account. I personally like to make an expense account called bank service charges. So I like to record what the bank has taken out in a separate account. It is up to the bookkeeper to do that if they want to or not, because note that it is probably going to be a small amount. So hopefully the bank's not taking a lot out. So since the amount some people might say is immaterial then, why don't we just put that into miscellaneous as well or something, because it's a small immaterial amount. Personally, most of the people I've seen, I kind of like to see how much the bank's taken out, even if it's small, just to make sure it is small. But that's a choice that the bookkeeper is going to make. In this case, we have a separate account, bank service charge, it's an expense, expenses that debit balances, we're going to make it go up by doing the same thing to it, which in this case would be a debit. So we have it going from zero up by the two here to $2. That's going to bring down the net income, the expense goes up, which brings down net income. And then the cash is the other side of the entries being recorded here. That's what's making the 82, the 80 plus the two. And so the cash has a debit balance, it's going to go down by the credit for the $2 in that case. And now we've recorded these two transactions. So now we can say, okay, those now I can see. If we look at this same transaction in terms of our general ledger now, note that this is where we were at on our trial bounce before these two transactions where we should also reflect this, this would be reflected on the general ledger as well, meaning in our GL, we have as of the 28th, there's that $80 that's going to come bring it down represented by this journal entry. And here's the $2 bringing it down represented by this journal entry. So that would also, of course, be reflected on our GL so that our new balance in the GL would be 16 to 56. So this is where we stand now. This is still where the bank statement is. So we're still not in balance, even though we've adjusted for these two amounts, what we have not adjusted for yet is of course, these that were outstanding. So that's what we'll have to do next time. So now you'll remember, you'll recall that we tick and tied all this off, we've now taken tied these off, and we're left with these items, these three items. So these two, they're on our books, but they're not on the bank statement. And we wrote them as of the end of the month. So it's expected, we would assume that we wrote them, and they just haven't cleared yet. So that's going to be on the bank reconciliation. So the bank reconciliation should for the most part be these timing differences, meaning this is what we started with, or this is what is on the bank statement. And then we're going to say what should be on the bank statement that is not due to timing differences. Well, this 130 plus the 110 are checks that we wrote, and they're not included in the ending balance on the bank statement. And they should be because it's just a timing difference, they're already out, the bank just hasn't got to them yet in order to record them. Therefore, we're going to reduce the balance by that. And what that'll do is I'll bring the balance down to 1556. And of course, we're still not quite there yet, because our balance on the books is 16256 at this time. What's the difference? It's the deposit we haven't yet recorded, I would hope. So let's do that now. So now we've found these two. Again, these two are done, the only outstanding item being this now at this time. So we found these. So that of course will be recorded here. So now we have the outstanding deposit, same idea. We deposited it as of the last day of the month. Therefore, the bank reconciliation for the month does not yet have it. We could verify that it has passed and cleared in March. But we just want to record as of this time that that's the difference. And so if we take the 15 minus the outstanding checks plus the outstanding deposit, we come up to 16256, which is now adjusted to what we have in our books. So what's the purpose of this? Now we can say this is what's on our books. And it ties out exactly to what's on the bank statement so we can double verify our entries, because we know exactly what the difference is. And the difference is exactly what we expect it to be. It's the timing differences. And if that's the case, then we've double checked our work and we've double checked it with a very strong source being the bank. And if our cash is in reconciliation, we have a much better verification and we feel a lot more comfortable that our transactions are correct. So whether you're a large business or a small business, if you get the cash reconciled, that is a huge check in order to verify the books. So obviously, we can see that this ties out here, it ties out to the general ledger, and it ties out to our ending balance on the trial balance. All right, so we are now able to describe what a bank reconciliation is perform a bank reconciliation, make a needed adjustments to our books in the reconciliation process and record adjustments.